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The price is right
How negative prices are positive for the energy revolution

 

Technology for generating renewable electricity is about to take over the energy industry as countries all around the globe are increasingly putting climate action policy into effect. But for the foreseeable future, both renewables and conventional power plants are needed to meet the ever increasing electricity demand, to keep the grid stable and avoid blackouts. In this article we not only try to explain why these different technologies within the energy system need to work together, but also want to shine a light on how this impacts prices, how negative prices occur and what they signify. Let’s get down to it:

 

Renewables and Conventionals

Weather is almost impossible to predict precisely, so relying on wind or solar energy to operate renewable energy sources can lead to either a surplus or a lack of energy at certain times. Being highly dependent on the surrounding environmental conditions, the energy sector can’t be turned 100% renewable right away. Variable renewables have a low flexibility capacity, as their energy generation heavily depends on fluctuating environmental conditions, and therefore they cannot simply produce more energy on cue. An energy system that partly consists of renewable energy sources needs to handle this energy fluctuation by balancing it with other flexibilities.

In our recent article, Hand in hand towards the energy revolution, we showed you how conventional power plants are able to compensate for some power shortages by firing up additional furnaces. By providing crucial flexibility to an energy system that consists of more and more renewable energy sources, they are able to minimize the risk of a major blackout. This way, conventional energy sources, like thermal power plants, could play a positive role in the energy revolution by offering valuable flexibility to the energy market. This new landscape of energy systems, however, also has its impact on the pricing of the energy generated.

 

Pricing with renewable energy

In a very ‘Macroeconomics 101’ sense, the price of energy is defined as the meeting point of the power demand and its supply at a specific moment. But in practice a set of variables influences this balance in real time and therefore creates trading opportunities for a variety of participants in the wholesale energy markets.

The price in the power spot market reflects the supply-demand situation in the physical grid, which needs to be balanced to prevent power outages. The more power is consumed, the higher the price rises, incentivizing more expensive generation assets (power plants) to produce that power. If less power is needed, the price is lower.

How power price is determined at electricity exchange
Diagram of how the power price is found at the electricity exchange. Power station operators bid their respective amounts of power for every hour of the day into the market at a certain asking price. Buyers lodge their bids. The merit order leads to the cheapest offer determining the market clearing price. © Clean Energy Wire, licensed under CC BY 4.0

 

Renewables are having a big impact on this interrelation between supply and demand these days: On the one hand, they are intermittent and cannot be “switched” on at will, hence conventionals and storage are required to balance the grid. This is often talked about, when a lack of renewable power leads to price spikes because the remaining conventional capacity is hardly sufficient to meet the power demand.

On the other hand, once a wind or solar asset is built, the power is basically available for free – at zero marginal cost. As more and more renewable capacity gets installed, the total power generation on particularly sunny and windy days exceeds the total power consumed. To stop this excess energy from destabilizing the entire grid, it is unfortunately not possible for transmission system operators to immediately throttle or stop the power production or activate large electricity consumers. But there is a way to deal with this situation, by letting the invisible hand of the market do its job - with negative price

Power production & consumption in Germany, April 2020
On April 21, renewable sources met Germany’s electricity demand almost completely, causing the actual electricity production in Germany to overshoot the demand by a few hundred thousand MWh. Negative prices had to come in effect to deal with this surplus.  ©Bundesnetzagentur | SMARD.de, licensed under CC BY 4.0.

 

Negative Prices

Theoretically, turning off wind and solar plants on a short notice is technically feasible, but often makes no economic sense due to regulations like feed-in tariffs and renewable surcharge schemes. Also coal-fired plants can’t be stopped or started instantly, as it takes time and would incur significant costs, so it is more cost-effective for them to continue generating throughout negative pricing periods. This ensures that they are available to meet peak demand in the late afternoon and evening once the intermittent sources such as rooftop solar and large-scale solar are no longer available. But the excess power from both conventional and renewable energy sources still needs to go somewhere, as power can’t just disappear. 

How negative market clearing prices occur
Diagram of power market situation that leads to negative market clearing price.  © Clean Energy Wire, licensed under CC BY 4.0.

 

Negative prices provide incentives for storage operators such as battery facilities or pumped hydro plants, who effectively receive money for storing that power and selling it later when prices are up again. Similarly, large consumers could temporarily ramp up their energy demand to accommodate the excess energy and even get paid for it. This also works the other way around, with industrial sites that produce power as a by-product interrupting their production process and getting compensated for the opportunity costs. Only if energy prices go so low that they exceed the surcharge on renewables do those assets get turned off.

The occurrence of negative prices is neither bad per se nor a reflection of a dysfunctional market. They regularly appear in wholesale electricity markets and can be understood as a temporary workaround in a market that is experiencing more frequent moments of surplus. It is simply another sign of increased price volatility as the energy transition progresses. Just like price spikes, negative prices also express the need for more flexibility in the power system. They incentivize the development of new technologies like battery storage, and demand-side flexibility to compensate for the excess power that comes at times with increasingly large capacity of wind and solar assets.

 

Get the price right with modern energy trading

Negative prices add yet another layer of complexity to energy trading, but they can be an opportunity if you manage them correctly. Algorithmic trading on the intraday market enables you to react quickly and intelligently to these market opportunities, allowing you to make the most out of your assets. Already today, there is no way around algo-trading, as increased volume and volatility, an ever-growing number of products, and the move to trading in near real-time have caused this market to become increasingly competitive. Running an intraday trading operation requires a complex setup including software, sophisticated data analysis and a specialized team, but the payoff speaks for itself.

Are you all fired up to get into trading and eager to get top dollar for your power assets? But you are not sure how to get started? Or do you just want to avoid the hassles of running your own modern intraday trading desk? Here at enspired, we want to assist you on your way to optimally monetize your power assets. Our team of experts in AI-based energy trading can help you get started in no time with full transparency and no risk.

 

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