Solar Wastage? Negative electricity prices

[Sparty]

https://www.afr.com/companies/energy...0240918-p5kbh5

The link above takes you to an article which discusses the significant curtailment of renewable energy generation in South Australia and other parts of Australia due to economic factors.

Amongst them was: Negative electricity prices during periods of high renewable generation can undermine the business case for new renewable projects.

I asked Claude AI: What is this about?

Response : This statement refers to a complex economic situation that can arise in electricity markets with high levels of renewable energy generation. Let me break it down:

Negative electricity prices: This occurs when there is an oversupply of electricity relative to demand. In such situations, generators may actually pay consumers to take their electricity, rather than the usual scenario where consumers pay for electricity.

Periods of high renewable generation: This typically happens during times of abundant sun or wind, when solar and wind farms are producing at or near their maximum capacity.
Undermining the business case: Negative prices can make it difficult for renewable energy projects to be profitable.

Here's why: Renewable energy projects typically have high upfront costs (building the solar or wind farm) but low operational costs.

Their profitability depends on selling electricity at prices that cover these costs over time.
If prices frequently go negative during times when these projects are generating the most electricity, it becomes harder to recover costs and make a profit.

New renewable projects: This refers to proposed or planned renewable energy installations. If existing projects are struggling with profitability due to frequent negative pricing events, it becomes harder to justify investing in new projects.

This situation creates a paradox: as more renewable energy is added to the grid (which is generally desirable for environmental reasons), it can become economically less attractive to add even more renewable capacity without changes to the market structure or increased demand/storage capacity.

To address this issue, markets and policymakers are exploring various solutions, such as:

Investing in energy storage to absorb excess generation
Improving grid interconnections to export surplus power
Implementing demand response programs to shift consumption to times of high generation
Developing new uses for cheap, abundant electricity (like green hydrogen production)

These strategies aim to maintain the economic viability of renewable energy while continuing to increase its share in the overall energy mix.

The costs are mostly "sunk" so how does stopping exporting power help?

You've raised an excellent point that highlights a key aspect of renewable energy economics. Let's break this down:

Sunk costs:
You're correct that most of the costs for renewable energy projects, particularly solar and wind farms, are "sunk costs." These are the upfront capital expenditures for construction, equipment, and installation that can't be recovered once spent.
Marginal costs:
The marginal cost of producing electricity from renewables (i.e., the cost of producing one more unit of electricity) is very low, often close to zero. This is because the "fuel" (sunlight or wind) is free, and operational costs are minimal.

[Sparty]

Why curtailment occurs:
Given these economics, it might seem counterintuitive for renewable generators to stop exporting power. However, there are a few reasons why they might do so:

a. Avoiding negative prices: When prices go negative, continuing to generate and export power means the generator would have to pay to put their electricity into the grid. By curtailing (stopping) generation, they avoid these payments.

b. Wear and tear: While minimal, there is some wear and tear on equipment from operation. During periods of negative prices, it might be economically sensible to reduce this wear and tear.

c. Grid stability: In some cases, curtailment might be requested by grid operators to maintain system stability.

d. Contractual obligations: Some power purchase agreements or market rules might require generators to curtail under certain conditions.

Subsidies and incentives:
It's worth noting that in many jurisdictions, renewable energy projects receive subsidies or incentives (like renewable energy certificates) for the power they generate. These can sometimes make it economically viable to continue generating even when prices are negative, up to a point.

Long-term considerations:
While curtailment doesn't help recover sunk costs in the short term, it can help maintain the overall economic viability of the project in the long term by avoiding losses during periods of negative prices.

Market signals:
Widespread curtailment sends a signal to the market and policymakers that there's a mismatch between supply and demand, potentially spurring investment in storage, transmission, or demand-side management.

In essence, while the sunk costs can't be recovered by curtailment, generators are making a decision to minimize losses in the short term. This highlights the need for market structures and technologies (like storage) that can better accommodate the variability of renewable energy production.

