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Denmark

Denmark

Denmark introduces penalties for over supply

In periods during windy nights in Denmark so much power is produced that owners of wind turbines -- and all other electricity generation -- will from next year run the risk of having to pay to offload their production. That will happen when the Scandinavian power exchange, Nord Pool Spot, introduces "negative" electricity prices during the first half of 2009.

With the aim of getting more wind energy integrated into the power system, Denmark is introducing negative pricing as a new market mechanism for ensuring an effective balance of electricity supply and consumer demand

Denmark introduces penalties for over supply

In periods during windy winter nights in Denmark so much power is produced that owners of wind turbines -- and all other electricity generation -- will from next year run the risk of having to pay to offload their production. That will happen when the Scandinavian power exchange, Nord Pool Spot, introduces "negative" electricity prices during the first half of 2009. That electricity prices can drop to below zero may at first sound like a strange idea, but it is a market mechanism that will contribute to expansion of renewable energy, says Nicolaj Nørgaard Petersen, head of market development at Energinet.dk, Denmark's power system operator.

During 2007, electricity prices on the Nordic power exchange dropped to zero for a total of just under 100 hours, or a little more than 1% of the time. Typically, zero prices occurred during windy winter nights when demand was low. Even when the price is zero, generation of electricity will most likely continue at flexible central and decentralised power plants because the cost associated with idling them is more than the losses incurred by continuing production. In future, however, by allowing prices to turn negative, generators will receive a price signal that reflects an imbalance between supply and demand, leading to an overloaded power network, says Nørgaard Petersen.

"The negative prices are an incentive to generators to adjust production to demand -- and maybe some consumers will use more electricity when they receive money for doing so," he explains. "As a result, periods of negative pricing will ideally be rare occurrences. Just the potential for negative pricing will provide an incentive for supply and demand to meet before the price drops to zero." In Germany, the power exchange introduced negative pricing in September, but until mid-October the price had not at any point gone through the floor, notes Nørgaard Petersen.

Nord Pool Spot announced back in 2003 its intention to use negative pricing as a market instrument, but for technical reasons delayed its introduction of the new system to 2009. A floor will be placed on how low prices may drop below zero in the same way as the exchange also operates a ceiling.

"The purpose with negative pricing is to ensure that more electricity is not produced than there is market demand for. In this way, negative pricing is one of the instruments to secure a future in which we can get significantly more wind power into the system, without it affecting security of supply or an effective market for electricity," says Nørgaard Petersen. The Danish goal is to double wind power production capacity by 2025 so that wind energy meets 50% of electricity demand, up from 20% today.

"Management of the significant rising volume of wind energy is a considerable challenge, which demands a broad sweep of flexible and effective solutions. Climate change goals must be reached at the same time as security of supply is protected and there is effective competition in the market for the benefit of consumers and society," he adds.

As well as a wholesale market for electricity, export-import of electricity, flexible generating plant, grid expansion and reinforcement, new and stronger transmission links with neighbouring countries and now also negative pricing, there are further ways of regulating supply and demand with the aim of integrating increasing levels of renewable energy, says Nørgaard Petersen. In the short term he cites heat pumps in combined heat and power plant, a wider dispersion of more wind power, particularly offshore, and some use of electric cars. Longer term he expects to see widespread use of electric cars, flexible consumption and production, heat pumps in houses and in the far distant future storage of electricity as hydrogen or as compressed air. "There are many ways of securing even more renewables," he says. "At Energinet.dk, we are focused on development of a much more robust and flexible electricity system so we can integrate even more renewable energy in future."

In practical terms, wind turbine owners can choose to turn off their wind turbines when prices go negative. Since wind electricity has a relatively low marginal cost, wind is likely to be among the last producers to voluntary stop generation. Alternatively, they can opt to sacrifice some profit in return for a long term and fixed price power purchase contract with a power broker.

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