POSITIVELY NEGATIVE How to capitalise on the opportunity presented by negative pricing in the British Wholesale Electricity Market 2 NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET Executive summary
Negative pricing is an agent of change, supporting the transition to the more flexible energy system needed to deliver the clean energy transition.
Negative prices are exactly as they sound, Investment should be focused on increasing the atypical situation where the party that flexibility in existing energy resources is normally the seller pays their customer where possible and in the development of to consume their product. In this case, highly flexible new entrant solutions both the product is electricity, the sellers are on the supply and the demand side. Timing generators and suppliers are buying on is everything and seeking advice regarding behalf of homes and businesses. when to deploy is also crucially important. Negative pricing in wholesale electricity This paper explores the; what, where, when markets represents an opportunity for and why of negative pricing in wholesale the owners of flexible energy utilising a electricity markets. In addition, we examine dynamic approach to asset optimisation. the implications and opportunities that To inflexible energy resources, unable to negative pricing presents participants in the react in a timely manner to the clear pricing wholesale electricity market, as the supply signals, to reduce their electricity output, demand context evolves as we negotiate the negative pricing is a threat. clean energy transition. The owners of flexibility resources must Negative prices are not the problem, ensure that the right route to market there are merely a symptom of the real strategy is in place in order to fully problem in power systems/markets; the capitalise on the opportunity created by lack of flexibility in both the production negative prices. Access to the Balancing and consumption of electricity. Negative Mechanism and the Imbalances market pricing catalyses the transition to the more is key, as most of the negative pricing flexible power system/market required for opportunity is in these markets at present. the low-to-zero carbon electricity system/ market, providing opportunity and threat to flexible and inflexible energy resources respectively.
NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET 1 Introduction
On Sunday 8 December 2019, the Great Britain (GB) Negative pricing is not a bad thing, it is merely a symptom wholesale electricity market observed negative prices for of an underlying problem. The root cause of negative a record, ten continuous hours, from midnight to ten AM. pricing is a lack of flexibility, or inflexibility in electricity In the oversupplied marketplace that existed during that production and consumption. time, electricity producers were effectively paying their In this paper we explore what negative prices are and customers to accept the energy they were generating. where, when and why they occur. We also examine the This apparently upside-down turn of events was by no implications and opportunities that negative pricing means unique. Wholesale electricity market prices have presents participants in the wholesale electricity market, as increasingly been dipping into negative territory in GB, GB negotiates the clean energy transition towards net zero a trend we have seen in other markets across Europe. In carbon emissions. 2019, the GB market saw negative pricing for around 112 hours in total, across the different markets.
2 NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET IMAGE TO BE SOURCED
What are negative prices?
In April 2020, West Texas Intermediate (WTI) May 2020 crude oil futures plunged into negative territory, the first time the marquee front month crude oil futures contract has ever been recorded in negative price territory. The attention this event gained and the commentary that followed, should now mean that the explanation of concept of negative pricing offered here ‘goes down’ more easily. Negative prices are exactly as they sound: a situation where the party that is normally the seller pays their customer to consume their product. A form of negative pricing takes place in the aviation industry when an airline overbooks a flight and pays compensation (over and above the original price paid) to customers who agree to give up their seats.
NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET 3 Where do negative prices occur?
In the wholesale electricity markets, energy is traded between producers and consumers ‘over the counter’ or via an exchange. Trading can occur as much as ten years in advance of delivery, in practice it is more commonly up to four years in advance of delivery. Trading can occur on the day of delivery, as little as one hour in advance of delivery. In the last ‘market’, the electricity system operators buys and sells energy in order to balance the system. Imbalance charges are levied on producers and consumers who have under or over delivered are charged a cost reflective of that incurred in balancing the system. Negative prices can occur in any of these markets but is much more likely to happen in the Day-Ahead and Imbalances Markets.
