Negative Pricing

In India, long term power accesses have continuously dominated the electricity power market and still the issue like bringing long term and short term players together in meeting the load in real time are to be addressed... - Dr S Prabhakar Karthikeyan, D P Kothari

In the present deregulated electricity market, the power system engineers have started emphasising the terminology called ‘Negative pricing.’ This has gained its significance when the renewable penetration increases more than the demand especially in the lean hours.

The installed capacity of our power stations in India is 282.023 GW (as on November 2015, by www.cea.nic.in ) while the base load energy deficit and the peaking shortage is 2.1% and 2.6% respectively for the fiscal year 2015-16. So within few years, India can anticipate negative pricing by the power producers, which needs to be solved in terms of reforms and policies. Business Line has also stated (dated 20th July 2015) that “there is a huge surplus capacity sufficient to meet demand for the next three-four years, during which period some private producers will go bankrupt, which will push up the stress levels of banks.”

Significance of electricity market

Compared to other market commodity, electricity cannot be stored; it should be available as and when required by the customers. At the same time, both generation and demand changes time to time. In this market, the electricity is sold in the form of energy and power. Energy is sold for a period of 15 min, 30 min, 60 min blocks etc., while power is sold to take care of ancillary services. In India, long term power accesses have continuously dominated the electricity power market and still the issue like bringing long term and short term players together in meeting the load in real time are to be addressed.

What is negative pricing? How this is possible?

Negative pricing phenomenon happens during when the power generation companies meet the demand which is less and operate with stringent constraints. For example, in the wind surplus region, the wind power producers are ready to pay the grid operators to sell their power during surplus supply which is termed as ‘negative price.’ This is because they receive tax credit/subsidy on the other way. Every country in the world has different energy policies and incentive schemes to meet their renewable targets. Renewable action Plan (REP) with feed-in tariffs, Production Tax Credit (PTC) are some of them. This harmful effect most of the time even overlooked in the western countries.

Existence of negative pricing in U.S.

In 2014, United States met 89% of their energy requirement from their own production while the remaining energy was met by importing petroleum. Around 11% of energy comes from renewable sources (source: US energy information Administration).

IOWA, which is enriched with wind power (under Midwest Independent System Operator) suffered approximately for six hours with negative pricing during morning hours. This is shown in figure 1. Electric Reliability Council of Texas (ERCOT), PJM ISO and California ISO too suffered from negative energy prices in the past few years. National Renewable Energy Laboratory has shown how negative locational price is created due to the rapid increase in wind power than the growth in transmission sector.

In mid-2015, the spot clearing price at Texas went negative and sustained for many hours. The price went from $ 17.40/MWh for a given block to zero in the next block. It immediately reached the negative region with the negative price of $ 8.52 /MW hand lasted for four hours. It was said that negative pricing can occur wherever supply demand mismatch exists.

Clean Technica, a news and analysis site has stated that on 2nd July 2015, in Australia, Queensland which is enriched with solar power pulled down the pricing to negative when the demand was low. This has changed the dynamics of the Australian electricity market on that day.

In the European Uniion, out of 28 countries, Germany leads in net electric power generation with its share of 19.2% followed by France and U.K with 17.7% and 11% respectively (courtesy: www. ec.europa.eu). The European market has a share of 24% of renewable sources (as per the report published by European Commission, “EU Energy markets 2014”).Still it was predicted that the negative pricing in European market will increase from 64 hours in the year 2013 to 1000 hours or above by 2022.Baringa, a consulting firm in United Kingdom reported that the negative pricing can increase still further when low carbon generators offer prices lower than the negative pricing. These generators can adopt this strategy to avoid loss due to shut-down or start-up costs. By adding more energy storage technologies, the negative pricing can be dropped drastically.

Belgium, Germany, France and Spain too face negative electricity prices. In 2012, 10 hours of negative pricing were recorded in France with 44 hours of nil energy pricing in Spain and 56 hours of negative pricing in Germany.

In India, no work has been carried out or initiated till now. One reason could be that the impact of negative pricing may take few more years to be felt on the system. And this is due to the existence of wide gap between the demand and generation. But during off peak hours when renewables take their upper hand then negative pricing cannot be avoided. In a subsidy based renewable market, that too with varied operational and economic constraints, it is sure that the clearing price gets distorted and create an unreliable electricity market.

Impact of negative pricing

This negative pricing directly affects the dynamics of the market. It can be temporary or remains over a time period. It disturbs the market clearing prices for other participants where it creates huge loss and burdens them financially. More clearly, the revenue received by the generation companies intended to meet the base load gets reduced as they do not receive any subsidies too.

Negative pricing changes the pattern of unit commitment. It plays a significant role in the market where storage of energy is not possible. Researchers are also working in finding the relation on how the negative pricing can support the usage of inefficient storage devices.

Figure 2 shows how wind generation in the early hours reduces indirectly the availability of conventional power plant. This still creates/increases the gap between the generation and demand especially in the peak hours. Consumers will be burdened by bearing the extra transmission cost when the power flows from wind rich areas to the load centres during negative pricing. It is a challenge to make the end consumers benefitted from the impact of negative pricing. Proper study has to be made as it creates a vulnerable situation to the transmission system. From the power producers’ point of view, it gives an incentive for them through which they can come out with various means of meeting the demand under different conditions.

Impact of negative pricing in other market

In Canada during 2014, propane manufacturing companies were trading at negative price which went for few hours while in U.K., since 2006, the association of natural gas price and negative pricing has been identified. In India, there exists a strong debate on negative pricing of coal and its impact on power tariff, which will create instability in the market. This is because the price of the coal is cheaper when purchased from auctioned blocks. In mid-2015, Ford has seen the negative pricing in the Chinese automotive market which was temporary.


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