Energy Supply vs. Demand in Spain: Navigating the Energy Skyline

We open our Blog this year with a very topical issue: the imbalance between energy demand and its associated supply. An aspect which, moreover, has a great impact on the general population.

Current state of market operation

On 1 January 1998, the first wholesale electricity market was created in Spain, which is the scenario for the various economic transactions that include the daily and intraday market, bilateral contracting, forward contracting, as well as the management of system adjustment services and deviations. The daily and intraday market is operated by the Iberian Energy Market Operator, Polo Español S.A. (OMEL). Likewise, since 2006, the Spanish electricity market has been integrated with the Portuguese market, generating different prices in the spot, daily and intraday markets for the Spanish and Portuguese electricity systems, although they are the same in the absence of congestion in the interconnections due to the application of the market splitting method.

The day-ahead production market, where transactions for the purchase and sale of electricity with physical delivery for the following day are carried out through a bid-matching process, is essential in this context. After the day-ahead market session, the system operator assesses the technical feasibility of the schedule resulting from the matching and establishes a schedule that still needs to be adjusted according to the actual demand at the relevant time. This system, of a very high level of technical rigour, has been fundamental to the efficient operation and evolution of the Spanish electricity market since its establishment. One of the fundamental characteristics of the electricity sector lies in the imperative need to balance supply and demand at all times, considering the practical difficulty of storing this form of energy. Consequently, it is common to observe increases in the cost of electricity during periods of higher demand, as more expensive generation technologies are activated. It is therefore of particular relevance to understand the functioning of the supply and demand system in this context.

In this context, electricity generation in Spain has evolved significantly in recent decades. Traditionally dependent on conventional and polluting sources, such as gas and coal, the country has experienced a notable shift towards renewable sources. The diversification of the energy matrix is a key pillar to guarantee long-term sustainability, as well as an aspect that has become necessary following the supranational agreements derived from the COP (under the ONU), the EU itself (and the common policies that help us to set targets) and the various policies that support and promote greater energy independence and sustainability.

The commitment to renewable energy has been a catalyst for change. The growing participation of wind and solar energy, among others, has transformed the energy supply, reducing dependence on fossil fuels and paving the way toward a cleaner, more environmentally responsible and resilient economy. This energy dependence is endemic to our sector and we analyse it in more depth in this blog post.

Moreover, recent events, such as the war in Ukraine, have shaken the energy stability that we thought was immovable. Furthermore, the recent conflict in the Middle East has further highlighted the need for our energy sector to seek greater independence (as it is not dependent on oil-based fuels), and the search for diversification in terms of partners and suppliers, which will allow us to guarantee the stabilization of the sector.

Supply, give what is needed

Flexibility in renewables

Renewables are the future and it is a fact. However, this shift to clean energy is not without its challenges. The intermittency of wind and solar generation presents flexibility issues. Efficient supply and demand management requires innovative solutions, such as the development of storage technologies and the improvement of the electricity grid. This is one of the most critical factors for success in our drive toward sustainability.

Figure 1. Spanish energy mix by technology in 2022. Source: REE

Generation flexibility then becomes a key factor. Traditionally, fossil fuel-based power plants have provided a fast and adjustable response to adapt to fluctuations in demand. However, with the growing share of renewables, innovative solutions are required to maintain the stability of the electricity system. What are the possible solutions?

• Energy Storage: A leading solution is the development and deployment of advanced energy storage technologies. From lithium-ion batteries to thermal storage systems, these technologies allow storing excess of energy during periods of abundant generation and to release it when the demand is high, thus providing a flexible reserve that compensates for the variability of renewables.

Figure 2. Global cumulative storage development in GW. Source: EESA.

• Smart grids: The implementation of smart grids is another key strategy. These grids incorporate advanced communication technologies and management systems to optimize energy distribution, anticipate changes in demand and coordinate generation efficiently. Artificial intelligence and data analytics play a crucial role in automated decision-making and dynamic adaptation to changing conditions.

• Demand Flexibility: Encouraging demand flexibility is also essential. Demand response programs, which encourage consumers to adjust their consumption according to energy availability, help to balance supply and demand. Electrification of sectors such as mobility and heating allows greater adaptability, as demand can be managed more dynamically.

• The incorporation of distributed generation, where small renewable energy installations are integrated into the grid at the local level, offers a decentralized solution. This reduces transmission and distribution losses, improves system resilience and allows more efficient management of generation variability, adapting to each situation and providing a solution to market variability. This generation goes beyond solar panels, as solutions like micro-hydro turbines, medium-power wind turbines, or biogas installations provide efficient and cost-effective tools to achieve energy sustainability, sometimes in an integrated manner.

All the solutions proposed above can be combined to achieve better results: integrating distributed generation facilities into a smart grid and adding storage systems is a clear example of a future solution already applied today. Our CIne building is an example, and our future nEFO factory will set the standard for industrialization adapted to solving supply vs. demand problems.