4 NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET © Arup BILATERAL, OTC BROKERED DEALS ELECTRICITY ELECTRICITY AND EXCHANGES SYSTEM OPERATOR MARKET OPERATOR
PHYSICAL & FINANCIAL PHYSICAL PRODUCTS PRODUCTS
FORWARDS, DAY AHEAD INTRA-DAY BALANCING FUTURES AND AUCTION IMBALANCES MARKET MECHANISM OPTIONS MARKET
WELL AHEAD DAY AHEAD HOURS AHEAD REAL TIME PAST TIME 4 YEARS AHEAD - 1 DAY AHEAD TODAY - SYSTEM OPERATOR PAST TIME IMBALANCES DAYS AHEAD 1 HOUR AHEAD PERFORMS BALANCING AND BALANCING COSTS ACTIONS ARE SETTLED
GATE CLOSURE DELIVERY 1 HOUR AHEAD OF DELIVERY
FIGURE 1 GB Wholesale Electricity ‘Markets’
FORWARD, FUTURES AND OPTIONS MARKETS BALANCING MECHANISM (BM) Electricity is traded ‘over the counter’ or via an exchange, If energy suppliers to homes and business have under- from several years ahead of delivery up to a day ahead bought, the Electricity System Operator (ESO), National of delivery. The Physical and Financial products of the Grid ESO in Great Britain, procures electricity from forward, futures and options markets are all used to perform producers in order to balance the system and meet demand. Speculation, Asset Optimisation and Hedging. Equally, if producers have generated more electricity than DAY-AHEAD AUCTION MARKET (DAM) is needed by the system, the ESO pays Suppliers to increase A day ahead of delivery, electricity producers and demand and take away the additional electricity. In some consumers are re-balancing their positions to reflect better cases, the price for this electricity will be negative, with forecasts about production and consumption and submitting the ESO paying energy suppliers to take away this excess bids and offers to buy and sell electricity which are matched electricity. by the exchange. IMBALANCES (OR NET IMBALANCE VOLUME (NIV) CHASING) MARKET INTRADAY MARKET (IDM) The electricity market operator settles all accounts: energy Electricity continues to be traded via the exchange, right producers and consumers are charged according to any up to an hour before delivery and producers and consumers imbalances in the system. Some market actors see this as continue to act on better forecasts and in reaction to the final market opportunity, trying to be at the right side of enforced outages of energy resources. the system imbalance to benefit from capturing imbalance prices.
NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET 5 When do negative prices occur?
Prices in the GB Imbalances market tend to dip below 180 zero when the inflexibility in the system is most acutely 160 felt – during times of low electricity demand such as overnight, weekends and public holidays – and in the 140 winter (see figure 2). A similar distribution is observed in 120 the German DAM. Demand for electricity is higher in the winter, however this is offset by increased inflexibility on 100 both the generation, due to wind and increased CHP and 80 consumption side, leading to larger positive variances in its output relative to the before deliver forecasts and therefore 60 greater imbalances in the Imbalances market.
NEGATIVELY PRICED HOURS NEGATIVELY 40 From 2010 to 2013, negative prices occurred just one hour per annum, on average. From 2014 to 2019, that average 20 climbed to 43 hours per annum. 0 The GB Intraday Market (IDM) has also seen instances of SUMMER WINTER negative pricing: 21 hours per annum, on average, between 2015 and 2019, with no instances of negative prices occurring before 2015. FIGURE 2 The first-time prices went negative in the GB day-ahead Frequency of Negative prices in the GB market (DAM) was on Monday the 9th of December 2019 Imbalances Market by Season (2010-2019) 03:00 to 04:00. In 2020 up until the end of April, prices Source: Elexon in the GB DAM have out-turned in negative territory a of 13 hours. This represents a significant escalation in the frequency of negative pricing events. It clear that negative pricing events increased in frequency after the Coronavirus/ Here large positive variances in output of intermittent Covid-19 lockdown, which started across the whole of the renewables such as wind, in comparison to the before UK from Monday the 23rd of March 2020. Only 4 of the 55 delivery forecasts, is the driver for large system imbalances negatively priced hours we have seen in 2020 up to end of which ESOs have to manage by paying energy resources to May, occurred before the lockdown. either reduce generation or increase consumption. The yearly to daily products seen in the futures, forward In Figure 4, it is seen that negative prices in the GB and