Why do negative electricity prices occur and can they encourage the use of inefficient energy storage devices?
What are negative electricity prices and how do they occur?
Negative electricity prices are a relatively recent phenomena in wholesale electricity markets. They were first seen in the German intra-day market in 2007 and are now rare but not extraordinary – there were 56 hours on 15 different days of negative electricity prices in the German day-ahead market in 2012. In modern wholesale electricity markets electricity prices are intended to and broadly do represent supply and demand, with a high price encouraging suppliers to participate in supplying electricity and a low price discouraging suppliers from producing electricity. Negative electricity prices mean that suppliers of electricity must pay consumers to use the electricity that they generate, rather than the usual manner in which consumers pay suppliers for the electricity they use. These negative prices generally arise when a highly inflexible electricity supply meets an exceptionally low demand and the supplier decides that the cost associated with the shutting down and restarting of the inflexible supply is more than the cost of paying an external party to use the generated electricity. Renewable output contributes to negative prices as there is often a protocol in place dictating that green electricity must be used ahead of other generation methods (for example coal and nuclear). Therefore when a time of exceptionally low demand coincides with a time of exceptionally high renewable output conventional base-load generation like nuclear could be asked to power down. A negative electricity price would then occur if the nuclear operator decided that it was cheaper to pay someone to use the nuclear energy generated at that time than to shut down (and subsequently have to re-start) the plant.
Figure 1: Showing the increase in frequency of negative prices in some European electricity markets in 2013 compared to 2012.
What do negative electricity prices mean for energy storage?
Negative electricity prices indicate inflexibility, and their occurrence essentially reflects a need for energy storage. Their presence should encourage energy storage: instead of buying electricity and then selling it at a later time, storage can “sell” (be paid) taking electricity which can then be sold again at a later period. Of course the action of storage will oppose the prices negativity – storage will tend to push the prices up and a large enough capacity of energy storage should remove negative electricity prices. However apart from Pumped Hydro, energy storage devices are generally small-scale prototypes that are essentially “price-takers” in the market (their effect on the price is very small). These are devices currently being demonstrated and it is thus important to understand them fully in before much larger systems can be developed.
A negative electricity price essentially means that in the absence of any fixed storage operational costs it always beneficial for storage to charge on this negatively priced electricity irrespective of the sell price. By making the observation that an inefficient energy storage device will take more electricity to charge it than an efficient one, one important question is whether these negative electricity prices encourage the use of inefficient energy storage devices.
There appear to be two distinct methods by which energy storage can derive revenue with negative electricity prices. Firstly there the storage can charge at a negative electricity price and discharge at a later positive electricity price or secondly storage can charge at a negative electricity price and discharge at later negative electricity price. Initially I focus on the latter case. This may seem counter-intuitive but given two consecutive price periods with the same negative price the only storage system that will not make a profit by charging at the first and discharging at the second is a device that is 100% efficient (which will simply break even). Of course a more profitable single transaction would be charging at the negative price and discharging at a later positive electricity price, however charging and discharging using negatively priced electricity can still be profitable and will be more profitable the more inefficient the device is. Hence in a sustained period of negative electricity prices if there exists the opportunity for storage to make a complete a charge and discharge cycle before charging on negatively priced electricity and selling at a time with positive electricity prices then this will be the most profitable storage schedule. This represents an unlikely extreme case – it is obviously completely undesirable for storage to discharge at times of negative electricity prices but it is worth mentioning nonetheless. If sustained periods of negative electricity prices do start occurring then policy may need to step in to regulate storage behaviour.
The first method of charging on negatively priced and discharging at positive electricity prices is more intuitive. Generally it is anticipated that this should not encourage inefficient devices as a more efficient device with the same charging and discharging power would always be able to make more money on a single charging and discharging transaction. For example a device with a charging power of 1 MW could take 0.5MWh of electricity from the grid in a 30 minute period. A 75% efficient device would then be able to sell 0.375 MWh at a later positive electricity price while a 50% efficient device would only be able to sell 0.25 MWh. However, again the possibility of the less efficient device making a larger revenue comes with a sustained period of negative electricity prices. For example, consider two 2 MWh storage devices, one 100% efficient and one 50% efficient and each with a charging and discharging power of 2 MW (so in one half hour period 1 MWh can be taken from or exported to the local electricity network) and the price timeseries shown in Figure 1a and 1b. It is assumed that with a round trip efficiency of 50% the charging process and the discharging process each have an efficiency of 70.71%. Therefore only 70.71% of the energy used to charge is stored, and only 70.71% of the energy removed from the store can be sold.
Figure 2: (a) Charging and discharging schedule for 1MW 2MWh 100% storage device. (b) Charging and discharging schedule for 1MW 2MWh 50% storage device. (c) Energy stored corresponding to Figure 1a. (d) Energy stored corresponding to Figure 1b.
As the Figure 1a and 1b show the 50% efficient device uses more energy to charge (the state of charge is shown in Figure 1c and 1d) than the 100% efficient device allowing it to exploit an extra period of negative electricity prices. The 100% efficient device then makes a greater revenue when discharging but not enough to make up for the extra negative electricity price period exploited by the inefficient device. With the price timeseries used the 50% device is able to generate an extra 6% revenue compared to the 100% efficient device.
To summarise, negative electricity prices indicate inflexibility in the energy network, and reflect a need for increased energy storage capacities. Energy storage devices should work to counteract these negative electricity prices by increasing demand and a large amount of energy storage should keep the electricity prices positive. However, given that negative electricity prices currently exist, there exists the possibility that these may encourage the use of inefficient energy storage devices that are better able to exploit these negative prices. This is not generally true and depends on the nature of the electricity prices – as well as the degree of positivity versus the negativity. However it is worth recognising the possibility that under certain circumstances negative prices can encourage the use of inefficient devices and this could be a hurdle in the development of effective energy storage techniques, especially given the small-scale demonstration nature of most current energy storage projects.