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What exactly is meant by ‘negative electricity prices’?
This is what it’s all about: Negative electricity prices provide a strong incentive for both the supply and the demand side to take action.
The price of a commodity is determined by the interaction of supply and demand. That’s the most basic rule of the market economy. More specifically, if a supermarket has a large stock of apples, but few customers willing to buy them, it will lower the price. And if it has a small stock of apples and a large number of potential customers, it will raise the price. These adjustments create a balance of supply and demand.
Back to electricity, which isn’t all that different. Except that there is one potential situation that is very unlikely to happen with apples: a very large supply and very little demand, resulting in negative prices. Which actually means that if you buy electricity on the wholesale electricity market, you will be paid for it.
But why is that?
High supply and low demand don’t go together
Unlike with apples and most other goods, electricity MUST find a taker, simply because it cannot be “dumped” and because storage is available for small quantities only. And because the electricity grid will only be stable if the amount of power that is fed into the grid equals the amount that is taken off. To cut the long story short: electricity must be used, even if this means negative prices. Negative electricity prices are not all that new. The first time the electricity price fell below €0.000 was in September 2008. This was when negative prices were first made possible – at the request of many market participants – to provide incentives for conventional power plants to adjust their output to demand levels and the amount of renewables being generated at that time.
Any functioning electricity market that has a high share of renewables will need to be highly flexible. German law stipulates priority for renewables when it comes to entering the grid. All the electricity generated from renewables can be fed into the grid. Unless conventional power plants adjust their own output to the current weather, which determines the amount of renewables being fed in, the result can be a massive surplus of electricity causing negative prices. This is especially likely to happen on public holidays like Christmas or New Year’s Day, when there is often a great deal of wind and when many industrial customers are not using much electricity.
Conventional power plants need to shut down and restart
When electricity prices are negative, electricity generators must pay those who buy their electricity. Operators of conventional power plants must foot the bill themselves. This is why even coal-fired power plants, which, for technical reasons, used to be rather slow to respond to changes in demand and in the amount of renewables in the grid, are now shutting down when electricity prices turn negative. Many operators of these plants have decided to invest in order to make their installations more flexible. This means that it is now more cost-effective for them to shut down and restart their plant than to pay the costs resulting from negative electricity prices. In other words, negative electricity prices have prompted at least some of the large power plants to become more flexible, thereby contributing to the success of the energy transition. However, there are other conventional power plants that continue to operate even when electricity prices are negative and when the electricity they are generating is not needed. On the demand side, there are still too few customers that adjust the time of their electricity consumption to coincide with times at which it is available in abundance. This means we must continue to render our electricity system more flexible.
Renewables installations on track
On the renewables side, things look slightly different. At present, they are governed by two different sets of rules. Some 37% of the renewables installations in Germany continue to receive public-sector funding even when electricity prices are negative. The cost associated with this is borne by all electricity consumers, who pay a surcharge on their electricity bill (EEG surcharge). This applies to old existing installations. The remaining majority of installations (63% in 2017) are subject to direct marketing rules. This is the case for all installations that began to operate after the entry into force of the 2014 Renewable Energy Sources Act (EEG), unless they are very small. Operators of these installations are entitled to funding from the EEG surcharge, but in the form of a market premium. This market premium does not nearly cover all of the costs, which means that there is an incentive for operators of these renewables installations to stop generating electricity whenever electricity prices are negative. In cases where negative prices apply for more than six continuous hours, new installations do not receive funding under the EEG. The share of installations subject to the requirement for direct marketing and therefore likely to respond to changes in supply and demand in a flexible manner is set to continue to rise. For wind-powered installations, it has already crossed the 90% threshold.
Demand for greater flexibility on the part of all stakeholders
Negative electricity prices are the opposite of normal prices. But they do not necessary cause harm. Instead, they are an indication that we need to make our entire electricity system more flexible as we pursue our energy transition, and they also provide incentives for all stakeholders to do so: the supply and demand side must respond better to fluctuating levels of renewables in the grid; Germany and its neighbours must make further progress on coupling our grids and electricity markets; we must find ways of storing excess electricity for later use; and we need better flexibility (click here to learn more). The Federal Ministry for Economic Affairs and Energy has made it a key priority to constantly improve the regulatory environment to encourage greater flexibility on the part of suppliers and consumers of electricity.