options markets have never been recorded closing Imbalances market are most frequently occurring during trading in negative territory. In the German market, though, the overnight hours of 03:00 to 06:00 (hours 4 to 6), where days, weekends and even weeks have traded below zero inflexibility is high due to higher amounts of variable price ahead of delivery. inflexible wind generation colliding with low electricity Figure 3 shows the number of negatively priced hours demand. There is another peak in negatively prices between across the different GB electricity markets. The Imbalance 14:00 to 16:00 (hours 15 to 16). Here, National Grid, as the market, fuelled by Balancing Mechanism actions, is where GB ESO, has to pay thermal generators to reduce output we see the highest number of negatively priced hours, towards their minimum stable loading levels during periods followed by the intra-day market. Negative prices occur when there is generally too much generation as thermal the least in Forwards, Futures and Options markets and generators seek to ‘run-through’ these lower demand increase as you move through day-ahead and intra-day periods in order to position themselves to benefit from the time scales and get closer to delivery and in the real-time higher prices associated with hours 18:00 to 21:00. market like the Balancing Mechanism and the past-time Imbalances market.
6 NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET 100
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30 NEGATIVELY PRICED HOURS NEGATIVELY 20
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0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
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FIGURE 3 Frequency of Negative Prices in GB Wholesale Electricity Markets (hour equivalent) (Jan 2010 - May 2020) Source: Nordpool and Elexon
FIGURE 4 Frequency of Negative prices in the GB Imbalances Market by Hour Equivalent (2010 - 2019) Source: Elexon
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NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET 7 Trends across Europe
The German DAM, leads by some distance as the market On Easter Monday the 13th of April 2020, all five of the with the highest volume of negatively-priced hours. CWE DAM out-turned with daily averages in negative Although negative prices are also seen in the French and territory, mostly as a result of negative prices in the hours Belgian DAMs, Germany’s experience of negative prices in between 06:00 and 20:00 Central European Time. The this market is far more frequent. German-Luxembourg DAM was negatively priced for fourteen consecutive hours. Across the Central Western European (CWE) markets – Austria, Belgium, France, Germany-Luxembourg and the All of these countries employ the same weather-driven Netherlands – there is a strong correlation on negative techniques for forecasting renewables output. So, when the prices. The strong correlation in the wind resource within forecast gets it wrong, the error – and with it the likelihood these wholesale markets within the CWE, i.e. when it is of prices dipping below zero – is replicated across all of the windy in one market it is also likely to be windy in another, CWE markets. has seen negative prices occurring simultaneously across a number of these markets. As discussed earlier regarding negative pricing in GB. There is no doubt that the Coronavirus/Covid-19 related lockdowns in the CWE has also led to an acceleration in the instances of negative pricing in these markets. The Netherlands, for example, had only ever seen 7 negatively priced hours across all years and hours up until the Monday the 16th of March when the lockdown commenced. Subsequently, 61 negatively priced hours has been witnessed in the Netherland DAM (up to the end of May 2020).
8 NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET 250
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0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
FIGURE 5 Comparison of the Frequency of Negative Prices in CWE Day-ahead Auction Markets (Jan 2010 - May 2020) DE-LU BELGIUM Source: Entsoe and Epexspot AT THE NETHERLANDS FRANCE FIGURE 6 CWE DAM Easter Monday the 13th of April 2020 Source: Entsoe and Epexspot
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HOUR OF THE DAY 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
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-60 PRICE, € /MWh
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NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET 9 What causes negative prices?
