During the month of June, Energy Edge is publishing a four-part series exploring how the growth in renewable energy on the grid is changing power prices. Check out our blog each week for the next article.
Part I of this four-part series introduced the idea of negative wholesale power prices and changes in the historical price relationships between daytime and evening prices in certain markets due to an abundance of renewable generation. Part II of this series will explore the following in more detail:
- Why negative prices occur,
- Why wind and solar generation can be economical at low and negative prices, and
- When we are seeing most of the low and negative prices occur
So, what exactly are negative power prices and how do they occur? Negative power prices occur when there is more generation on the grid than there is demand. This is a price signal for generators to curtail production. In a negative price event, instead of being paid for their electricity, generators who inject generation onto the grid are charged for producing electricity.
Power plants with technology that allows them to easily ramp up or ramp down their generation, they can generally avoid negative pricing periods by curtailing production. However, generation assets that do not have ramping capabilities, such as large coal and nuclear facilities, continue generating and ultimately incur costs above their production costs due to the negative prices.
The economics of wind and solar are different than those of traditional fossil generators. In fact, today, their respective economics actually support generating at certain negative prices. Let’s examine wind generation first. Wind generators in the United States receive a subsidy from the federal government called a Production Tax Credit (PTC). This tax incentive is realized only when the wind generator produces electricity.
During normal grid conditions, a wind generator is realizing value from both selling its power as well as from the PTC. If power prices went to $0, the wind generator would continue to realize positive value for producing electricity from the PTC.
In fact, a wind generator will receive positive economic value at negative price levels as low as the negative value of the PTC, which ranges from $14 – $23 / MWh. In other words, many wind generators still make money at prices as low as negative $23 / MWh!
Solar generators can continue to realize value during negative price events for a different reason. In states such as California that have robust renewable energy mandates, there can be significant value in the Renewable Energy Certificate (REC) that is created when the renewable energy is produced. For example, in California, the value of a Category 1 REC has ranged between $10 – $18/MWh over the past few years. Similar to wind generators, solar generators continue to receive the value of the REC even when power prices go negative. Theoretically, solar generators would produce electricity at negative prices as low as the negative value of the REC.
So, when do we see most of the negative prices occurring? There is a relationship between negative prices and the amount of renewable energy being used to meet demand. As the percentage of demand being served by renewable energy increases, so does the frequency of negative prices.
In a study performed by Energy Edge of the California and Texas markets, negative prices were observed to notably increase when renewable energy was serving 20% or more of the demand on the grid. When the percentage of demand being met by renewable energy is higher, the frequency of negative prices is higher, and the magnitude of negative prices is even more extreme (i.e. prices are even more negative).
So, what does all this mean?
- What will happen to power prices as more and more renewable energy is added to our grids?
- What will more negative prices mean for fossil-based generators that are not economical when prices go negative?
We will explore these topics in Part III of this four-part series to be published the week of June 17.