Peak, off-peak and base price: Why the power price is now often cheaper when demand is high
Electricity prices on the power exchange vary every quarter of an hour. The difference between the highest and lowest price can be enormous. The availability of renewable energy has a greater impact than the demand. This is why the hours with the highest load are now often the cheapest, especially in summer.
Definitions
Peak Price
The peak price is the price for a good or service at particularly high demand. In the power market, the peak price generally refers to the average market price of a megawatt hour (MWh) at times of peak load, i.e. on weekdays between 8 am and 8 pm.
Off-Peak Price
The off-peak price is accordingly the price that a good or service costs at times of low demand. In the power market, this refers to the average power price on weekdays between 8 p.m. and 8 a.m. and on weekends.
Base Price
In the power market, base price refers to the average power price at peak and off-peak times. Similarly, the term base load is also used in relation to power consumption.
Base-Peak-Spread
The base-peak spread is the difference between the base and peak prices. The spreads that market participants expect in the future can be seen in the prices of base and peak futures. These are transactions traded on the futures market. They are used to trade future power deliveries with a lead time of 24 hours to six years. The base-peak spread is the difference between the base and peak prices at a specific point in time for the same period in the future. For example, on 29 October 2024, a base future for 2025 was trading at 93.68 EUR, while a peak future for the same year was trading at 102.00 EUR; the spread was 8.32 EUR or 8.9 per cent . In hindsight, the base-peak spread can be determined based on actual prices achieved.
Other uses of the terms
Depending on the context, the terms peak price and peak load are also used to refer to the highest overall price within a certain period, for example, a day or a year. This meaning is also reflected in the term peaking power plants, or just peaker, for gas-fired power plants that are used to cover peak loads.
In this article, "peak price" refers to the former meaning, i.e. the power price on weekdays between 8 a.m. and 8 p.m.
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What do peak and base prices depend on?
High demand is often linked to price increases. There are two reasons for this: On the one hand, in free markets, available goods are sold to the most solvent buyers; consequently the price rises when a good becomes scarcer. On the other hand, the cost of providing a good may rise when demand is high.
The latter is the case in the power market. According to the merit order, the power plants with the lowest marginal costs are used first to generate power. Conversely, more expensive power plants are only used when demand increases.
For this reason, power demand and power prices rose and fell more or less in step until a few years ago . Therefore, peak prices were always higher than base prices. In this article, we explain why this has changed with the expansion of renewable energy.
For this reason, power demand and power prices rose and fell more or less in step until a few years ago . Therefore, peak prices were always higher than base prices. In this article, we explain why this has changed with the expansion of renewable energy.
How do peak price and base price relate to one another?
Before renewable energy was used to any significant extent for power generation, the power price depended largely on two factors: in the short term on demand and in the medium term on the price of raw materials. When world market prices for coal, natural gas and uranium rose, the power price rose. When demand was high, the power price also rose because, as explained above, the more expensive power generators had to be used.
As demand during normal working hours is usually around 25 to 30 per cent higher than during the rest of the time, the power price was higher during the day than after work.
Frequent start-ups and shut-downs posed an efficiency problem, particularly for coal-fired power plant operators, because power generation per unit of fuel is highest at full load. To reduce the difference between daytime and night-time consumption, pumped storage power plants were used, which were filled with cheap 'night-time power' and emptied at midday. This was also the aim of the large-scale installation of storage heaters. They heat up with cheaper 'night power' and release their heat during the day. They are still widely used in some European countries, such as France, where they are well suited to the constant production profile of nuclear power plants.
Nevertheless, the peak price was always higher than the base price well into the 2010s. Now, however, it is not uncommon for power to be more expensive at night than during the day.
How has the base peak spread evolved?
Until the beginning of the 2010s, the base-peak spread in Central Europe was around 40 per cent. This means that on weekdays between 8 a.m. and 8 p.m., power was around 1.4 times more expensive than base-load power. Since then, the spread has narrowed considerably. Since 2022, power consumed between 8 a.m. and 8 p.m. from Monday to Friday costs only about 10 per cent more on the previous day (day-ahead market) than the average. It should be noted that this applies to the annual average. However, the base-peak spread in summer has been significantly lower than in winter for several years.
