The Absurdity of Negative Electricity Prices: A Hurdle in the Clean Energy Race

The global transition towards a clean energy future is gaining momentum, with renewable energy sources like wind and solar playing an increasingly crucial role everywhere. This is great news! However, a seemingly paradoxical situation – negative electricity prices – is threatening to derail this progress. How is it possible that wind and solar farms are frequently forced to stop production to avoid losses, even though they should be prioritized over conventional power plants ? Prices can easily reach -30 AUD/MWh during a common sunny or windy day.

Electricity prices operate on a fundamental principle of supply and demand. Wholesale electricity markets function as platforms where generators bid to supply electricity at specific prices, while consumers bid on the amount they are willing to pay. The market clears at a price point where supply and demand meet. However, in certain circumstances, the equation can tilt, leading to negative prices:

• Surplus of Renewable Energy:?A primary reason is the variable nature of renewable energy sources like wind and solar. Periods of high wind or sunshine can lead to a sudden surge in electricity generation, exceeding current demand. This surplus pushes down prices, sometimes even into negative territory. For instance, latest reports suggest negative electricity prices occur for a range of?5-7%?of the time in Australia's National Electricity Market (NEM), which covers eastern states, South Australia, and Tasmania. In Europe, values are between 1-2%.
• Inflexibility of Conventional Plants: Conventional power plants, such as coal and gas-fired units, are not readily adaptable to fluctuations in demand. Shutting them down and restarting them incurs significant costs. Therefore, during periods of high renewable energy production, these plants might continue operating even at a loss (negative price) to avoid the higher cost of restarting later. As a consequence, renewable assets may decide to stop their production to avoid losses.?

Negative electricity prices pose a significant threat to the clean energy transition in several ways.

First of all, faced with negative prices, renewable energy producers may be forced to curtail their production, essentially wasting clean energy. This undermines the very purpose of investing in renewables – reducing dependence on fossil fuels.

Second, the uncertainty and potential financial losses associated with negative pricing can discourage further investment in renewable energy infrastructure. This creates a situation where existing renewable assets might become stranded, hindering the expansion of clean energy capacity.

Finally, negative pricing incentivizes the continued operation of conventional power plants, even when renewable energy is abundant. This not only negates the environmental benefits of renewables but also contributes to ongoing greenhouse gas emissions.

A stark example of this absurdity occurred in Germany in 2019, where wind farms were curtailed while coal plants continued to operate due to negative prices.?On Easter Monday, April 22nd, 2019, the country experienced a confluence of factors leading to negative electricity prices:

• High Renewable Generation:?Favorable wind and sunshine conditions resulted in a surge in renewable energy production, exceeding demand at certain times.
• Low Demand:?Easter Monday is a national holiday in Germany, leading to a significant decrease in electricity consumption compared to weekdays.
• Inflexible Conventional Plants:?Conventional power plants like coal and gas-fired units require significant time and resources to ramp up and down. Shutting them down completely for short periods during high renewable generation can be costly.

The Outcome:

• Curtailed Renewables:?Faced with negative prices, some wind farms were forced to curtail their production – essentially wasting clean energy – to avoid financial losses.
• Continued Fossil Fuel Reliance:?Conventional power plants continued operating despite negative prices, as restarting them later would be more expensive. This resulted in unnecessary carbon emissions even with abundant renewable energy available.

Eliminating negative electricity prices is important to ensure a smooth and effective energy transition. Wind farms needs to run when there is wind !!!

One potential solution lies in the implementation or increase of a carbon price.

A carbon price acts as a disincentive for fossil fuel use by attaching a cost to carbon emissions. This cost is reflected in the price generators bid for electricity production. With a carbon price in place, conventional power plants would have to factor in the cost of emissions when bidding, making them less competitive compared to clean energy sources.

As of today, 46 countries?only have implemented some form of carbon pricing mechanism, including?Emissions Trading Systems (ETS) or?Carbon Taxes. This is clearly not enough. Up-coming Presidential elections in the US may have an impact on the decisions of many countries like Japan or Australia to set up or not a potential carbon market. This is a topic to follow to be successful.