It is important to emphasise that the intermittency and Electricity demand hasn’t traditionally been very flexible. variability of the output of renewable energy technologies Looking at the main segments; Commercial, Industrial, is not the root cause of negative prices. Negative prices Residential and Transport, it is only in the Commercial are in fact the result of inflexibility from the perspective and Industrial segments where there has been substantive of production or consumption. All energy resources can progress in making demand more flexible. This flexibility, be considered inflexible if they find it commercially and called demand side response, is facilitated by smart technically impractical to change output during periods of (advanced) meters, demand control technologies and/or variable demand, or if the system is significantly long or behind the meter generation, which allows this demand to short. be controlled by system/market actors called demand side response aggregators (or merely aggregators). Aggregators The fact that negative prices are more frequent in the pull together demand from a number of businesses and winter than in the summer, has led some to put the blame their operations in the Commercial and Industrial segment, for negative prices on wind generation, due to that fact that using technologies in order to reduce or increase demand it is noticeable higher in the winter. In reality, winter in in response to market signals. Negative pricing is one such North West Europe means higher electricity demand due market signal which would cause aggregators to instruct to increased heating and lighting requirements. A lot of an increase in demand (or a reduction in behind-the-meter the additional electricity demand seen in the winter isn’t generation). flexible, for example; street, motorway lighting as well as heating, so exacerbating the inflexibility of the system.
10 NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET Battery Energy Storage Energy from Waste Systems (BESS)
Compressed Air Energy Biomass Storage (CAES)
Combined Cycle Gas Combined Cycle Gas Turbines (CCGTs) – modern Turbines (CCGTs) - older
Hydro Reservoir Hydro Run-of-River FLEXIBLE INFLEXIBLE ENERGY ENERGY RESOURCES RESOURCES Interconnectors Lignite
Open Cycle Gas Turbines Nuclear (excluding (OCGTs) some of the French fleet)
Solar Photovoltaic Pumped Storage PV
Reciprocating engines Wind
FIGURE 7 Generalisation of Flexibility by Energy Resource
Since the Coronavirus/Covid-19 lockdowns, electricity The electricity produced by such ‘heat-led’ CHP plants demand in GB and the CWE has been significantly lower, is merely a by-product which they spill into the market, especially from the Commercial and Industrial segment this type of CHP plant is more prevalent in Germany and with business and industry effectively shutting down. Scandinavia. This has seen the removal of electricity demand from From a technical perspective, flexibility is a discussion that the segment most responsive to negative pricing signals, involves a range of performance criteria, including: contributing to an increase in frequency of negative prices. - Ramping rates (MW/min) Inflexibility on the production side, has been baked ito power generation technologies developed decades ago, - Minimum stable loading levels (% of nominal capacity) when the focus was on efficiency, rather than on flexibility. - Start-up times (minutes or hours). Energy from Waste, Hydro Run-of-River, Lignite and Generally, flexible energy resources are the ones with high Nuclear (excluding some of the French nuclear fleet which ramping rates, low minimum stable loading levels and low are able to operate flexibly due to use of grey control start-up times. rods), are configured to run at full output level and to produce electricity as efficiently as they can. Additionally, Combined Heat and Power (CHP) plants, configured to prioritise the production of heat over the production of electricity are also technically inflexible from a power system/market perspective.
NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET 11 Inflexibility in the GB system
TECHNICALLY INFLEXIBLE ELECTRICITY ESO ANCILLARY/BALANCING SERVICES GENERATION TECHNOLOGIES ARE PRESENT PROCUREMENT AND MARKET DESIGN ARE IN THE GB SYSTEM IMPORTANT CONSIDERATIONS IN THE On the GB electricity production side there is conventional, NEGATIVE PRICE DISCUSSION technically inflexible production facilities, such as; There are fundamental features of the Balancing conventional large frame CCGTs, hydro run-of-river, and Mechanism, (or Balancing Markets generally, as it is nuclear plants. This is in addition to intermittent renewables referred to in Continental Europe), and the way imbalance such as wind and solar photovoltaic (PV) which tends to be prices are calculated, that impacts the likelihood of technically inflexible as they don’t have ‘dispatchability’ – negative-price events. Examples of such feature are; the the ability to modulate their output on demand. granularity of the trading/settlement period (30 minutes as opposed to 15 minutes in other markets), as well as the GENERATORS WHICH ARE INFLEXIBLE FROM A COMMERCIAL PERSPECTIVE ARE ALSO quantification of primary, secondary and tertiary control PRESENT IN THE GB SYSTEM requirements such as frequency response, fast reserve and In addition, renewable resources in the GB are generally Short-term Operating Reserve (STOR) in the GB electricity subsidised via the Renewable Obligation (RO), Feed-in- vernacular. The levels of negative pricing in the BM and tariff (FiT) or contract for difference (CfD) mechanisms, Imbalances markets are also affected by the extent to which so they would incur an ‘opportunity cost’ if they were the ESO is willing to trade the traditional synchronous to reduce their output. This cost would be factored into inertia provided by large conventional generation with new wholesale electricity market bids (including market orders emerging synthetic inertia provided by flexibility providers to buy back their own electricity) by operators of these such as battery energy storage systems and modern high resources, which in essence renders them inflexible, both voltage direct current (HVDC) interconnectors. commercially and technically. The subsidised renewable The introduction of lower thresholds triggering a 2nd DAM cumulative negative price bid supply curve in GB (and auction (-150 €/MWh for CWE and -150 £/MWh for GB in other markets) will evolve with time, as units drop out any hour) is an example of an initiative designed to prevent of subsidy and new subsided renewables units come on or reduce the instances of negative pricing. Additionally, stream. we have seen regulatory and policy changes like the IN EUROPE TECHNICAL INFLEXIBILITY 6-consequtive negative price rule and direct marketing of HAS BEEN COMPOUNDED BY ADDING renewables in Germany, aimed at encouraging flexibility in COMMERCIAL INFLEXIBLE ENERGY RESOURCE renewable technologies. Across Europe, the addition of significant volumes of Market coupling in general, and the more intimate commercially and technically inflexible renewable capacity flow-based system used in CWE (Austria, Belgium, has outpaced the introduction of more flexible energy France, Germany-Luxembourg and Netherlands) markets resources. This has exacerbating the inflexibility that was reduces the instances of negative prices that would have already present in the GB wholesale electricity market, occurred with the alternative explicit allocation, and leading to more frequent instances of negative pricing. day-ahead nomination of interconnector capacity. Market and flow-based coupling is one of the manifestations of the European Union’s (EU) internal energy market (IEM) as it strives towards “ever closer union” between its members and associate members. Market coupling’s continuing application to GB wholesale electricity market’s interconnectors between EU members and associate members, is dependent on the nature of the future relationship between the UK and the EU now that the UK has left the EU. This also creates the potential for divergence between the GB electricity market design and the EU target model design.
12 NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET CUMLATIVE CAPACITY (MW)
0 4,382 8,765 13,148 17,531 21,914 26,297 30,680 35,063 0 -10 -20 -30
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FIGURE 8 GB Subsidised Renewables Cumulative Negative Price Bid Supply graph – 2020/21 BIOMASS CONVERSION SOLAR PV - BUILDING MOUNTED BIOMASS CONVERSION + CHP SOLAR PV - GROUND MOUNTED
ADVANCED CONVERSION TECHNOLOGY WASTE
ONSHORE WIND DEDICATED BIOMASS FIGURE 9 GB subsidised renewables cumulative negative OFFSHORE WIND DEDICATED BIOMASS + CHP price bid supply curve – 2034/35
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0 4,382 8,765 13,148 17,531 21,914 0 -10 -20 -30
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NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET 13 Negative pricing – The opportunity
Negative prices in the GB wholesale electricity market This opportunity also extends to those on the demand side. should not be viewed as a ‘market irregularity’ that should Both the businesses discussed earlier in the commercial be remedied out of existence. But instead considered and industrial segment and more recently the households an agent of change, supporting the transition to a more in the residential segment. Energy suppliers in GB are flexible energy system that is needed to deliver the clean offering Time of Use Tariffs (ToUTs), giving access to energy transition. As the UK and the EU seeks to deliver the opportunity created by negative pricing to residential of their respective commitments to deliver net zero carbon consumers who have smart meters installed and are able emissions by 2050, negative pricing can support the to respond by increasing their consumption; putting on the evolution to more flexible energy system needed to deliver washing machine, tumble drier, dishwasher or charging the clean energy transition. their electric vehicle, if the household has one.