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Spread reversal in summer 2024
In summer, the highest prices of the day often no longer occur at midday, but in the evening hours. According to the ContextCrew, citing EPEX data, even the average base price was higher than the average peak price from May to August 2024. It was not until September that the ratio returned to "normal".
Why does the peak price rise above the base price?
Influence of renewables on the peak price
It is no coincidence that this development of the base-peak spread correlates closely with the expansion of renewable energies. Solar and wind have the lowest marginal costs of any type of power generation. As soon as they start producing, they push more expensive power plants out of the market. According to marginal pricing, the price of electricity then falls to exactly the price demanded by the operator of the most expensive power plant needed. This means that even at times of peak demand, namely midday on weekdays, the power price can fall if the supply of renewable energy is sufficient.
Solar power turns base-peak spread on its head
This effect can be seen particularly well in the case of solar power, as it is almost exclusively available during peak hours.
Following the massive expansion of photovoltaic capacity in Germany, the installed solar systems can cover a large proportion of Germany's total power demand on an hourly basis.
Following the massive expansion of photovoltaic capacity in Germany, the installed solar systems can cover a large proportion of Germany's total power demand on an hourly basis.
In the first week of July 2024, a significant part of the high demand (green) at midday is met by renewables, mainly solar power (yellow). As a result, the spot market price for power (blue) falls despite the high demand - in combination with wind power (light blue) it even falls below 0 euros/MWh in some periods.
This solar effect is clearly visible in the power price curve (see graph). Particularly in the summer around midday, solar parks regularly displace not only the extremely expensive peak-load power plants from the merit order but increasingly also coal-fired power plants – which are cheaper but still expensive compared to solar power . As a result, power prices in combination with wind power fell below zero more and more often in the middle of consumption peaks.
In the summer of 2024, this happened so often, favoured by sunny weather with little cloud cover, that the average power price was lower during the day than at night.
Could the base peak spread grow again?
The futures market for the coming years shows widening base-peak spreads for the coming years. In October 2024, futures for 2025 traded at a base-peak spread of around 9 per cent. Futures for the end of the decade showed spreads of around 16 per cent. However, this does not necessarily mean that market participants actually expect the base-peak spread to widen again in the short-term markets.
Base-Peak-Spread on the German futures market
1. Okt. 2024 | 8. Okt. 2024 | 15. Okt. 2024 | 22. Okt. 2024 | 29. Okt. 2024 | |
|---|---|---|---|---|---|
Cal-25 | 9.7% | 10.8% | 8.9% | 9.1% | 8.9% |
Cal-26 | 12.8% | 13.4% | 11.9% | 11.7% | 11.5% |
Cal-27 | 13.8% | 14.5% | 13.8% | 13.8% | 13.4% |
Cal-28 | 16.1% | 18.3% | 17.9% | 17.1% | 13.6% |
Cal-29 | 14.3% | 15.7% | 16.2% | 16.8% | 16.0% |
Cal-30 | 15.9% | 17.0% | 17.3% | 16.9% | 16.6% |
Difference between peak and base prices of 2025-2030 futures on five trading days in October 2024 (Source: EEX)
This is because futures act as a form of insurance. Producers offer them to plan their revenues better. Consumers want to protect themselves against fluctuations in power prices. Hence, the spread can be seen as a kind of risk premium. However, higher difficulty in calculating a risk tends to provoke higher premiums; and power market forecasts are more difficult the farther they reach into the future. This may be one reason for the widening of future spreads towards the end of the decade.
Rising CO2 costs make peak load generation more expensive
Another factor could be the rising prices of emission certificates (EU-ETS). The number of available EU-ETS certificates will be reduced by 4.3 per cent each year, and by 4.4 per cent from 2028 onwards. The price of certificates will therefore tend to rise, and with it the price of power from coal and gas-fired power plants.
As a result, spot market power prices (day-ahead and intraday trading) are expected to become even more volatile. During the summer months, the power price will tend to remain negative, from time to time. However, in the evening hours and at off-peak times, it will tend to be higher than before as EU-ETS prices increase. This effect is likely to increase overall power prices even more in the eight months of the year when solar power is less reliable in reducing the midday price. Between September and April, the “normal” pattern is likely to last even longer. After all, the average peak price could return to being significantly higher than the base price.
What is the impact of falling base peak spreads on the power market?
