Negative prices unmask limitations of the market

GERMANY: One Sunday in May revealed some very different ways of dealing with wind generation among Germany's energy traders when faced with extremely low prices.

To sell or not to sell? Some energy traders stopped wind farms and paid operators compensation, others sold generation into market with negative prices (pic: RWE)
To sell or not to sell? Some energy traders stopped wind farms and paid operators compensation, others sold generation into market with negative prices (pic: RWE)

On Sunday 8 May, the day-ahead spot market price between 2pm and 3pm CET in the joint Germany/Austria market plunged deep into the red - to -€130.09, the lowest price since 2012. According to energy-trading consultancy Energy Brainpool, the average day-ahead baseload price for the day was -€12.89/MWh.

Instead of earning money through electricity sales, generators and traders, including those marketing wind power, were paying customers to consume it.

Intraday prices that day were even more dramatic. Over an eight-hour period, they fell to a low of -€374/MWh in the wholesale electricity market's continuous trading process for same-day delivery, reported energy trader Statkraft Markets.

Wind generators get a support price for their electricity calculated as the difference between the average monthly value of their wind power in the day-ahead spot market and the support price they are entitled to.

The average monthly value of wind power in the day-ahead wholesale market is currently around €20-24/MWh and the average rate of support is roughly €97/MWh.

In that negative peak hour on 8 May, wind generators will still have received around €74/MWh of support. But they will have paid €130/MWh to get rid of the electricity to customers, meaning an overall loss of €33/MWh.

Statkraft Markets, Germany's biggest marketer of wind power with a portfolio of 7.7GW of wind energy and 700MW of solar, saw the negative-price problem coming when a large amount of wind and solar power hit a market with low demand.

It reduced its traded wind input by 3GW in that period, reducing the capacity that would otherwise have needed support payments. Statkraft said it saved EUR5 million in wind-support payments as a consequence.

But other traders ignored the price signals and still offloaded 15GW of wind power into the market, said Energy Brainpool.

Administrative effort

Wind power trading is a business with very slim margins. Having to carry out a separate billing, as well as paying compensation to operators for their lost wind-energy support if turbines are switched off, would certainly add to costs, noted Johannes Henkel, senior manager at Energy Brainpool.

Avoiding this administrative effort and cost in a rare period of negative prices seems to have been the preferred option for some wind-electricity traders. They simply left the turbines running, even if the trading loss incurred was bigger.

Other traders seem to have ignored contractual details and accept the resulting losses. In their contracts for marketing electricity from wind, the parties agree on the technical requirements for curtailing or stopping output, and also that the trader is allowed to reduce output or switch off the turbines.

In practice, that did not happen.

But 8 May might have served as a reality check for both electricity market traders and wind-turbine operators.

Operators of older wind turbines (commissioned before 1 August 2014), for which direct marketing of their electricity is not obligatory, may return to the feed-in tariff (FIT) system, in which the electricity must be taken up and marketed by the transmission system operators (TSO). In effect, curtailment is not allowed.

In May 2016, roughly 3-4GW of onshore wind was still under the FIT system, and marketed on a day-ahead basis by the TSOs, possibly accounting for around 20% of wind power that stayed on the system in the negative-price period. Depending on the location of their projects and transmission-grid capacity in the region, wind-power traders' motivations may have swung hard in the other direction, however.

Faced with some hours of negative prices, a trader selling wind generation may reduce uncertainties by switching off turbines and not bidding into the market for the period. This approach may be chosen if, during high-wind periods, there is a danger local networks could get overloaded. But the electricity trader may not be able to fulfil its electricity-supply commitments to keep its balancing pool stable and could be subject to penalty payments.

New rules

Electricity traders' decisions on whether or not to switch off the turbines at wind projects may have become more clear-cut for capacity coming online since the beginning of 2016.

Germany's Renewable Energy Act 2014 states that if a period of negative prices continues for at least six hours, all turbines over 3MW that were commissioned after 1 January 2016 will have their support reduced to zero, with no compensation, during all those hours.

In the ongoing debate over the draft Renewable Energy Act 2016, due to be adopted later this year, Statkraft has been arguing that the six-hour negative price rule is unnecessary. Its response on 8 May demonstrated that the existing rules are sufficient incentive for electricity traders and wind-farm operators to curtail output at times of negative market prices, it said.

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