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Bloomberg shows this chart:

enter image description here

I understand the above chart to mean that consumers were actually paid to use electricity. (Please correct me if I'm mistaken.)

I was wondering how this is possible? How is the power/electricity market special and different from other markets? (Or perhaps the German electricity market is special.)

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  • $\begingroup$ They only turn negative for a very short time. The average price is still positive. That's probably why it's still worthwhile to do it. This whole spot market for power is anyway a bit artificial. As if you could turn your power station on and off within minutes... $\endgroup$ – Trilarion Nov 10 '17 at 10:03
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    $\begingroup$ @trilarion it depends on the generator: storage hydro can turn on and off within seconds. When windy, wind turbines can too. When sunlit, PV panels can turn on and off in a split second. $\endgroup$ – EnergyNumbers Nov 10 '17 at 13:02
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    $\begingroup$ @EnergyNumbers Yes, they can and they should but regenerative energy has priority in Germany (it's mostly traded at a fixed positive price) so this chart above is for coal power plants and the like. Or actually it was like this and now the renewable energy is also auctioned. Not sure. More at en.wikipedia.org/wiki/… $\endgroup$ – Trilarion Nov 10 '17 at 13:12
  • $\begingroup$ This happened because Holland didn't want the horrid electrical power spikes into their grid so they basically blocked it. $\endgroup$ – user2617804 Nov 11 '17 at 10:12
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Yes, customers who were exposed to day-ahead wholesale market prices were paid to use electricity.

It is a combination of several different factors that make the day-ahead wholesale electricity market special.

Firstly, very few electricity consumers participate in it directly. So the demand side is very illiquid, with very low short-run elasticity - and it quickly becomes perfectly inelastic.

Secondly, there's very little time-arbitrage. The market for electricity at 0500 and the market at 1500 are two separate markets: there are very few arbitrageurs who can buy at 0500 and sell at 1500. That's because until recently, there's been very low rewards for doing so (more on this, below).

Thirdly, there are several suppliers for whom reducing supply would incur expense: so, for market-clearing purposes, they have negative short-run marginal costs. There are two ways that can happen.

  1. very inflexible conventional generators (usually nuclear) just can't turn their output up and down every hour or two, without incurring maintenance costs.

  2. generators with contracts that enable them to sell all their output at a pre-specified positive price: they would need wholesale prices to go negative by the more than that amount, to make it worthwhile for them to reduce their output.

Germany now has such a high combination of those two kinds of generators, that there are times when their combined output is greater than domestic consumption, and that's when prices go negative.

Fourthly, although Germany shares a grid with many other continental European countries, the opportunities for spatial arbitrage are very limited, because total German generation is much much larger than the interconnection power capacity to the rest of the grid: so that interconnection capacity strictly limits the amount of energy that can be arbitraged with other countries within a given trading hour.

Finally, though it seems strange, these negative prices are a good thing. They're a temporary condition that will only last for a transition period, as electricity markets decarbonise. At the moment, we've got transmission networks and market structures that were designed for, and built around, excessively-polluting suppliers such as coal and gas. We have to stop that pollution - the cost of it way exceeds the benefits. So, the industry has to change structurally, and markets and networks will have to change too.

Coal- and gas-fuelled generators have been very helpful for in-day markets, because they can rapidly change the amount they supply. So the near-absence of participation from the consumption side hasn't been a problem at all, until recently - and why the rewards for arbitrageurs were low. But now, there is an increasing number of hours when those very flexible generators no longer dominate the market.

As we move to a grid that no longer has that supply-side responsiveness, we need responsiveness from new arbitrageurs, and from the demand-side. Period of negative pricing provide strong incentives for those new market participants to come forwards. And, as more and more of those new participants enter the market, the negative prices will become rarer and rarer.

So this isn't just Germany. It has happened, and will happen, elsewhere too.