No matter how well the reasons for the lower base-peak spreads can be explained, they don’t provide further insight into the power market. All that can be deduced from them is that, on average, the relative scarcity of peak and off-peak power has converged – with the emphasis on “on average” .
However, this result does not provide any information on the volatility of power prices, i.e. the level, frequency and regularity of price fluctuations. Nor does it provide any information on volume, i.e. the amount of energy traded at a given price. Therefore, it does not say anything about the arbitrage profits that can be made by balancing shortages.
However, this result does not provide any information on the volatility of power prices, i.e. the level, frequency and regularity of price fluctuations. Nor does it provide any information on volume, i.e. the amount of energy traded at a given price. Therefore, it does not say anything about the arbitrage profits that can be made by balancing shortages.
Is the success of the energy transition at risk if the spreads are too small?
However, this is precisely the business model of essential components in a power supply system that relies heavily on renewable but intermittent energy sources like wind and solar — namely, power storage facilities such as pumped storage power plants and battery storage systems.
They make money by being filled with low cost power, which they then feed back into the grid when prices are high. Until the expansion of renewables, this was a predictable business model. But ever since the 2010s, operators have been complaining about the declining profitability of pumped storage plants.
The slow expansion of gas-fired power plants also shows that it is difficult to take advantage of the increasingly short periods when renewables do not provide enough power to refinance an investment of this size.
The fact that gas-fired power plants are priced at peak load does not help - this means that they have to produce at marginal cost in the few hours when they are needed. This prevents the profits that would make the "peaker" business model truly attractive to investors.
This, too, threatens the success of the energy transition. After all, the new gas-fired power plants are to be fuelled by hydrogen one day, which will be used to store power in a similar way to pumped storage power plants and battery storage systems, using temporary surpluses of wind and solar power.
New regulations to compensate for narrowing spreads?
For years, energy lobbyists and experts have been calling for a capacity market. In this market design, power plant operators receive a kind of basic fee for being ready to supply electricity when it is needed, rather than being paid only for the power that is actually fed into the grid, as in the current energy-only market (EOM). In the summer of 2024, the then ruling coalition consisting of social democrats (SPD), the Green party (Grüne) and the liberal FDP announced its intention to introduce such a technology-neutral capacity market. According to a discussion paper published in early November 2024, the conservative Union parties (CDU/CSU) who are leading the polls for the upcoming election in February of 2025 also want to support such a market design.
Battery storage systems that are directly connected to a transmission or distribution grid already benefit from favourable conditions. For example, storage facilities built between 2011 and 2029 do not have to pay grid fees for power fed into and withdrawn from the grid. Most older pumped storage plants are also largely exempt from grid fees
Will arbitrage profits for storage rise again?
However, there are increasing signs that the market conditions for pumped storage power plants and battery storage are becoming more attractive again. This is evidenced not only by the rather dynamic expansion of large-scale battery storage capacity in Germany but also by the facts that two major power plant operators, EnBW and Uniper, have each announced investments of around a quarter of a billion euros in existing pumped storage plants over the past two years. EnBW's project will start in the summer of 2024 and be completed in 2027, while Uniper's will follow a year later.
It may seem paradoxical but solar power peaks around midday could be responsible for the rise of the energy storage business model. On sunny days, PV systems prevent the very attractive power prices that result from the demand for gas-fired power plants. On the other hand, for several years now, operators have often been able to fill their storage very cheaply twice a day in summer: at night and at midday. If the power price is negative at midday, they are even paid for storing it. In the evening, when prices are positive, they can earn money again with 'the same' power.
Is the concept of base load an outdated model?
From the point of view of power traders, peak-price and base-price products are declining. As we have seen, consumption plays a subordinate role on the short-term futures markets and in intraday trading, as it follows fairly constant patterns and is therefore known quite accurately at an early stage. However, the closer we get to the delivery date, the more accurate it becomes to predict how much power will be supplied by renewables. And short-term power prices, which provide arbitrage opportunities for traders and storage operators, become even more visible.
From the consumer's point of view, however, the variable power price is a risk that they want to hedge against. By buying power futures, large consumers such as industrial companies or municipal utilities can protect themselves against fluctuating power prices and create certainty in their planning.
Finally, power futures also give power generators a way to hedge against falling power prices. They can also use the distinction between base and peak in long-term futures as an insight into future consumption profiles, which they can use to decide which technologies to invest in.
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