Negative energy pricing: Challenge, yes, but also an opportunity

This week’s Power Playbook looks at negative pricing as a new challenge for Europe’s energy markets and the opportunity it presents for battery storage investments.

“The price crisis, honestly, is behind us.” So said Eurelectric’s Kristian Ruby to a room full of journos during Enlit Europe.

However, the electricity sector association’s secretary general added that we are now facing a new challenge characterised partly by frequently observed negative prices.

“Negative prices are on the rise, and very significantly…” said Ruby, citing stats from the Financial Times in September, demonstrating that European energy prices have dropped below zero a record number of times this year.

“I don’t want to scare you with negative prices. Negative prices are a consequence of people taking rational decisions in the market.

“They’re saying, ‘I’m ready to pay somebody to take my power because I’d rather keep my power plant on at this particular moment in time, because it’s more expensive for me to shut it down’.”

You’d think that too many renewables coming online would be a good thing, but au contraire, its rapid uptake is not all glitter and solar sunshine.

More from Enlit Europe:
Enlit Europe told that ‘competitiveness and sustainability go hand in hand’
Tech Talk | Enlit’s The Guide 2024 technology highlights

Rather, when a rapid supply of renewable energy is taken on, to the extent that supply outstrips demand, grid system operators are forced to choose between paying renewable generators to turn down or paying customers to use more.

According to LCP Delta in a blog post, renewable generators also have a choice: either stop producing electricity because there is no one to buy it, or find a way to increase demand so they can continue to be paid for producing and selling.

But, as most renewable contracts have no negative pricing rule, except for newer Contracts for Difference (CfDs), to remove subsidies when these events occur, it is likely that negative pricing will continue until most current contracts come to an end in the next decade.

Said Ruby: “You can also do the math that if there’s only negative hours in the market, it’s going to be difficult to justify the investment [into renewables]. So this is an unprecedented situation.

“This has not happened for the European power markets. This is new, and it has to do with…the massive influx of renewables, the relative decline of demand, and the resulting unusual patterns of production and lower prices.”

A challenge and an opportunity

As is the case with the ‘burden’ of renewable generation outstripping demand, negative pricing can be seen as an incentive for investors to look more towards batteries as a coping mechanism.

The use of these technologies, which tend to be available 24/7, to mitigate the highs and lows of supply is no secret.

Storing energy when supply soars and later discharging back onto the grid is a concept being investigated and already applied across European utilities to balance the precarious supply and demand curve.

In the UK specifically, according to Modo Energy, a rise in negative-priced periods in August helped to increase battery revenues. According to the company, which provides benchmarking for batteries, low and negative wholesale prices during off-peak periods allowed these batteries to charge up cheaply.

This way, by storing energy when prices are negative, companies can save on overall costs and use the energy later when prices are high again.

Indeed, although negative pricing is bad for competitiveness on the continent, it has at the same time, as per Modo Energy’s findings, sparked an opportunity for British companies – and investors – who happened to have battery tech ready and waiting.

This marks the latest market signal pointing to battery technologies as a critical focal point for investments.

More on batteries in the Power Playbook:
Energy VC: Batteries the new black
Tesla’s Q2 quandary: Energy storage vs e-mobility

Industrial electrification

For Ruby, however, before looking at this tech, a key fix to the negative pricing issue is industrial electrification.

“One of the things that we believe is really essential right now, from a policy point of view, is to stimulate industrial demand. Prices are coming down…and demand is not there, so how are you going to justify more investments?

“The first remedy to fix the business case for additional capacity is to balance supply and demand, and that means jack up demand for electricity.

“What is extremely interesting is that up to 90% of existing industrial processes can be electrified directly,” said Ruby, citing a Fraunhofer study, commissioned by Agora.

“And the good news is that the European Commission has gotten wind of this, and they’re seeing that there’s a way forward. Essentially, one big shift that has happened inside the commission is that, along with industry recognising that hydrogen is going to be too expensive if you want to stay competitive, there’s only one way forward to decarbonise, and that’s direct electrification.

“Industry is seeing this, the Commission is seeing this, and this is why we’re hearing more and more about electrification as the way forward.”

As we ramp up supplies of clean energy, negative pricing appears to be a conundrum here to stay. As an investor in clean tech or a company who has had to grapple with these issues, what has been your experience?

Reach out and let me know so we can feature your insights in the Power Playbook.

Cheers,
Yusuf Latief
Content Producer
Smart Energy International

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