The continuing rise of renewable energy could cut electricity prices in half by decade’s end in Spain, where wholesale prices have already dropped after renewable sources were added to the supply mix, a new study concludes.

“Increasing the share of renewables in electricity generation could have a profound impact on price dynamics in wholesale electricity markets,” says a recent Bank of Spain report.

Renewables especially have that effect on marginalist pricing systems seen in Europe—where electricity prices are set by the cost of the most expensive supply source needed to meet demand. Since renewable energy, like wind and solar, is cheaper to produce compared to fossil fuels, it can lower prices by replacing more costly sources.

Wind and solar generated more than 40% of Spain’s electricity in the first half of 2024—up from 26% in 2019—and electricity prices were 40% lower than they would have been if solar and wind were still at 2019 levels. If the trend continues, and if renewables deployment meets the goals of the country’s national climate plan, wholesale electricity prices could drop by an additional 50% by 2030, the report authors say.

The impacts of wind and solar are especially pronounced when the two options combined, because their coinciding peak production periods can wholly displace other energy sources more effectively than either would alone.

But importantly, renewable energy’s effect on prices is not linear: displacing a small share of the total electricity mix would have only a small impact. As the share of renewables grows, the effect on pricing increases exponentially, finds the report. Increasing the share of renewables is therefore key to maximizing the effect on electricity prices.

Currently, as the most expensive supply source in the country’s electricity mix, fossil fuels set prices most of the time, thereby reducing the effects of renewable sources. But the authors say this link has begun to “weaken over the past year” due to the sharp increase in wind and solar capacity, which has created greater volatility throughout the day. Compared to 2019—when there were no hours of zero or negative wholesale electricity costs—prices in the first half of 2024 were zero or negative for 15% of the hours “when renewable generation technologies with very low marginal costs were able to meet demand.”

However, there is significant uncertainty about these outcomes due to unpredictable changes in supply factors and adaptation of demand to new renewable energy sources, the authors warn. Electricity prices are still linked to gas costs, which would alter projections if prices change. The Bank of Spain therefore presents its findings with a confidence interval of between 45% and 60%.

“Beyond specific examples, the report concludes that renewable energies play a very significant role in reducing wholesale electricity prices, and that significance is expected to increase in the future,” reports La Vanguardia.