The Technology Link Between Short-term and Long-term Electricity Markets: The Case of Spain

Economic intuition suggests that day-ahead and long-term electricity markets complement each other through price signals to ensure the efficiency of the markets. However, while important for market and policy design, there is little empirical research on the links between these markets. We investigate the effect of long-term contracts in different generation technologies on price formation and volatility in the short-term market in the case of Spain between 2019 and 2024. The findings indicate that: (i) the energy traded in the forward market reduced (on average) the spot prices, (ii) hedging wind and photovoltaic production in the long-term market increased the day-ahead prices and their volatility, and (iii) displacing hydropower from the day-ahead to forward market reduced the day-ahead prices. We then provide recommendations to improve market design and operation.