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    $\begingroup$ Could you explain a little more what the "day-ahead" wholesale market is? Does that mean buyers are buying electricity for the next day? $\endgroup$ – Kenny LJ Nov 10 '17 at 8:54
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    $\begingroup$ @KennyLJ that's worth asking as a whole new question! $\endgroup$ – EnergyNumbers Nov 10 '17 at 9:04
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    $\begingroup$ Most consumers have to pay additional costs such as transmission and distribution or environmental supplements, so may not actually get paid if the generation price is slightly negative. You wonder whether some of the inflexible generators might consider running a current into the ground or the sea just to avoid the impact of negative prices $\endgroup$ – Henry Nov 10 '17 at 9:09
  • $\begingroup$ @henry just running big resistance heaters, in ground, water or air, is going to risk local environmental damage, so will usually be proscribed. The both conventional plants already have giant heatsinks, (cooling towers) because they are so inefficient, but they're not designed with huge excess capacity. $\endgroup$ – EnergyNumbers Nov 10 '17 at 9:32
  • $\begingroup$ Buying giant heatinks is not worth it, because there are enough consumers, which already have a way to use all this power, and would be happy to get free power. All they need is some software. The markt is evolving slowly, and such software is being written. $\endgroup$ – Christian Nov 10 '17 at 12:18
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This reflects the problem of electricity storage. With most other commodities, there is some way to store it ahead of future need, but in general this option is not so readily available with electricity.

Of course storage is possible. Traditionally this has been in the form of pumped hydroelectric storage, where the "free" electricity is used to pump water back uphill. More generally there are other forms of storage possible, and Tesla is famously planning to contribute with its Powerwall and Powerpack projects.

When grid storage becomes more widespread, it is possible that negative electricity price spikes will no longer occur. Price spikes will still occur, but storage may limit how extreme those spikes are, both in positive and negative directions. At the moment though, it is those negative spikes which allow rather inefficient pumped-hydro schemes to be cost-effective.

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Basically negative prices reflect that there is produced more electricity than the market asks for. In all other markets, this is not a problem as you can just refuse to sell, but for electricity, there has to be a balance. You can not stack up electricity in a warehouse.

So to give a bit background information, let us take Nord Pool Spot as an example: Every day at 12 CET suppliers and consumers provide Nord Pool Spot with bids on what they can sell and buy the electricity for per MWh the next day (from 00:00). Link to Nord Pool Spot

These bids form the suppliers can be divided into several bits. Which is (in increasing price): forced production, Wind power, gas-, oil- and coal-fired. One can think of this as the suppliers first sell the electricity from the forced production, then the wind energy, etc. The more expensive it is for the suppliers to produce, the higher the cost per MWh.

The wind power is the zero point. Once the windmill is up, it is (for simplicity) free to use, and you can shut it off if necessary. In other words, giving wind power away is a lost opportunity, but it does not include extra costs for the supplier.

In the negative, we have the forced production, this can come from @EnergyNumbers, third point. If it is more costly to reduce the produce the production of a plant than to pay someone to take it, you would rather do this.

Something that is not mentioned, is that plants typically also provide you with hot water. However, in older plants, the generator is always coupled to the output of the plant. Thus sometimes they have to fire up a plant to produce hot water, and thus also electrical power at the same time, giving them a forced production. Often the usage is high enough to take the forced production, but sometimes this is not the case and you will have negative prices.

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  • $\begingroup$ Energy can be "stack up", in the form of battery or unused fuel. Only battery are able to give reserved output for immediate surge on demands, while in fuel form, it need time to ram up the generation capacity. $\endgroup$ – mootmoot Nov 10 '17 at 15:56
  • $\begingroup$ First of all, I was talking about electricity, once it had been "made". It is technically possible to stack up electricity in batteries, but it is not practically possible - the cost is simply too immense. Batteries are though used to stabilise the grid, but we are often in the duration of minutes, at most an hour (Though, Hawaii, have one that shifts the solar energy by 4 hours to use in the evening). The best storage we currently have in Northern Europe is Norway, who use the electricity to pump water to higher grounds, and then use it to generate power on its way down. $\endgroup$ – Nicky Mattsson Nov 16 '17 at 9:51

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