What are negative energy prices and why do they occur?
Negative electricity prices are a phenomenon that at first glance may seem paradoxical – why would producers pay consumers to use energy? In reality, this is the result of dynamic changes in the energy market, driven by the rise of renewable energy production and the volatility of demand. In this article, we explain what negative energy prices are, why they occur, and the challenges and opportunities they present for energy systems.
Negative Energy Prices – What Are They?
What does negative energy pricing mean? This term is related to the characteristics of the wholesale electricity market, where supply and demand must be balanced in real-time. If this balance is not maintained, a situation may arise where energy supply exceeds demand. This leads to negative energy prices – a situation where the cost of producing excess electricity is lower than the cost of not producing it. In such cases, electricity producers are forced to "pay" consumers to take the surplus energy off the grid.
This phenomenon most often occurs in energy systems where there is an oversupply of production, and the system lacks the capacity to effectively store the surplus. Negative prices appeared on the Polish market for the first time on June 11, 2023, immediately sparking questions about market stability and the potential impact on electricity prices.
Main Causes of Negative Energy Prices in the Wholesale Market
In Poland, coal-fired power plants are still the primary source of electricity. Many of these plants have yet to be sufficiently modernized to adapt flexibly to situations of overproduction. Moreover, for many years, their electricity was the cheapest on the market. However, this changed with the introduction of climate policies, including CO2 fees, and the dynamic development of renewable energy sources (RES), which popularized green electricity. Today, renewable energy is the cheapest available on the market. Unfortunately, the energy exchange does not trade exclusively in green energy; conventional producers' electricity is also available.
The energy market operates so that electricity with the lowest production cost enters the market first. As demand grows, producers with higher production costs introduce their offers. This means that electricity prices on the exchange are highest when demand is greatest. Conversely, when demand is low, prices drop. Negative prices occur under specific conditions, such as:
- Excess energy production: During periods of high energy generation (e.g., from renewable sources like wind or solar) combined with low demand (e.g., at night), prices may turn negative.
- Lack of storage infrastructure: Many energy systems lack sufficient capacity to store energy, meaning surplus electricity must be removed from the grid.
- High production costs: Energy producers may face significant costs associated with shutting down power plants or adjusting production. In such cases, it may be more cost-effective to sell electricity at negative prices than to incur additional shutdown costs.
- Market regulations: In some countries or regions, regulations may influence price formation, leading to negative values under specific conditions. For example, importing energy from neighboring markets with negative prices can cause this phenomenon in Poland as well.
- Increased use of renewables: A higher share of renewable energy in the energy mix leads to greater production variability, which can generate negative prices when supply exceeds demand.
Do Negative Energy Prices Affect Consumer Bills?
Negative energy prices in the wholesale market do not directly translate into electricity bills for consumers. The fees paid by consumers are based on long-term contracts and retail tariffs, which are always determined in advance. Retail prices include not only energy purchase costs but also transmission, distribution, customer service, and other charges. Thus, electricity bills do not directly reflect market price fluctuations.
However, the situation is different in the wholesale market, where short-term contracts and auctions prevail. Here, prices change dynamically depending on real-time supply and demand.
The emergence of negative energy prices could influence future market changes. For instance, electricity consumption patterns may shift, with the introduction of new, dynamic tariffs allowing more flexible energy usage during specific timeframes when prices are lower due to overproduction. This could provide financial benefits to end users while also raising awareness about energy management in households.
It is planned that such dynamic tariff systems will be introduced in Poland as early as 2024. These systems will allow retail customers to purchase electricity at wholesale or near-wholesale prices, which fluctuate every 15 minutes. However, it should be noted that additional charges, such as transmission fees, will still apply.
Negative energy prices are likely to have a significant impact on prosumers and cogeneration companies. They will need to invest in energy storage solutions to manage surplus production and explore options for self-consumption. Moreover, cogeneration operators are already required to account for negative prices in their annual CHP reports. According to the Act on Promoting Electricity from High-Efficiency Cogeneration, cogeneration units cannot receive support for energy generated during periods of negative prices.