Interesting read, I was wondering what happened that day. As an operator of a small network of fastchargers, we were delighted to have a purchase price of negative 20cent per kw. Which is huge.
We often read (even in this blog post) that these wholesale prices often don't impact consumers (who tend to pay a more fixed rate), but how true is that of entities in your space - did you immediately profit from the reduced rates (to their full extent), or was that mostly absorbed by some other middleman, hedging, etc?
As a consumer in the UK, the last time I got paid to use electricity was 11 April 2023. See https://agileprices.co.uk/ for how much I got paid per kWh and when.
There is one thing to keep in mind. Day-ahead prices are often quoted because they are public and objective. But day-ahead trading, at least in The Netherlands, is only about 30% of the electricity market.
If you look at consumers, only a tiny minority has an electricity contract that is directly based on day-ahead prices.
I'm afraid I'm the middleman here. Profit went straight to us, consumer still paid the 0.70/kw.
I have to say that we are implementing dynamic pricing and want to have fixed margin of 0.30/kw, I believe we will be the first medium sized operators who will have full price transparency. We are going to be publishing 'tomorrows' prices on our website, even.
You mention renewables and especially solar as a contributing factor to these negative prices when combined with capacity constraints. Can you explain how this works?
A PV installation can easily start and stop production as long as the sun is shining, right? Then it seems like PV producers should bid to produce as much as possible whenever the price is positive, and not produce anything whenever the price is negative. Is this how they operate, and if so, how does this contribute to negative prices and not just to bringing the price towards 0?
Certainly for wind operators in the UK, there is a "contract for difference" payment process such that they are not paid the spot price. Instead they're paid a guaranteed price within a range (i.e. the difference between the spot price and a benchmark). And there will be an agreement in place that if they're not allowed to export this power they will be paid for "curtailment".
Specifically, both electricity and gas have robust futures trading markets. And gas can be converted to electricity.
So... In the ideal world, whenever the price of gas is higher than the price of electricity, gas generators should shut down - since there isn't money to be made.
However, looking at market data for the UK, that only happens sometimes. There are plenty of generators who, according to spot market prices, shouldn't be operating, yet are.
Obviously some gas generators might have purchased low priced gas futures, or have sold high priced electricity futures - making it profitable to operate. However, even gas generators in that position stand to profit more by shutting down and reselling the futures they have bought on the open market.
It appears that even big companies make suboptimal market decisions on quite a frequent basis.
I suspect the cause is general lack of business flexibility. If such inflexibility is widespread, it would be a good reason to disallow futures trading entirely - by forcing people to buy things as they use them, they are forced to notice that what they are about to do isn't profitable - and the futures market hides that from them.
it is very possible that such generators are commissioned by a TSO to keep running for grid stability, such as must runs and/or redispatch actions. In essence what you are describing is very much happening, at least on the continent where I am based.
For energy markets, and this includes gas and electricity, one must distinguish between the spot markets, and longer term agreements. The former ones have very high volatility during the day, while the latter ones base on long term contracts usually with fixed prices. The spot markets are generally only there to cover any additional demand that one didn't want to make long term commitments for, while the longer term contracts create the base load.
That's why it's profitable to keep the gas turbines running. You must also consider the price of the turbine and surrounding infrastructure: if it can only run profitably 10% of the time it will be a much harder sell than running it 30%.
Even with long term contracts in place they will mark the contracts to market so they do notice the loss on their books.
But plants have thermal limits to what they can do, the heat they provide may be used elsewhere, they may provide services to the grid operator... a range of reasons why they'd run even when not profitable for that hour.
In general, plant operators are very good at maximising value (which translates to more revenue for them). And they will happily use all the flexibility at their disposal to do so.
Gas has storage constraints, and once you start talking about physical delivery, the nice abstraction of buying/ selling futures starts to leak.
Perhaps the gas generator company bought some gas for delivery today, and has some more arriving tomorrow. When they locked in those deliveries, forecast electricity prices for today were greater than gas prices.
Unlike futures, the gas in your storage tank isn't perfectly fungible (or even convertible at a cost) with gas next month or the gas in someone else's power station across the country.
In the UK specifically, piped gas and electricity are effectively transported 'free'. Ie. economically it is a single market with a single price. Regulations require all market participants are treated equally, and delivery is done by the government at a fixed price, no matter how far away you are, and if for some reason they cannot deliver (for example capacity/transport constraints), then you will be compensated.
Thats why specifically the UK is a good case study for a 'perfect futures market', because many of the real world market distortions don't exist.
this is no longer true anymore since brexit. Electricity on spot market no longer has the same price in the whole country, it depends on which exchange you trade. this has been forbidden in the EU for a long time. There are more things that broke after brexit, hence the market coupling algorithm is much less efficient these days for the UK.
Different generators have different heat rates. There are also operational considerations (turning off a combined cycle isn’t flicking a switch).
Further, the two-settlement system means you are guaranteed the day ahead price which can be higher than spot rates. Furthermore, in the US you can trade the spread between day ahead and spot. Therefore, it isn't always rational to shut off when spot gas is higher than electricity times your heat rate.
