The Long Shadow of Negative Pricing

A Record-Setting Summer in Texas
July 25, 2018
Flexibility, Fuels & the Future
August 10, 2018


Top Takeaways:

  • Renewable energy plays a valuable role in the nation’s generation mix.
  • But when renewable energy flows into the wholesale market at prices below zero, the generation mix is distorted over the long haul.
  • There really is no such thing as “free electricity.”

Like many people, I love free stuff. Tote bags and coffee go-cups top my list of free energy conference swag. So, I can understand why renewable energy enthusiasts enjoy discussing “negative pricing” and the benefits for consumers’ electricity bills. Some trumpet “free electricity” in a manner that calls to mind cell phone advertising.

However, sometimes you get what you pay for, and that’s certainly the case with “free” electricity. It may be more accurate to say that free electricity is always paid for by someone else. Last week, we discussed the long, hot summer in Texas, where wind resources have boomed, thanks to receiving significant federal tax subsidies as high as $24/MWh and state incentives as well.

The excess of wind generation causes many episodes a year of negative pricing, meaning these plants can and do, set the market price for generation, making many coal, gas and nuclear plants too expensive to operate. Negative pricing also deters investors from building new generation. “Free” electricity has helped cause a Texas reserve margin crisis and the sudden extreme spikes in wholesale and retail electricity prices.

The phenomenon of negative pricing deserves more discussion so that policymakers can sift through myths and facts about “free electricity.” In 2012, the U.S. Energy Information Administration (EIA) commented on negative pricing, explaining some basics: “wholesale electricity markets sometimes result in prices below zero. That is, sellers pay buyers to take the power.” Put another way, “generators may seek to maintain output by offering to pay wholesale buyers to take their electricity.”

EIA further explained that “®echnical and economic factors may drive power plant operators to run generators even when power supply outstrips demand. … “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.”

EIA makes it clear that wind isn’t the only resource paying a buyer to take power. It can happen for any resource that either cannot control its fuel inputs or operates best when continuously running full-steam ahead. However, the wind industry frequently touts its ability to lower costs, and the American Wind Energy Association released a map last week highlighting wind’s contribution to annual generation.

Texas weighed in at 14.8 percent overall, which dovetails with the relatively low contribution it has made to power generation this summer in Texas. How can wind set the market price when it isn’t on that often? The answer can be complex, and indeed, this topic deserves detailed study. A great place to learn is a 2017 article, “Growing Evidence of Increased Frequency of Negative Electricity Prices in U.S. Wholesale Electricity Markets” on the Energy Forum page of the International Association for Energy Economics.

But the answer can also be fairly simple – so far, in markets around the nation and the world, even relatively few hours of negative pricing go a long way, dragging down, on paper, the wholesale cost of power, and pushing baseload resources out of the market. Negative pricing is an illusion but it casts a long shadow over the energy landscape and stands in the way of consumers’ access to reliable, affordable power. Ultimately, it also harms renewable energy, which cannot contribute to power flows without the backup provided by coal, gas and nuclear.

Wind plays a valuable role in our generation portfolio. But the negative prices that often blow in with it distort reality, play favorites with resources and ultimately harm consumers.