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Negative Prices Q&A

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How they occur, what they mean

What are negative prices and how do they occur?

Negative prices are a price signal on the power wholesale market that occurs when a high inflexible power generation meets low demand. Inflexible power sources can’t be shut down and restarted in a quick and cost-efficient manner. Renewables do count in, as they are dependent from external factors (wind, sun).

On wholesale markets, electricity prices are driven by supply and demand which in turn are determined by several factors such as climate conditions, seasonal factors or consumption behavior. This helps to maintain the required balance. Prices fall with low demand, signaling generators to reduce output to avoid overloading the grid. On the French and German/Austrian Day-Ahead market and all Intraday markets of EPEX SPOT, they can thus fall below zero.

In some circumstances, one may rely on these negative prices to deal with a sudden oversupply of energy and to send appropriate market signals to reduce production. In this case, producers have to compare their costs of stopping and restarting their plants with the costs of selling their energy at a negative price (which means paying instead of receiving money). If their production means are flexible enough, they will stop producing for this period of time which will prevent or buffer the negative price on the wholesale market and ease the tension on the grid.

Are negative prices a theoretical concept or gets the buyer really paid for buying electricity?

Negative prices are not a theoretical concept. Buyers are actually getting money and electricity from sellers. However, you need to keep in mind that if a producer is willing to accept negative prices, this means it is less expensive for him to keep their power plants online than to shut them down and restart them later.

How often do they occur?

Negative prices are a comparably rare phenomenon, as several factors have to happen at the same time. However, they are nothing unusual. In Germany, where inflexible power generation from renewables is increasing, 56 hours on 15 days with negative prices were observed on the Day-Ahead market in 2012. On the Intraday market there were 41 hours on 10 days. If these markets were not coupled, negative prices would occur more often, and price peaks would be more acute.

Since when do they exist?

They were first introduced in 2008 on the German/Austrian Day-Ahead and 2007 in the German Intraday market. In 2010, they were introduced on the French Day-Ahead and Intraday markets. The Austrian and the Swiss Intraday markets, launched in 2012 and 2013 respectively, also provide the possibility of negative prices.

Are there limits of negative prices? If so, why?

Yes. There are price caps that are reached extremely rarely. They are an economically logical barrier for power trading.

Aren’t negative prices killing producers?

No. Negative prices are a signal, an indicator for market participants. If producers decide to keep their production up, they have calculated that this is the best, most cost-efficient way for them considering the costs of shutting down and restarting their plants.

In addition, negative prices are an incentive for producers to invest in the development of more flexible means of production that can react more efficiently to fluctuating energy supply in order to increase security of supply and prevent negative prices.

Are there any means to soften or prevent negative prices?

Liquidity – based on wide offer and demand – is key for lowering the occurrence of negative prices. This is where cross-border trading solutions come in. On the Day-Ahead market, Market Coupling provides a solution for the optimal use of cross-border capacities between two or more markets. Thanks to the Market Coupling in North-Western Europe (including France, Germany, Benelux, Great Britain, the Nordic and Baltic countries), negative prices arebuffered or prevented. For instance, in case of low or negative prices in Germany, France and Benelux, Denmark and Sweden will import electricity until the cross-border capacity is fully used or prices converge.

On the Intraday market, the trading system ComXerv can use cross-border capacities in an optimal way and hence buffer volatility, which also helps to decrease the number of negative prices. As a result, the “quality” of negative prices both on the Intraday and the Day-Ahead markets today is different to the extent that they did not reach -1500 € as in 2009 before the integration process took off.

Are final consumers benefitting from negative prices?

Prices on the wholesale markets reflect market fundamentals and the evolution of supply and demand. Power Exchanges like EPEX SPOT provide a transparent and secure price signal to the actors of the wholesale markets. Please contact suppliers on the question if low or negative wholesale prices have an impact on prices for final consumers.

What is the impact of negative prices on transmission grids?

Negative prices are a signal of tense situations in the power system. Please contact the transmission system operators for more information of the impacts on grids.

 
 

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