For inflexible energy resources, the rise in negative-price FOR FLEXIBLE ENERGY ENTRANTS, events will present a threat. For investors in flexible THERE’S A ‘FIRST-MOVER ADVANTAGE’ generation, though, it presents a growing opportunity. From 2017/18, a rush of significant battery energy storage system entrants led to the price-cannibalisation of the INCREASED NEGATIVE PRICING IS BAD NEWS FOR BOTH INFLEXIBLE GENERATORS AND GB Firm Frequency Response market. Similarly, as more INFLEXIBLE CONSUMERS flexible energy resources come onstream, the frequency Inflexible generators will face the rising costs of paying the of negative price events falls, and prices stabilise, making market to take away generation instead of reducing output the opportunity for the next new entrant flexible energy to avoid or reduce accumulating losses. resource less attractive. Meanwhile, major electricity consumers, such as There’s a ‘first mover advantage’: after a certain a point large businesses, who lack the flexibility to shift their it will be too late to act, and the next new flexible energy consumption into negatively priced periods, will miss out entrant will fail to hit their targeted investment return on the opportunity to reduce their overall electricity costs. threshold. In that case, we would probably see negative price frequency and volatility settle at a level where FLEXIBLE ENERGY RESOURCES CAN EXPLOIT existing flexible energy resources make money, but new RE-OPTIMISATION OPPORTUNITIES, AND entrants aren’t profitable enough. BOOST GROSS MARGINS Flexible, asset-optimised resources such as energy storage systems, hydro reservoirs and interconnectors, have the opportunity to lock in profitable periods ahead of time in the futures, forwards and options markets, and respond – buying back the previously contracted generation volumes, when these periods are delivered more cheaply by the market. Negative-price periods essentially allow asset optimisers to be paid to not generate electricity. And when they’re not generating, they’re also saving on fuel, battery degradation and other variable operation and maintenance costs.
14 NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET Next steps
Operators of inflexible generation should investigate the The UK’s future relationship with the EU could also open added value of increasing their flexibility, perhaps by up greater opportunities for local flexibility solutions, as switching to new, hybridised generation solutions that market coupling and other market design features diverge amalgamate flexible resources into their existing assets. from the EU target model. If, in the future, interconnectors fail to offer the flexibility they do at present, this could For operators of flexible energy resources, a dynamic create more opportunity for domestic flexibility solutions. optimisation approach will allow them to take full advantage of the opportunity offered by negative prices. There are opportunities on the demand side, too. Major Having the right route-to-market strategy in place will consumers of electricity, such as businesses, should allow them to access all of the markets at the right price, examine their processes for any latent flexibility they especially the Balancing Mechanism and the Imbalances can unlock in their consumption, perhaps by pausing market, which is where most of the negative pricing refrigeration or heating for a period of time. Behind-the- opportunity exists at present. They can access these markets meter energy storage solutions may also create added value through a market participant such as a trading company or from negative pricing, in addition to value from other aggregator. It is well worth noting for owners of flexible flexibility services. Households up and down the country energy resources that National Grid Electricity System can also benefit from negative prices but getting a smart Operator’s Wider Access project, implemented on the meter and a Time of Use Tariff, an example of such a tariff 11th of December 2019, made it easier for smaller flexible is Octopus Energy’s Agile tariff. energy resources to participate. For both operators and consumers wishing to take Project developers seeking to bring flexible energy advantage of the opportunities from negative pricing over resources to the market, such as reciprocating engines, the next few years, timing will be everything. Seeking out highly flexible CCGTs and energy storage, should be aware the best advice and acting at the right time will make all the of the additional value that re-optimisation opportunities difference. and negative pricing can bring to the stack of revenues from other services.
NEGATIVE PRICING IN THE BRITISH WHOLESALE ELECTRICITY MARKET 15 CONTACT [email protected]