Utilities and generators need to ensure the grid balances supply and demand in real time, and significant renewable generation complicates the process. Traditionally, energy grids ramped generation up and down piecemeal to match predictable loads on any given day. Renewables, by contrast, produce intermittently and according to the weather, which does not always align with demand. With the proliferation of renewables in certain areas, like California and Texas, the effect of this intermittent supply can create added price volatility. When there is significant excess energy, that electricity gets priced to sell as fast as possible.
Why don’t generators just stop generating?
It may seem that a more intuitive answer to plummeting electricity prices would be to simply curtail generation.
Yet for renewable generators, supplemental revenue streams often make it a better financial decision to continue selling energy at negative prices. Renewable generators often receive RECs for every MWh produced—that revenue, combined with the cost or time involved in stopping generation, leads generators to simply keep producing.
Who benefits from negative prices?
In the case of both electricity and oil, owners of storage assets – whether that’s an oil tanker or a battery – are in a unique position to capture the market benefits associated with oversupply.
Oil tanker rates have recently more than doubled as demand for storage and transport increase. “Right now, storage seems more valuable than oil,” Daniel Yergin, vice president of IHS Markit, told The Wall Street Journal. “Storage was a logistical tool. Now it’s a prized commodity.”
Similarly, battery energy storage allows users to store electricity during hours when it is cheapest, and then dispatch it later when prices are higher. Typically, electricity consumers are not directly exposed to wholesale market prices, which is where prices turn negative; however, certain electricity contracts are directly indexed to wholesale prices and enable end consumers to capitalize on wholesale price volatility through automated trading algorithms. Storage coupled with renewable energy projects may increase the advantage of this economic optimization, by providing valuable firming capacity to intermittent resources.
Are negative prices here to stay?
Oil has since risen above zero, but its price is down significantly on the year. Some analysts think there is a chance that, when the June contracts are due to expire, prices could once again plummet.
Electricity prices, in the near-term, will certainly continue to occasionally turn negative in markets like California. But there is hope that increased storage, combined perhaps with advances in storage technology, can help balance the grid and minimize some of the price volatility on display when prices go negative.