Negative electricity prices are an increasingly common occurrence in the National Electricity Market (NEM). In this article we explain why prices can go negative, show how often it occurs, and importantly we explain what this means for Flow Power customers.
Why do negative prices occur?
The wholesale electricity price is set every five minutes based on supply and demand. Generators (such as solar farms or coal-fired plants) make offers to the Australian Energy Market Operator (AEMO) to supply customers and AEMO will create a “bid-stack” that compares these offers.
The cheapest generation offers in the bid stack are typically offered at a negative price. While this seems unusual, (offering to pay to generate) generators do so to guarantee dispatch knowing that AEMO will dispatch the generators with the lowest price first.
However, in most instances, these generators receive a positive wholesale price because the price paid to all generators is set by the marginal generator offer i.e. the price of most expensive generator needed to meet consumer demand. Click here to learn more about generator bids.
The diagram below shows how the wholesale price is set by where demand for electricity intersects the offers made by generators.
Normally, the price is set based on cost of operating different types of generation i.e., the cost of running a coal-fired power station or a gas plant.
However, with much more renewables connecting to the system, we’re seeing more instances of the wholesale price going negative. This happens both because of reduced demand (driven in large part by more solar rooftop PV), and generators offering electricity at negative prices (explained below).
The result is a negative price which means generators pay to generate electricity, and consumers are paid to take electricity. While this sounds bizarre, it’s an important feature of the NEM.
Negative prices signal times where there is too much energy being generated, and have two effects – they discourage generators from producing energy and encourage consumers to use more energy, helping to balance supply and demand.
Why don’t generators just stop generating when the price goes negative?
There are three main reasons why generators would offer electricity at negative prices:
- They are inflexible and don’t want to turn off.
- For some generators, particularly coal-fired power stations, turning off and turning on is a slow, expensive process.
- To avoid being turned off, they offer some of their power at very low prices, guaranteeing dispatch.
- They have supplemental revenue streams that allow them to profit while selling energy at negative prices.
- For example, renewable generators get renewable energy certificates for every MWh produced.
- The revenue earned from these certificates could offset the negative wholesale prices.
- They’re indifferent to the wholesale price.
- Some generators have fixed the price of their generation by selling hedges or signing offtake agreements that mean they get a fixed payment per MWh regardless of the wholesale price.
- This means these generators are happy to produce at any wholesale price, including negative prices.
Most energy customers don’t actually get paid when negative prices occur because they’re on fixed price contracts but, as we explain later, negative prices present great opportunities for Flow Power customers!
How often do negative prices occur?
Historically, negative prices were somewhat of a peculiarity. However, did you know that there were more trading intervals with negative prices in Q3 2021 than in 2012-2018 combined?
Negative prices are increasing in frequency, and materialising in all of the mainland regions of the NEM.
The above table shows the increasing frequency of negative prices, and the current quarter has seen more negative prices across almost all regions.
Historically, South Australia has had most of the negative prices; however, they are now a common occurrence in Victoria, Queensland and New South Wales, particularly in the third quarter (July – September).
When is the price going negative?
Negative prices are occurring primarily during business hours – this generally corresponds with lots of renewable generation, a large driver of low prices.
If we compare the third quarter of 2019 and 2021, focussing on New South Wales and Victoria, we can see the broadening of when negative prices occur. Particularly in Victoria, negative prices have occurred at all hours outside of the evening peak.
From the perspective of an energy customer, the increasing frequency on negative prices means it’s going to be something you encounter more and more often. Indeed, the negative prices have had a material impact on wholesale prices!
What are the impacts on overall prices?
The negative prices are becoming so significant that they pushing the time weighted average monthly price lower and lower. At the same time, the morning and evening peaks of price are becoming more pronounced – this extenuates the price difference between those high-renewable periods with low or negative prices, and peak periods where prices are much higher.
Focussing on the average wholesale prices over the month of August in 2019 and 2021, we can see the impact of more frequent negative prices. Average spot prices in South Australia, Queensland and Victoria all fell close to, or below zero in the middle of the day. All states have seen the wholesale price in the middle of the day hollowing out.
What does all this mean for Flow Power customers?
The growing trend of low or negative prices is a fantastic opportunity for customers to use flexible demand to lower their bills. Retail customers who have fixed price contracts won’t see the direct effects of negative prices flowing through to their bill.
However, all Flow Power customers can decrease their bill by being more price efficient. This means that, by moving energy demand from high priced periods to negative prices, Flow Power customers can both avoid high prices and get paid for using electricity.
Flow Power’s team can also equip customers to make demand flexibility easier.
By installing our kWatch intelligent controller, we’ll automate your operations so you don’t have to flick the switch. You’ll always have control on whether or not you’ll power down. You can respond to high or low prices by managing your energy usage.
The kWatch intelligent controller provides you:
- transparency and control over your energy use
- a live view into your energy demand
- the right information at the right time
Any questions? We’re here to help.
If you’re interested in learning more about how your business could potentially benefit from demand response, our friendly team are always available for a chat.
If you’re an existing Flow Power customer, please do not hesitate to reach out to your account manager.
If you’re not a Flow Power customer, please contact:
📞 1300 08 06 08
Alternatively, you can submit your questions through our website contact form here.