As electricity markets transition toward high renewable penetration, long-term contracts and Physical Bilateral Contracts (PBC) become more relevant for hedging by both generators (renewables) and customers. PBC also reallocates generation and demand between the long-term and day-ahead markets. This paper analyses the impact of technology-specific PBC on spot prices in the Spanish electricity market between 2019 and 2024, a period marked by several events and structural breaks. We use hourly data using an Autoregressive Moving Average (ARMA) model with Generalized Autoregressive Conditional Heteroskedasticity (GARCH) features. We find that PBC affects the formation of the spot prices, which is related to hedged output of different technologies. Displacing hydropower from spot markets to PBC always reduces the day-ahead spot prices, but displacing wind and photovoltaics has the opposite effect. This shows that the day-ahead market may lose some of the expected dampening effect of renewables. This impact from renewables is observed during the post-crisis “normalisation” phase and coinciding with the increase in their installed capacity. As the main conclusion, our resultssuggest thatfuture regulatory changes on long-term markets or welfare analysis of long-term markets should always consider potential impacts on the day-ahead prices. Finally, we provide policy recommendations to minimize the welfare implications from PBC in the future. • Physical bilateral contracts (PBC) reduce spot-prices during demand and supply shocks, but not when normalised. • Displacing hydropower from day-ahead markets to PBC reduces spot prices. • Displacing renewables from day-ahead markets to PBC increases spot prices during the post-crisis “normalisation”. • Regulators must always assess how regulatory changes on long-term markets could impact spot markets.
Davi-Arderius et al. (Wed,) studied this question.