Germany gets ready for marketing wind -- Electricity exchange to introduce negative price bidding

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Germany's incumbent power companies are increasingly keen to get wind-generated power integrated into the electricity trading market as an alternative to the must-run and mandated-purchase-price support mechanisms set out in the current renewable energy act. To this end, energy giant E.ON apparently wants a solution found for keeping both wind power and conventional generation online in periods of low demand in the name of power system efficiency.

With a mind to achieving both these aims, German energy exchange EEX is planning to introduce a mechanism which allows for negative pricing for bids to sell electricity in intraday trading and day-ahead spot market trading. When prices bid are negative, market players are effectively paying power consumers to use power.

This may be in everybody's interest at times when power demand is low, but there is plenty of must-run wind generation on the market. Stopping a nuclear or thermal plant dead in its tracks in these circumstances can be more costly than a short period of negative prices. That is because costs for starting up again are likely be steep.

For wind power operators, negative pricing is at worst neutral and at best helpful, because it makes the entire power system more efficient. Keeping wind plant rather than other generation online at all times saves on fuel, making it the cheapest option for consumers.

"Introduction of negative pricing is a good thing, it's absolutely correct and is in line with market logic," says Ralf Bischof from German wind energy association Bundesverband Windenergie. He disagrees with the notion that negative pricing provides an economic reason for developing energy storage to cover for periods when wind generation is in short supply, rather than relying on system reserve. "We expect negative pricing to occur relatively seldom. It will also be difficult to forecast when negative prices will be bid, so there won't be much of an incentive to build more energy storage facilities or to develop more demand side management," he points out.

EEX introduced the option for negative prices in intraday trading in December and plans to start negative pricing down to minus EUR 3000/MWh on the spot market this autumn. On the intraday market, bidding for individual hours is possible up to 75 minutes before physical delivery. In particular, this allows Germany's four transmission system operators -- which are required to take up all wind and other renewables generated power -- to make short term market adjustments if, for instance, wind generation turns out to be an hour or so earlier or later than predicted. Negative pricing has been rarely used in intraday trading so far. EEX data reveals there have been only a handful of individual trading hours for which players have bid negative prices in the hope of seeing the power taken off their hands.

Sensible management

"Intraday-managed wind is required for a sensible managing of wind expansion," says a trading expert from one major energy company, who prefers not to go public with his views. Apart from wind energy, there are few reasons why there should be negative prices on Germany's intraday trading market, he adds.

The one scenario he can imagine is when national power demand is very low at around 33-37 GW and all conventional plant, apart from that required for reserve, has been throttled back, yet cogeneration plant must run to supply heat -- and need to offload the power they also produce. If wind energy comes on the scene too, prices will drop to zero and would become negative "if this is possible,"

Negative pricing allows market forces to help wind operators to decide whether to run their plant or not, he points out. The alternative is to leave the decision to the transmission system operators (TSOs). If there is an overload on the transmission system, TSOs are required by law to switch off plant to maintain transmission system stability.

"To be realistic, over the next one, two, three years negative pricing will be the exception, happening perhaps at Christmas and Easter and maybe ten to thirty times in individual hours a year. But with expansion of wind and other renewables growing from say 23 GW to 50 GW, on days when there is low demand of about 33 GW, then there is a problem and negative trading will happen," says the trader.

Energy economists like the idea, too. A study produced for EEX, "Electricity Market Design," by Axel Ockenfels, say the possibility of negative bidding "is welcome from an economic point of view." This is especially the case, states the report, when it is more expensive to ramp down output from a power station over the coming hours in order, say, to accommodate must-run wind power on the system, compared with continuing to run the station. If bidders are not allowed to express negative costs in the bids, the overall cost efficiency of power generation can suffer for the sake of keeping a small amount of wind online, or reaching a market price where supply and demand are matched is rendered more difficult, according to the report.

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