Q4 2023: The rise of negative power prices

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Britain experienced a record-breaking 214 hours of negative power prices during 2023, averaging more than half an hour a day. Their frequency has more than tripled from the year before, and this coincides with the highest ever payouts for wind farms not to generate (so called curtailment payments), which exceeded £300 million in 2023.

Negative power prices are not just on the rise in Britain, they are becoming commonplace throughout Europe.  In the Netherlands and Nordic countries, on average 1 hour in every 24 had prices of zero or below.  Britain saw Europe’s 8th largest number negative price hours in 2023, with prices averaging –£16 / MWh during those hours.

Negative prices – paying customers instead of charging them for your product – suggests that what you’re selling is a waste that must be got rid of.  For example, shops pay to have their refuse collected, which could be seen as selling it for a negative price.

So, why might electricity be treated as a waste product for some of the year?  This can be explained by the peculiar nature of electricity as a commodity, and the design of renewable policies.  Firstly, electricity is not like other products: supply and demand must balance exactly at all times.  If too much is produced (because it is windy and sunny) then the excess must be exported, stored, or shut off to avoid making the electricity system unstable.

Britain now has 44 GW of wind and solar capacity, and a minimum electricity demand of just 17 GW.  Add to this the 6 GW of inflexible nuclear reactors and oversupply is a very real possibility.  At times of oversupply, price needs to fall to persuade flexible generators to reduce output, interconnectors to export, storage systems to charge up, or customers to use more electricity.  One reason prices go negative rather than fall to zero is due to the support schemes in place for wind farms.  Some older farms earn ‘ROC’ subsidies, worth around £50 for every MWh sold.  This means it is still profitable for these farms to sell power even at prices down to –£50 (or thereabouts).  Only when prices fall below what they could have earned from ROCs will they be willing to shut off.

The number of hours with negative electricity prices in Britain each year

The share of hours in 2023 with zero or negative power prices across European markets

Negative prices go hand in hand with the curtailment of wind farms.  Britain’s wind farms lost 5% of their output to curtailment in 2023, some 4.3 TWh (enough to power 1.5 million houses).  Constraint payments for shutting farms off reached £300 million in 2023, which adds nearly £4/MWh to the cost of wind generation.

How do we fix the issue of negative prices, and should we?  

To adapt a common refrain among traders: ‘the cure for negative prices is negative prices’ – the market will adjust in ways that reduce the impact of negative prices. Taking this view, negative prices are no bad thing, they are a signal for developers to build more flexible technologies that rely on large price differentials.  This could include large-scale energy storage which can use these times to charge, more interconnectors to export excess electricity abroad, or ways for people and industries to shift the timing of their consumption such as National Grid’s Demand Flexibility Service. As the share of electric vehicles increases, there may be greater scope for individual households to shift their demand by a few hours, or even days.  This can benefit households, as cars can be charged when prices are lower, and the wider system, as these will be times when power supply is lower carbon.

As more of these solutions come online, the mismatch between supply and demand will shrink, and with it the incidence of negative prices.  The goal posts are always moving though, and if the development of new flexibility sources does not keep pace with new wind and solar farms, we should expect price volatility to continue growing in future.

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