June 18, 2012

Negative wholesale electricity prices: possible, but rare

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Under certain conditions, electric generators in regional transmission organizations (RTOs) actually pay to produce power as reflected in a price below zero. This situation can arise because some types of generators, such as those providing nuclear, hydroelectric, or wind energy, cannot or prefer not to reduce output for short periods of time when demand is insufficient to absorb their output. Negative wholesale prices are a relatively rare occurrence, as shown by the price data reported by RTOs.

RTOs use locational marginal pricing (LMP). Prices are determined at thousands of locations. Prices are also determined hourly and on a 5-minute basis. In total, RTOs produce over 3.3 billion energy prices in a year. So while the over 740,000 instances of negative prices in 2011 prices reported by RTOs may seem a lot, this number is very small relative to the total number of prices produced. The chart above shows the frequency of negative prices reported by six RTOs across the nation.

Technical and economic factors lead power plant operators to run generators even when power supply outstrips demand. For example:

• For technical and cost recovery reasons, nuclear plant operators try to continuously operate at full power.
• The operation of hydroelectric units reflects factors outside of power demand, for example, compliance with environmental regulations such as controlling water flow to maintain fish populations.
• Eligible renewable generators can take a 2.2 cents/kWh or $22/MWh production tax credit (PTC) on electricity sold. This means that some generators, primarily those operating wind turbines, may be willing to sell their output at negative prices to continue producing power.
• There are maintenance and fuel-cost penalties when operators shut down and start up large steam turbine (usually fossil-fueled) plants as demand varies over a day or a week. These costs may be avoided if the generator sells at a loss when demand is low.

In these situations, generators may seek to maintain output by offering to pay wholesale buyers to take their electricity. Given this, the greater granularity of RTO prices helps to explain why RTOs produce significantly more negative prices than bilateral markets. While generators will rarely be willing to pay to generate for a whole day to avoid shutting down, many are more willing to do so when they only have to pay for 5 minutes or an hour. Also, the market and operating conditions that give rise to negative prices are more likely to occur for short periods of time.

Negative prices generally occur more often in markets with large amounts of nuclear, hydro, and/or wind generation. The operators of these types of generators may be less willing to ramp up and down for the reasons mentioned above. The RTO with the highest number of instances of negative prices in 2011 was the California ISO (CAISO). The resource mix in CAISO is highly dependent on nuclear, hydro, and wind generation. Also, typically in the late spring, California imports significant quantities of excess hydroelectric generation from the Pacific Northwest.

The Midwest ISO (MISO) was the RTO with the next highest number of instances of negative prices in 2011. MISO has abundant wind resources and a large concentration of nuclear generators is located next door in the northern Illinois area of the PJM Interconnection RTO.

By contrast, the New England ISO (ISO-NE) did not report any negative prices in 2011. This may be due to the low level of congestion on the New England transmission network. A few years ago, utilities in New England made significant transmission upgrades, particularly in Connecticut, which have reduced congestion. Transmission congestion contributes to negative prices by limiting the supply adjustments available from the wider electric system.

In a previous article, we focused on negative daily bilateral spot prices in the Pacific Northwest in 2011.