Negative wholesale electricity prices: possible, but rare

Under certain conditions, electric generators in regional transmission organizations (RTOs) actually pay to produce power as reflected in a price below zero. This situation can arise because some types of generators, such as those providing nuclear, hydroelectric, or wind energy, cannot or prefer not to reduce output for short periods of time when demand is insufficient to absorb their output. Negative wholesale prices are a relatively rare occurrence, as shown by the price data reported by RTOs.

RTOs use locational marginal pricing (LMP). Prices are determined at thousands of locations. Prices are also determined hourly and on a 5-minute basis. In total, RTOs produce over 3.3 billion energy prices in a year. So while the over 740,000 instances of negative prices in 2011 prices reported by RTOs may seem a lot, this number is very small relative to the total number of prices produced. The chart above shows the frequency of negative prices reported by six RTOs across the nation.

Technical and economic factors lead 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 renewable generators can take a 2.2 cents/kWh or $22/MWh production tax credit (PTC) on electricity sold. This means that some generators, primarily those operating wind turbines, may be willing to sell their output at negative prices to continue producing power.

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 when demand is low.

via Negative wholesale electricity prices: possible, but rare – Today in Energy – U.S. Energy Information Administration (EIA).

Categories: Electricity, Energy, Policy