By Joakim Book, Guest Contributor — The views expressed by guest contributors are their own and not the view of IER.
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Most things in the economy have positive prices. After all, a “price” of zero isn’t really a price since whoever is providing the good is simply giving it away. Similarly, prices below zero, where a producer is paying a consumer to take their product, is a pretty strange thing to encounter. What? I get my groceries, and five bucks for the bother?
These kinds of scenarios were increasingly talked about last year when government and corporate bonds around the world were yielding less than zero percent interest – the yields of some $17 trillion worth of bonds fell below zero. Governments like Germany’s issued debt that carried no interest, only 96% of which would be repaid thirty years down the line. Getting paid for borrowing? Surely, that’s bonkers.
Bond yields, it turns out, are not the only things that can produce negative prices.
Statistics by the European power group Nordpool showed that on February 22 the day-ahead market for electricity in the German market fell to -€1.51 for a MWh of electricity. Buyers, in other words, were paid to consume electricity.
Unusual? Not at all – welcome to the new destabilizing world of green electricity generation. Prices in one of windfarm-crazy Denmark’s two electricity areas also turned negative; and the weekend before saw negative German electricity prices as low as -€15/MWh.
The UK isn’t a stranger to negative prices on the electricity wholesale market either. During the storms of last spring, the UK day-ahead market popped below zero for a couple of hours causing wide-spread media attention – at one time even hitting -£71.26/MWh.
While the UK electricity markets did not see negative electricity prices during the latest bout of winter storms, the Nordpool UK prices did fall below zero for the first time this year in the early hours of February 16.
The explanation lies in the non-storable property of generated electricity and an increased reliance of renewable energy. For most other goods in the economy, sudden overproduction wouldn’t be a problem as we can store oranges or iPhones until another day. This isn’t the case for electricity: grid operators are continuously matching supply to demand. Since we don’t control the production of wind and solar with the same delicate detail we can operate coal or gas-fired plants – for all humanity’s great achievements, we don’t decide over the wind and the clouds – their production sometimes flush electricity markets with large volumes of electricity.
Coupled with low demand, say during night, there is nothing left to move but prices, as power producers offer their spare production at less than zero.
Because produced electricity must go somewhere, at any price, feed-in tariffs or Wind Production Tax Credits allow solar and wind generators to keep producing at a loss, while other electricity sources, like natural gas and coal, quickly stop producing. The latter can be easily scaled up and down in line with fluctuations in demand – the very reason they are so well suited for electricity production – whereas the former operate at the whims of Mother Nature. When it is windy, the turbines flush the system with irregular bouts of electricity that the power markets must quickly dispose of, hence the negative prices.
This may sound like a vindication of the clean electricity sector and a bonanza for consumers and the planet alike, but most research seems to suggest the opposite. The cost imposed by wind and solar on the rest of the grid has, despite these instances of negative pricing, increased. The reason, says Michael Shellenberger, an environmental policy writer, is that:
“Solar and wind require that natural gas plants, hydro-electric dams, batteries or some other form of reliable power be ready at a moment’s notice to start churning out electricity when the wind stops blowing and the sun stops shining.”
Shellenberger recounts the recent results of a University of Chicago research team that concluded that:
“The higher cost of electricity reflects ‘the costs that renewables impose on the generation system[,] including those associated with their intermittency, higher transmission costs, and any stranded asset costs assigned to ratepayers.”
Instead of replacing outdated fossil-fuel technology, the increased capacity of windfarms ends up duplicating the system’s capacity. As a result, the necessary back-up systems operate inefficiently and spread their large fixed costs over smaller and less-profitable production. Even much-praised hydro plants struggle to recoup their large capital expenditures as their production is relegated to whenever wind parks don’t produce enough – yet still required to ramp up capacity should the grid require it.
Long and numerous transmission lines needed to deliver the green electricity from offshore wind parks to the high-consuming cities and industrial areas also means a larger use of materials and higher maintenance costs.
Germany’s Energiewende in recent years has greatly increased the capacity of wind and solar on the European continent – electricity sources that are much less suitable to the minutia adjustment between production and consumption that electricity markets require. In consequence, with stormy enough weather, often coupled with unexpectedly low use (say during mild weekends), green electricity floods the grid and forces the price down, which is why we keep seeing negative wholesale prices. With feed-in-tariffs and the EEG surcharge making consumers foot the bill, the more often the prices go negative, the higher consumer’s electricity bills become, and the less profitable becomes conventional electricity production that is still necessary for back-up.
Accommodating the unreliable ups and downs in electricity generation from wind and solar sources is easier when they constitute a small share of generation, their sources are close to point of use, or back-up facilities such as coal or natural gas allow back-up generation to be cheaply deployed. None of those conditions are fulfilled on the electricity grids of Northern Europe, causing wholesale prices to rapidly fall yet still increase the total cost for operating the grid.
The more renewable capacity we have, the more often we will see instances of highly volatile prices – including, sometimes, steeply negative prices.
The total cost to consumer, however, may not move down in tandem, as the production, maintenance and back-up generating facilities are necessary for the renewables to work. Instead of reducing electricity costs, which frequent negative wholesale prices would imply, it is possible that a higher share of renewables causes overall electricity prices to increase.
That, so far, has been the European experience. As the push for renewable energy continues across the U.S. – with California, naturally, taking the lead – the outlook for American electricity grids is looking increasingly grave.
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Joakim Book holds academic degrees in economics and economic history from the University of Oxford and University of Glasgow. He specializes in financial history with a broad interest in financial markets, environmental economics and technological progress. He works as a writer and freelance editor of mainly financial and historical material for both academic and professional outlets.
His popular writing has been featured on CapX, RealClearMarkets, Mises Institute, ZeroHedge and Financial Times’ Alphaville. He’s a regular writer at HumanProgress.org and American Institute for Economic Research where he has also been a visiting scholar in 2018 and 2019.
