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Negative electricity prices can occur on short-term electricity markets when high and inflexible electricity generation coincides with low demand.
In a few hours in the year the electricity price on the exchange is negative. This means that during that time electricity producers have to pay for the offtake of the electricity they generate. There is a strong incentive to consume and also not to generate this electricity. However, there are reasons why producers of both conventional and renewable electricity continue to run their generating installations even when the price is negative.
When do negative electricity prices occur?
Supply and demand determine the Wholesale prices of electricity. However, electricity is a special commodity with limited storability. Electricity always needs an offtaker to ensure that the grid remains stable. Storage providers therefore act on the electricity markets on the demand side (taking energy off the grid for storage) and on the supply side (releasing electricity into the grid from storage).
Negative electricity prices can occur on short-term electricity markets when high and inflexible Electricity generation coincides with low demand. Negative electricity prices usually occur in periods when there is high wind and/or solar photovoltaic generation. Particularly low demand often occurs over public holiday periods such as Easter, Pentecost or Christmas.
For instance, electricity prices on the exchange were negative (averaging minus 52.75 euros per megawatt hour) between 10am and 6pm on Easter Monday, 22 April 2019. In other words, traders on the electricity exchange received money for buying electricity. On that day, consumption was low, which is typical for the Easter bank holidays, while at the same time photovoltaic installations were generating a lot of electricity. Despite moderate wind generation, renewables produced enough electricity to meet Germany's entire demand over a period of several hours.
Why do conventional power plants continue generating electricity?
There are various reasons why operators of conventional power plants keep their plants running when prices are negative. For operators of large fossil fuel or nuclear power plants, for example, shutting down and later re-starting their plants would be very costly. In light of these start-up and shutdown costs, it may make economic sense when prices are negative to ramp down a plant to its technical minimum but not shut down the plant completely. Industrial power plant operators also optimise the operation of their plants in conjunction with their Electricity consumption. Nuclear power plants are also subject to technical and licensing restrictions.
Another reason for continuing operation is a plant operator's commitment to provide contractually agreed system services, such as balancing energy, to the network operator. This is referred to as conventional minimum generation.
Another reason that is more significant both in terms of scope and in economic terms, however, is what is known as the conventional generation base. This arises from the fact that conventional power plants earn revenue not only from the sale of electricity but also from various other sources. From the operators' perspective, it makes sense for combined heat and power (CHP) plants to continue producing electricity if they are responsible for supplying heat to an urban or industrial heating network and if it is not yet possible – or would be expensive – to separate the heat generation from the Electricity generation process. Finally, there are other financial incentives that encourage operators to continue generating electricity even when prices are negative, such as "avoided network charges" (payments to power plants for feeding in electricity below the extra-high voltage level) and "self-consumption privileges" (exemption from network charges and the renewable energy surcharge for power stations attached to industrial plants).
Why do wind and solar photovoltaic installations continue generating electricity?
Renewable energy installations in Germany receive payments under the Renewable Energy Sources Act (EEG) because they cannot yet be fully refinanced through the market. Renewable energy generators receive a guaranteed payment for every kilowatt hour they produce. Since the entry into force of the revised EEG in 2014, installations with a capacity of more than 100 kW have to sell the electricity they generate directly on the wholesale market ("direct selling").
Installation operators selling their electricity directly do not receive a feed-in tariff but a "sliding" monthly market premium that makes up the difference between the guaranteed payment and the average monthly revenue on the wholesale market. The level of the market premium is therefore largely independent of the applicable exchange price. The operator of a renewable energy installation will thus accept negative prices for as long as they are overcompensated by the market premium. Only when a negative price cancels out the market premium completely will the operator have negative revenues and switch off the installation.
The revised EEG of 2014 also introduced the "six-hour rule", under which larger new installations receiving EEG payments and selling electricity directly will not receive payment if the day-ahead price on the electricity exchange is negative for a period of at least six consecutive hours. If this is the case, the installation operator will not receive the market premium as from the first hour in the period with negative prices. The revised EEG 2021 shortened the period to four hours.