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Being positive about negative Texas wind prices

Jenny Marusiak 
 and
Synapse Energy Economics

Being Postive about negative electricity pricesIn September, it was reported that wholesale electricity prices in Texas were negative during some evenings, largely a result of high wind production.  Wind makes up a higher percentage of Texas’ energy mix than in New England, but we want to see more wind here.  So what does it mean that there were negative electricity prices?  To get a good answer, we asked our expert friends at the Cambridge-based Synapse Energy Economics. 

Oh – the New York Times also covered this issue just the other day. 

 

 A recent kerfuffle over negative wind prices in Texas raised concerns throughout energy media channels. While some worried it was a sign of the dreaded renewable integration issues that we keep hearing about, a closer look shows that the event was neither particularly unusual nor problematic. In fact, the attention it received was as overblown as some of those integration concerns. If anything, the negative electricity prices that occasionally pop up on blustery nights when electricity demand is low present promising opportunities for utilities to engage their customers in modern energy management.

Here’s how it happened in Texas, where the wind industry has been booming:

A windy September night in West Texas set the electric grid alive with wind turbines churning out power. At the same time, the region’s coal-fired plants continued to provide baseload power in their conventional manner – which is to say inflexibly. Coal-fired plants are unable to react quickly to short-term changes in demand. Ramping their production up and down is a slow and inefficient process. Because most people were asleep in their beds, no one was there to use the extra power. Electricity supply exceeded demand and drove the spot market price down below zero in the Texas wholesale electricity market.

Negative prices are counterintuitive – why would a supplier pay someone to take their product? And, in the case of wind power generators, a premium, carbon-free product at that? But this happens on occasion in the wholesale electricity markets across the United States, especially late at night when the wind whips across the West Texas ridges, the plains of North Dakota, or the hills of Northern Maine.

In most markets, suppliers would cut production if the price went negative. But wind generators can afford to bid a negative price into the market; firstly because their fuel source is free and secondly because they generally receive some combination of Renewable Energy Certificate (REC) payments as well as the federal Production Tax Credit (PTC) for each kilowatt-hour they produce. These payments can offset a negative spot market payment, so wind turbines can continue to generate even when there’s little demand.

Not particularly unusual

An article from Slate on the negative wind price occurrence in Texas implied it was freakishly weird. To its credit, Slate later amended the article to reflect the fact that such events aren’t all that unusual. As our consultants noted in many of the emails on the topic that bounced around the office, this happens on a fairly regular basis across the United States – including in Texas, New England, the Midwest, and California.

In one email, a Synapse staff member wrote that he saw the article and was “struck by the focus on Texas.” He noted: “This has happened in New England several times, ever since they changed the energy market offer floor price to -$150/MWh in December 2014.”  

This happens in the Midwest all the time (or at least it used to). Not sure why this hit the news at all.

Another email noted that “this happens in the Midwest all the time (or at least it used to). Not sure why this hit the news at all.”

More tellingly, as one staffer pointed out, this type of occurrence actually used to be much more common in Texas. In 2011/2012, the Lone Star State built additional electricity transmission lines, called the CREZ lines after the Competitive Renewable Energy Zones in which they were built, so that ERCOT, the grid operator in Texas, could better distribute wind energy. The chart below shows the steep decline in negative electricity price events that occurred after these lines were built.

ERCOT wind curtailments and negative electricity price events
ERCOT_wind_curtailments_and_negative_electricity_price_events_EIA_graph.png

Source: Energy Information Administration, 2014. Available at:  http://www.eia.gov/todayinenergy/detail.cfm?id=16831.

It turns out losing money on a transaction isn’t unheard of outside the electricity sector either. As one colleague wrote, suppliers in many industries frequently sell their products below cost and take a loss in order to generate business. And in subsidized industries such as agriculture and healthcare, any situation where the marginal subsidy rate exceeds (in absolute value) the marginal loss per unit, the suppliers are effectively paying someone to take their product. According to this staffer, what makes the negative electricity prices so interesting is not that the wind turbines are operating at negative prices, but that fossil fuel-based steam units are: “To the extent that power generators are exposed to these spot market prices (and that extent varies) wind is easy to understand because of the RECs and tax credits; but fossil fuel-based steam generation is far more complex – they’re losing money now to make it up later.”

Another important note about these occurrences: most electricity suppliers and customers don’t pay those prices. The negative prices are real-time wholesale prices, which are paid only by a few large industrial customers. Most electricity providers, and thus their customers, pay the less volatile day-ahead prices from the wholesale market.

Future opportunities

If power generators are producing too much energy at any given time, the system operators have several options. They can tell generators to produce less electricity (although this is particularly problematic for coal-fired plants for the reasons mentioned above), they can find a way to store extra energy for later use, or they can shift some of the peak daytime demand to when the electricity is available. Called load shifting, this last option is becoming more and more feasible with improved technology and lower costs for that technology.

If we could shift some of our demand to those hours when the wind is blowing the most, instead of letting this excess clean energy go to waste, it would benefit everyone on the grid.

If we could shift some of our demand to those hours when the wind is blowing the most, instead of letting this excess clean energy go to waste, it would benefit everyone on the grid. In the past, this has been hard to do, since electricity is expensive to store for later use. But electric vehicles, with their big batteries, are changing all of that. Indeed, many utilities have begun to offer electric vehicle owners a special rate that allows them to power up cheaply at night on renewable energy. This is an efficient market outcome – good for both buyers and sellers of electricity – and also good for the climate. If load increases during these off-peak, high wind production periods, the effect should be that real time prices return to $0 or higher. This would benefit every generator operating at that time, including wind, fossil fuel-based, and nuclear generators.

This all raises an interesting point: might EV owners ever be paid to shift electricity demand to the midnight hours? In the near term, it seems unlikely because those negative prices don’t directly impact consumers. In the longer term, however, utilities might find it in their best interest to incentivize EV owners to charge their vehicles during negative price events. Imagine a large utility offering an “EV charging” product to end-use customers that alerts them when to charge their car if real-time prices go negative.

In fact, emerging energy management technologies are making it easier for any number of electricity users – from EV owners to electric water heater owners to home energy storage owners – to shift their demand from costly peak periods to off-peak periods in a way that benefits all customers. Through participating in demand response programs, these customers often receive financial incentives for such load shifting, although the focus of such programs is generally only on shaving peaks rather than filling demand troughs. The flip side to this is that more and more customers have incentives to join in this load shifting behavior. This should lead to reducing the electricity system supply and demand mismatch, and an end to the negative wind power prices on the wholesale market.

So for those of us in New England, we should not fear negative electricity prices.  For one thing, we have some ways to go before wind power reaches the levels currently seen in Texas and the Midwest. And for another, by the time that happens, hopefully our system will also be supporting great numbers of EVs and appliances capable of being charged during off-peak times.

The result of all this is nicely summed up by another colleague: “Then there’ll be more room for even more intermittent renewables, and we’ve got 350 parts per million reasons to add more intermittent renewables.”

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