Does this actually happen:
Avoiding negative prices: When prices go negative, continuing to generate and export power means the generator would have to pay to put their electricity into the grid. By curtailing (stopping) generation, they avoid these payments.

You've asked an insightful question that gets to the heart of how electricity markets function with high renewable penetration. Let's explore this in more detail:

Yes, this scenario does actually occur in electricity markets, particularly those with high renewable energy penetration. Here's how it works:

Market Mechanism:

In many electricity markets, generators bid to supply power at specific prices.
When supply exceeds demand, prices can go negative.

Negative Prices:

When prices go negative, the normal flow of payments reverses.
Instead of being paid for supplying electricity, generators would effectively pay to put their power into the grid.


Why Generators Might Pay:

Some generators (especially thermal plants) find it more expensive to shut down and restart than to pay to keep running for short periods.

Renewable generators might continue to generate if they receive subsidies or credits that outweigh the negative prices.


Curtailment Decision:

For renewable generators, the decision to curtail is often purely economic.
If the negative price exceeds any subsidies or credits they receive, it makes economic sense to curtail.


Real-World Examples:

This has happened in markets like Germany, California, and South Australia.
In Texas in 2020, there were periods where wholesale electricity prices went as low as negative $40 per megawatt-hour.


Market Impact:

These events send strong price signals to the market.
They encourage investment in energy storage, demand response programs, and grid improvements.


Consumer Benefit:

In some cases, these negative prices can be passed on to consumers, leading to very low or even negative retail prices during certain periods.



It's important to note that while this mechanism exists, most markets have systems in place to manage and limit extreme price events. Additionally, long-term power purchase agreements often protect generators from short-term price fluctuations.

This phenomenon underscores the challenges and opportunities in managing grids with high renewable penetration, and it's driving innovation in market design, energy storage, and flexible demand.

[Sparty]

Consumer Benefit:

In some cases, these negative prices can be passed on to consumers, leading to very low or even negative retail prices during certain periods Really?

You're right to question this, as it's not a common occurrence in most retail electricity markets. Let me clarify and provide a more nuanced explanation:

Typical Retail Pricing:

Most residential and small business consumers are on fixed-rate or slightly variable tariffs that don't directly reflect short-term wholesale price fluctuations.
Retailers typically absorb short-term price volatility, including negative prices, to provide stable rates to consumers.


Rare Instances of Negative Retail Prices:

Instances of negative retail electricity prices are extremely rare and usually occur in very specific circumstances or pilot programs.
When they do occur, it's often in the form of credits or rebates rather than actually paying consumers for using electricity.


More Common Approaches:

Time-of-Use (TOU) Tariffs: Some utilities offer lower rates during periods of expected high renewable generation, encouraging consumption when supply is plentiful.
Demand Response Programs: These might offer incentives or rebates for shifting consumption to times of high supply, which can indirectly pass on the benefit of negative wholesale prices.


Examples of Consumer Benefits:

In Texas, some retailers have offered free electricity during certain hours to incentivize off-peak usage.
In the UK, there have been occasions where some consumers on dynamic pricing tariffs received small payments for using electricity during periods of negative prices.


Barriers to Passing Through Negative Prices:

Regulatory frameworks often don't allow for negative retail prices.
The fixed costs of transmission, distribution, and retail services typically prevent prices from going negative at the retail level.

Future Possibilities:
As smart meters and dynamic pricing become more common, there may be more opportunities for consumers to benefit from periods of negative wholesale prices.
However, this would require significant changes in market structures and regulations.

In summary, while it's technically possible for negative wholesale prices to be passed on to consumers, it's extremely rare in practice. The benefits of negative wholesale prices are more likely to be seen indirectly through innovative tariff structures, demand response programs, or overall lower electricity prices in markets with high renewable penetration. The direct pass-through of negative prices to retail consumers remains more of a theoretical possibility than a common reality in most markets.

Claude can make mistakes. Please double-check responses.

[Sparty]

https://www.abc.net.au/news/2024-11-...some/104606640