Current and future energy vectors

The specific forms of energy that are used to meet energy needs in various applications are referred to as “vectors”. These vectors represent the different ways in which energy is stored, transported and used in society. They play a crucial role in energy matrix diversification, efficiency and the transition to a more sustainable and environmentally friendly energy system. The choice of a particular energy carrier will depend on the specific application and sustainability objectives. Each energy vector has unique characteristics and is adapted to certain specific uses, the most obvious being electricity, but there are others such as gaseous fuels, biofuels, heat or hydrogen.

Both biogas (gaseous fuel) and biofuels allow consumption to be programmed by having the fuel in the form of a storable vector, as well as displacing or replacing current fossil fuel consumption. These relate, in various uses, to heat as its own vector, when it is stored and transported for use in heating or industrial processes. Central heating systems, solar thermal systems and other conventional methods are examples of heat carriers.

The drive towards green hydrogen, using renewable energy and the technique of electrolysis for subsequent storage offers a versatile solution. Hydrogen can be used as a direct fuel or converted back to electricity when needed, although we currently must overcome efficiency issues (economic and technical) that favour other non-renewable sources. However, this remains an opportunity to expand capacities and improve system flexibility. We must not forget the dual energy factor, as the thermal energy factor is the most complex one, due to the associated fuels, and hydrogen can solve both.

Electrifying the economy

In addition to thermal energy, one of the solutions to stabilise supply and demand and provide security for the future is the electrification of production processes and of the economy as a whole. Electrification is a concept that describes the process of replacing the use of fossil fuel-based energy with electricity in various areas of society and industry. This shift aims to reduce greenhouse gas emissions, improve energy efficiency and move towards a more sustainable model. Electrification involves the transition from systems that rely primarily on fossil fuels to systems powered by electricity generated, preferably, from renewable sources. But what can we electrify?

• Electric Vehicles (EVs): The mass adoption of electric vehicles is one of the most prominent drivers of electrification. Electric cars, together with other forms of sustainable transport, reduce dependence on fossil fuels and contribute to cleaner mobility.

• Electric Heating and Cooling: Electrification of heating and cooling systems using heat pumps, which harness energy from air, water or ground, is becoming a popular option to replace traditional fossil fuel-based systems.

• Electric Industrial Processes: The adoption of electric technologies in industrial processes, such as electrolysis for hydrogen production or the application of electric heaters instead of gas burners, contributes to reducing carbon intensity in industry.

• Electric Agricultural Machinery: The electrification of agricultural machinery, such as electric tractors, represents a transition towards more sustainable and energy-efficient farming practices.

Electrification of the economy is an essential component in the transition to cleaner and more sustainable energy systems. These vectors not only reduce greenhouse gas emissions, but also contribute to the efficiency and resilience of energy systems globally.

Demand: ask for what is necessary

Current electricity demand

Electricity demand is another key factor shaping the energy landscape. Evolving consumption patterns, driven by digitalization and the electrification of various sectors, pose challenges to ensuring a constant and reliable supply. If we look at where we come from, for much of the 20th century and early 21st century, electricity demand in Spain experienced sustained growth. This was linked to economic development, population growth and the expansion of industrialization. This situation changed radically after the global economic crisis that began in 2008. During this period, a temporary reduction in electricity demand was observed, as industrial activity declined and there was a general economic contraction. As Spain embarked on efforts to diversify its energy matrix and increase the share of renewable sources, such as wind and solar energy, the structure of electricity demand also changed. The introduction of digital technologies and advances in energy efficiency also impacted electricity demand and the adoption of more efficient devices, and awareness of responsible energy use helped to moderate demand growth.

The COVID-19 pandemic had a significant effect on electricity demand worldwide, as mobility restrictions and economic disruptions influenced demand, with temporary reductions in industrial activity and a shift in consumption patterns. It is crucial to bear in mind that the evolution of electricity demand is intrinsically linked to changes in economics, technology and energy policies. The transition towards greater sustainability and digitalization are key factors that will continue to influence this evolution in the years to come, but we are currently heading towards an ever-increasing decline in our demand.

Throughout 2023, electricity demand was 229,526 GWh, 2.5% less than that recorded in 2022, according to REE data.

Conclusions and overview

This is mainly the picture of conflict that we need to solve in the dichotomy between supply and demand. We will increasingly have larger and more efficient generation systems (more supply) and a system that tends to absorb less consumption (demand).

In the complex framework of energy supply and demand in Spain, innovation and collaboration are essential catalysts for a successful transition. The vision outlined by the PNIEC (Spanish National Integrated Energy and Climate Plan), together with the drive towards renewables and improved generation flexibility, sets us on the path towards a more sustainable energy future. However, the path to full decarbonization requires continuous efforts and bold strategic decisions.

In this journey, every actor in the sector plays a vital role in building a future where energy supply and demand converge towards sustainability.