The big problem with futures trading in electricity is that there's no "carry trade". If you're futures trading in aluminium you can pile it up in a warehouse. It's very hard to warehouse more than a tiny fraction of daily demand for electricity.
To some extent these higher variations in intraday or between-day prices should help make storage look more economically viable.
> It appears that even big companies make suboptimal market decisions on quite a frequent basis.
This topic is covered with a focus on renewable (but applicable otherwise) in [1, pdf]. By accounting for cost of capital, volatility of the commodity, expected sale price, shutdown and startup costs, and a couple other variables, you can optimize the decision on how to act as a producer.
Having previously been responsible for forecasting natural gas consumption at one of the largest aluminum plants in the world, I can confirm inflexibility is a big component. Shutting one section of a plant down for a day is disruptive enough for planned maintenance. You need a really big incentive to shut it down on short notice, and you'll feel the effects your days to weeks in the future. Ideally you've sold product to book every machine pretty evenly and you're "sweating the assets", working them hard.
[1] An Exit and Entry Study of Renewable Power Producers: A Real Options Approach (PDF)
50Hertz Transmission GmbH, formerly named Vattenfall Europe Transmission, is one of four transmission system operators for electricity in Germany, and is wholly owned by Eurogrid GmbH
That is actually an occasional problem for us because identifiers, including Enum values in Python (and probably some other languages) cannot start with a digit.
26 comments
[ 2.7 ms ] story [ 71.7 ms ] threadIf you look at consumers, only a tiny minority has an electricity contract that is directly based on day-ahead prices.
I have to say that we are implementing dynamic pricing and want to have fixed margin of 0.30/kw, I believe we will be the first medium sized operators who will have full price transparency. We are going to be publishing 'tomorrows' prices on our website, even.
A PV installation can easily start and stop production as long as the sun is shining, right? Then it seems like PV producers should bid to produce as much as possible whenever the price is positive, and not produce anything whenever the price is negative. Is this how they operate, and if so, how does this contribute to negative prices and not just to bringing the price towards 0?
Households are usually not exposed to spot price signals, so residential PV will always produce electricity (network permitting).
Utility scale PV up to a few MW may not have the ability, or the operator may not have the option to curtail contracted.
Specifically, both electricity and gas have robust futures trading markets. And gas can be converted to electricity.
So... In the ideal world, whenever the price of gas is higher than the price of electricity, gas generators should shut down - since there isn't money to be made.
However, looking at market data for the UK, that only happens sometimes. There are plenty of generators who, according to spot market prices, shouldn't be operating, yet are.
Obviously some gas generators might have purchased low priced gas futures, or have sold high priced electricity futures - making it profitable to operate. However, even gas generators in that position stand to profit more by shutting down and reselling the futures they have bought on the open market.
It appears that even big companies make suboptimal market decisions on quite a frequent basis.
I suspect the cause is general lack of business flexibility. If such inflexibility is widespread, it would be a good reason to disallow futures trading entirely - by forcing people to buy things as they use them, they are forced to notice that what they are about to do isn't profitable - and the futures market hides that from them.
That's why it's profitable to keep the gas turbines running. You must also consider the price of the turbine and surrounding infrastructure: if it can only run profitably 10% of the time it will be a much harder sell than running it 30%.
But plants have thermal limits to what they can do, the heat they provide may be used elsewhere, they may provide services to the grid operator... a range of reasons why they'd run even when not profitable for that hour.
In general, plant operators are very good at maximising value (which translates to more revenue for them). And they will happily use all the flexibility at their disposal to do so.
Perhaps the gas generator company bought some gas for delivery today, and has some more arriving tomorrow. When they locked in those deliveries, forecast electricity prices for today were greater than gas prices.
Unlike futures, the gas in your storage tank isn't perfectly fungible (or even convertible at a cost) with gas next month or the gas in someone else's power station across the country.
Thats why specifically the UK is a good case study for a 'perfect futures market', because many of the real world market distortions don't exist.
Further, the two-settlement system means you are guaranteed the day ahead price which can be higher than spot rates. Furthermore, in the US you can trade the spread between day ahead and spot. Therefore, it isn't always rational to shut off when spot gas is higher than electricity times your heat rate.
To some extent these higher variations in intraday or between-day prices should help make storage look more economically viable.
This topic is covered with a focus on renewable (but applicable otherwise) in [1, pdf]. By accounting for cost of capital, volatility of the commodity, expected sale price, shutdown and startup costs, and a couple other variables, you can optimize the decision on how to act as a producer.
Having previously been responsible for forecasting natural gas consumption at one of the largest aluminum plants in the world, I can confirm inflexibility is a big component. Shutting one section of a plant down for a day is disruptive enough for planned maintenance. You need a really big incentive to shut it down on short notice, and you'll feel the effects your days to weeks in the future. Ideally you've sold product to book every machine pretty evenly and you're "sweating the assets", working them hard.
[1] An Exit and Entry Study of Renewable Power Producers: A Real Options Approach (PDF)
https://dr.lib.iastate.edu/bitstreams/7607fc3a-9acd-40a9-946...
50Hertz Transmission GmbH, formerly named Vattenfall Europe Transmission, is one of four transmission system operators for electricity in Germany, and is wholly owned by Eurogrid GmbH