The Upstream Blog

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How can electricity have a negative price?

Sep 26, 2019 4:35:46 PM

 

I recently read in RenewEconomy about wholesale electricity prices going negative in Australia. I didn't understand it, so I investigated.

 

Electricity is one of the only products we use that must be consumed at the precise moment it is produced.

 

Other examples that come to mind are live performances, and fresh sushi. But where a Taylor Swift fan has to buy a ticket, get to the stadium, find their seat, and wait for the magic to happen, a consumer of electricity has a much easier time.

 

Electricity can be sent very long distances very quickly. So you and I can flip a switch and enjoy the product even though it's just been created in a power plant somewhere far away. The grid is a brilliant invention - thank you Mr Tesla (Nikola, not Elon).

 

But it's not easy. Australia has one of the lowest population densities on the planet - only five countries (like Namibia, Mongolia and Western Sahara) have more elbow room than us. The cost of building and maintaining a network of around 5 million power poles to deliver energy all across Australia is a big challenge.

 

Right now, another problem is becoming increasingly relevant - production must match consumption. That is to say, across the whole country, for every minute of every day, the total amount of electricity produced must match the amount in demand. This is causing problems we haven't seen much in the past, because lately the number of people generating electricity has increased.

 

If an electricity generating facility finds it's producing more power than is needed, they have only two options. They can either shut down, or they can keep producing but sell their power at a lower price - usually to consumers further away, often interstate.

 

Coal powered facilities don't like shutting down for the same reason my grandpa doesn't like sitting in bean bags - it takes a long time to go down and it takes even longer to get back up.

 

So the second option is often preferred - keep producing, just drop your price.

 

In fact, it's even worth dropping the price below zero - if the cost of doing so is less than the cost of shutting down and starting up again.

 

There are other reasons generators don't slow or turn off. Some electricity providers may have contracts to supply that mean their hands are tied. More interestingly, it's also possible some players in the market want to push back, and just keep producing so that others have to stop. It looks like it's a fossil fuel vs. renewables tussle.

 

A key driver of all this is that renewables have arrived. Both large scale (wind farms, solar farms, etc) and small scale (rooftop solar etc) are being built at a rapid base which is leading to this oversupply.

 

Clean Energy Australia tell us that in 2018, renewables hit an all time high of 21% of total energy production with an interesting mix of hydro, wind, solar and bioenergy.

 

To make things interesting, there's also the question of how this plays out over the course of each day.

 

The contribution of these many power producers varies a lot over the course of a day. There's a brilliant chart created by Open NEM which shows the mix of generation types by the half hour for each state. The black is black coal, the orange is gas, the green is wind and the yellow is solar.

 

Screen Shot 2019-09-26 at 4.25.30 pm

 

You can play around with the timelines and it's interesting to see how the yellow solar generation is starting to grow for the daylight hours.

Tim Johnson
Written by Tim Johnson

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