After electricity prices in the UK briefly went negative on May 8th, I’ve been curious to understand the economics of this peculiar phenomenon better. A world powered by renewable energy, a talk I attended on 12th May shed some light on the topic – convincing me we are heading into in a time of great change in the way electricity markets and grids operate. Today the FT has an interesting article (UK power prices go negative as renewables boom distorts market – but behind a paywall) shedding some further light.
The main driver for negative prices is that the UK has a market for electricity where electricity prices are set by an auction mechanism at the operating cost of the most expensive generator required to produce a large enough supply to match the demand that is expected to exist at that moment in time*. Once a solar or wind farm is built, the marginal cost of producing an extra kWh is zero – and negative if the generator is being paid a subsidy for every kWh they generate. In addition, it is hard (i.e. expensive) for conventional fossil fuel and nuclear plants to reduce output rapidly. As a result the price can be zero or negative when supply from renewables exceeds demand for electricity. On May 8th the price was minus £30 per MWh (or minus 3p per kWh). On New Year’s Day 2016, the price fell to £70 per MWh. Consumers don’t currently pay these negative prices but they do benefit from their contribution to lowering the wholesale price of electricity (NB some of this reduction is merely offsetting the costs consumers are paying for that subsidises renewable generation)
Renewables generation capacity in the UK has grown very rapidly** and is now about 22GW. This is significantly greater than weekend demand which can can drop to 17GW. Of course, the actual amount electricity generated from renewables fluctuates depending on the weather – sunny days for solar and windy days for wind.
Negative prices have been a feature of other European electricity markets since 2007. In addition to the UK, they are a feature of markets in Germany, France, Belgium, Austria and Switzerland according to Epexspot which is an exchange that provides spot and day ahead and transnational markets in these countries.
Enappsys publish good quarterly and annual summaries of the electricity market. In their summary for the first quarter of 2016, they report that:
- 35.4% of total electricity generation across the quarter came from gas-fired plants, 22.4% from renewable sources, 19.0% from nuclear plants, 16.2% from coal-fired plants and 7.1% via imports from Ireland and the continent.
- Of the total renewable generation, 46.1% came from wind farms, 33.2% from biomass plants, 13.5% from hydro plants and 7.2% from solar farms.
- The trend of growth of renewables is well illustrated in this chart
A note that small scale solar generation (such as the solar panels on peoples roofs that qualify for Feed-in-tarriffs or FITs) is treated as a reduction in demand at a local level in the grid (as shown as embedded generation in the top diagram). It does not therefore feature in the figures for solar generation above.
* Elexon who operate the UK market for handling the differences between expected and actual demand and supply and ensuring that actual supply and demand balance have a very good guide to how the market works here
** In 2012 the official government forecast for Solar generating capacity was 6.5GW by 2030. In March this year we had 9.5GW installed, an increase of 1.6GW, or 20%, in the last 12 months.