Negative energy pricing occurs when electricity supply outstrips demand in such a way that grid system operators are forced to choose between paying renewable generators to turn down or paying customers to use more. As solar and wind farms generally have agreed prices for their output, paying customers to consume is often significantly cheaper than paying generators not to produce, even when that price becomes negative.
Several factors create the conditions that cause negative pricing, including generation and demand being driven by weather conditions and the seasons. Nuclear operators have strong economic and technical reasons to remain inflexible with production, meaning they’re not suited to respond to increases in renewable production. Storage is a partial solution to the problem, but many countries don’t have enough to meet the demand. National transmission networks and cross-border interconnectors can help curb variations across wider regions, but they have capacity limits.
Driven by these forces, negative pricing has become more common in the GB energy market. In July 2023 there were several negative pricing events clustering around weekends. The EPEX hourly day-ahead market reached a record low of –£70/MWh (–$90/MWh) and at one stage the intraday price dropped to –£120/MWh (–$150/MWh).
Benefits and strategies
There is a lot to gain from negative pricing for organisations that can store energy or adjust consumption. By using their flexibility, they can generate revenue by accessing the shorter time-scale electricity markets and the balancing mechanism. Alternatively, they can use pass-through supply agreements to access cash-out prices too.
While there are regulatory changes concentrated on widening access to these markets, organisations must focus on determining the assets they can use to create the required flexibility, along with the best strategies for capitalising on negative prices.
Dedicated, always available battery energy storage systems are a clear candidate and can deliver the highest revenues. They can effectively generate revenue twice from a single negative pricing event. For example, during the negative pricing events of July 2023, battery owners were able to charge batteries while day-ahead prices were negative, discharging them once they had returned to positive pricing. Batteries also have the response-time capabilities to operate in faster markets like frequency response, which generates more value than just tracking negative prices.
The one-hour, 50MW West Gourdie battery, operated by Flexitricity and owned by Foresight Group, was one of the highest earners during the 2 July 2023 negative pricing event. Over four-fifths of West Gourdie’s revenues came from Dynamic Containment—mostly the low-frequency service, where prices averaged £13/MWh. It was able to stack trading actions to take advantage of negative prices; charging and subsequently discharging once they were positive, accounting for 17% of revenues. The system cycled approximately 0.9 times on the day.
Electric vehicle fleets can exploit negative pricing events in a similar way by choosing when to recharge. Industrial and commercial energy users that can modulate processes such as cooling, heating and pumping can get the same results and revenue streams. These assets have to perform their “day job”, so organisations must create a strategy around their functions while deploying their flexibility in an ad hoc manner. It is important to set operational parameters for these assets and give the business dynamic control over the parameters.
Aggregation and automation are also key. A primary goal of a flexibility provider like Flexitricity is to remove size-based restrictions from the market opportunities. This is done by aggregating many assets into virtual power plants with a large enough capacity to make a difference to the grid or to a distribution network operator. Securing value from negative prices and other fast-moving events is not a manual task and working through an experienced flexibility partner with sound relationships across a wide range of different asset classes will be vital. While the approach will likely vary depending on the specific site and assets, operational access to all appropriate markets alongside all other assets should be the goal.
The longer-term outlook
Negative pricing has a role to play in helping the UK transition to net zero as it provides financial incentives for organisations to support a net-zero grid by encouraging the use of batteries and other flexible energy assets.
The continued growth in variable renewable energy generation plus production and demand inflexibility across the grid make it likely that negative pricing events will be more frequent, with their depth and duration continuing to change as the grid transforms further.
Such events are a market signal calling on us to invest more in flexibility that optimises the energy resources helping us to achieve net zero. As the National Grid ESO has highlighted, all credible future energy scenarios will depend on market participants being able to gain revenue and savings from flexible operation.
Dr Alastair Martin is founder and chief strategy officer of Flexitricity
This article was published as part of PE Outlook 2024, which is available for subscribers here. Non-subscribers can purchase a copy of the digital edition here.
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