Call it the curious case of the negative power price. On a sunny day in California, perhaps in the early afternoon, the state’s nearly 15,000 megawatts of solar generation is running at nearly full capacity. Power use isn’t necessarily high enough to take advantage of the situation, but with electricity streaming into the grid, it has to go somewhere and wholesale electricity prices drop below zero. In this situation, major power users, like factories, are literally paid to take the electricity.
What does that mean for most consumers?
Negative prices are a quirk of the power industry. Demand for electricity fluctuates depending on the time of day, the season, and other factors. Meanwhile, generation equipment frequently takes a certain amount of time to cycle down production. In the interim, utility companies need to get rid of the excess power they have on hand–and quickly.
“Basically, electricity is a rare commodity in two respects. First, it has no shelf life and is therefore consumed immediately. Second, power plants can’t always be easily stopped and started again like some production lines. It may be cheaper for a power plant to pay you to consume more power than ramp up and down,” explains Craig Morris, co-author of Energy Democracy, the first history of Germany’s Energiewende.
“But ‘you’ probably don’t get paid to consume power. Negative prices only occur on the wholesale exchange. Retail customers can’t buy there, so they don’t benefit. You only benefit if you can purchase wholesale power – and even then, only if you can use it at those times.”
Negative power prices are largely a fluke, lasting for only a few hours. In fact, research by one professor at the University of California, Berkeley, found that hydropower was a significant factor in negative power prices. Following periods of heavy rain, hydropower generation surged, which, added to power from solar and wind, pushed prices below zero.
“California, Oregon and Washington lead all U.S. states in hydroelectric generation and it is no coincidence that negative prices have occurred most often in these states. Contrast this with Texas…Texas has twice as much installed wind capacity as any other state so you might have expected to see negative prices during high wind periods. This may well happen in specific transmission-constrained locations (e.g. West Texas), but negative prices throughout the state are rare,” writes Lucas Davis, faculty director of the Energy Institute at Berkley’s business school.
Davis explains that many smaller hydropower facilities were built to operate with the natural flow of the river and were not designed to let water pass through without turning the generators.
They are more significant as a market signal, showing the need for more investment in storage and other technologies. At the same time, negative power prices hurt consumers in the long run, since they are a sign of overall market inefficiency. Utility companies may be paying businesses to take the power they produce, but they are still charging their customers for the equipment and fuel needed to generate this electricity.
It also shows how flexible electricity markets will need to become as solar and other renewable energy sources come to play a greater role in generating. The economics of this are tricky. It is already becoming difficult to continue to operate traditional fossil fuel plants in California, but they are needed as a backstop for situations where renewable sources cannot meet demand.
Meanwhile, frequent periods of negative power prices make utilities hesitant to install more wind turbines and solar panels. At the same time, prices and regulation make it more difficult to maintain the natural gas plants that the state currently relies on to fill in for renewables. Without these plants, some experts say, the state risks facing black or brownouts.
Grid integration, which would allow utilities to sell surplus power across state lines would help to ameliorate the situation. However, the underlying reality is that full integration of renewable energy is continuing to have major effects on how the electricity grid functions.
More than just a curiosity, negative prices are a sign of growing pains in a rapidly changing industry.