Negative prices in wholesale electricity markets indicate supply inflexibilities

Wholesale electricity markets sometimes result in prices below zero. That is, sellers pay buyers to take the power. This situation arises because certain types of generators, such as nuclear, hydroelectric, and wind, cannot or prefer not to reduce output for short periods of time when demand is insufficient to absorb their output. Sometimes buyers can be induced to take the power when they are paid to do so.

Negative prices are rare in bilateral markets and more common—albeit still unusual—in Regional Transmission Organizations (RTO). In this article, we focus on negative bilateral spot prices, which occur predominantly in the Pacific Northwest. Negative prices in RTOs will be the subject of a follow-on article.

Technical and economic factors may drive power plant operators to run generators even when power supply outstrips demand. For example:

  • For technical and cost recovery reasons, nuclear plant operators try to continuously operate at full power.
  • The operation of hydroelectric units reflects factors outside of power demand, for example, compliance with environmental regulations such as controlling water flow to maintain fish populations.
  • Eligible generators can take a 2.2 ¢/kWh or $22/MWh production tax credit (PTC) on electricity sold. This means that some generators may be willing to sell their output for as low as -$22/MWh to continue producing power. Typically, wind generators are the largest such group in any region.
  • There are maintenance and fuel-cost penalties when operators shut down and start up large steam turbine (usually fossil-fueled) plants as demand varies over a day or a week. These costs may be avoided if the generator sells at a loss to attract a buyer when demand is low.

via Negative prices in wholesale electricity markets indicate supply inflexibilities – Today in Energy – U.S. Energy Information Administration (EIA).

Categories: Electricity, Energy