Power at a negative price: an insidious effect of a market model promoting renewables
On the weekend of 15th and 16th of June, Belgium experienced 14 hours of negative electricity prices, with a three hour peak at -200 €/MWh, when the average spot market is usually around 50€/MWh. This phenomenon has never been observed in Belgium with such duration and magnitude.
How is it that energy producers are willing to pay to sell their electricity? Why is that phenomenon bound to become more and more frequent?
To understand that, it is necessary to look into the way renewables are injected onto the grid.
The complicated equilibrium of European markets jeopardized by the injection of intermittent renewable electricity
To promote the development of renewable energies, European countries have adopted a system that gives priority to injection, ensuring network access to renewable sources whenever they are producing electricity. This mechanism upsets the way the different means of production are called on the network. Indeed, the logic used is based on economic merit order and consists on using the units of production depending on the cost of the last MWh generated.
The Renewable Energy sources are reducing the generating period of gas-fired power plants
Source : Sia Partners
(Click to enlarge)
The priority granted to renewable sources postpones gas-fired units in the merit order, which reduces their producing time. Another consequence of the arrival of this new source of production is a drop in the spot market prices.
In the cases of very high intermittent production, negative prices phenomenon are observed. Indeed, producers at the end of the merit order would prefer to maintain a minimal level of production rather than supporting the costs of a shut down and a restart of their plant. Such a decision then creates a surplus of supply that can only be reduced by paying actors to drain off that excess production.
This happens in situation of very low demand, such as Christmas Days for example.
On December 25th 2012, several factors combined to create negative energy prices:
- Wind energy increased by 20% in Belgium and 60% in France, as compared to the previous day,
- General load was lower by 20 GWh (approximately 10%), because it was a holiday,
- Contractual power flows between Germany and France were saturated. With a domino effect, high wind production in Germany was exported to France, and then to Belgium.
The combination of these three effects created a power surplus in Belgium. Instead of shutting down the thermal power plants, electricity producers preferred to sell their electricity to increase the load.
These negative prices were thus almost "imported" from Germany. Due to a wind power surplus, it had maximized its exports to relieve its power grid.
Worrying perspectives for Belgium when comparing to our European neighbors
The share of renewable power sources in the energy mix is limited compared to other European countries, such as Germany or Spain. However, Belgium already faces negative electricity prices.
We can hence question the persistence of this phenomenon should the share of renewable energy keeps growing. Such considerations are especially relevant when observed that the number of hours with negative or nil prices is increasing for the European countries with high amount of intermittent renewable energy sources. In 2012, 10 hours of negative energy prices were observed in France, 44 hours of nil energy prices were observed in Spain (no negative prices authorized), and 56 hours in of negative energy prices in Germany.
Number of hours with negative energy prices on Day-Ahead Spot Markets in 2012 and 2013 (up to 30/07)
Source : Energy Stock Exchanges
(Click to enlarge)
During the weekend of June 15th and 16th, when negative energy prices peaked at -200€/MWh, this market anomaly reached a whole new level and there are no signs to show that it will stop there.
Gas-fired power plants are sacrificed to energy transition
Priority injection of renewable energies causes another side effect that can have significant consequences on the economy. Indeed, these new energy sources pushes away the gas-fired power plants in the merit order, hence reducing their production time.
When they were designed to run for twice that time, gas-fired power plants have a producing average of 25% in France. This lack of profitability forces power producers to shut those plants down.
The last announcement occurred in April. GDF SUEZ declared that they will have to "mothball" three of their gas-fired power plants in France. The French group is not an isolated example in Europe:
- E.ON announced the shutdown of 11000 MW (the equivalent of 6 next generation nuclear plant EPR)
- Statkraft closed 430 MW in Germany
- Centrica mothballed 340 MW in the United Kingdom
- Eneco is decommissioning one of its power plant after only one year of power generation
The attention is now given to the energy transition, and the impact of the decision to close the nuclear power plants. The likely boost of the development of solar and wind energy in the next decades should not hide the worrying current situation: should we continue in a direction that creates negative energy prices? Should we wait for all the gas-fired power plants to be mothballed to assess how the "priority to renewables injection" endangers our electric network?
Mothball : to take (a factory, plant, etc) out of operation but maintain it so that it can be used in the future