Going negative on energy pricing
In the spring and fall, the wind blows so hard at night that wind turbines supply all of the power that Texas needs in the wee hours of the morning.
More surprising is that all of that wind means the price of electricity turns negative. That’s right, electric power is not just free, but generators have to pay the grid operator to take their electricity.
Negative pricing can occur because Texas and other states operate a wholesale electricity market, where the grid purchases the cheapest electrons possible first. So the day before generators bid to supply the expected demand and ERCOT, which manages most of the Texas grid, buys the cheapest electricity.
Prices then adjust every 15 minutes in real time based on actual market and weather conditions.
Wind is more predictable than you might think, so Texas wind energy generators have bid negative prices into the market for years now. But the newest surprise comes from the U.S. Energy Information Administration, which reports that the same thing is now happening in California between 11 a.m. and 2 p.m., but this time it’s solar power.
Solar energy plants have been generating more than 40 percent of the state’s
electricity needs in late winter and early spring this year, and it’s causing negative pricing in California’s wholesale energy market.
How is it possible for wind and solar power to generate electricity at negative prices? Tax credits.
Federal law grants a $23 production tax credit for every megawatt-hour of electricity produced by a wind turbine or a solar array that did not collect an investment tax credit. Solar projects can receive an investment tax credit worth 30 percent of the cost of the project, which brings down the cost of the power plant.
Theoretically, wind and solar generators can therefore pay grid operators up to $22 a megawatt-hour to take their electricity and still make a profit. Before California began adding solar energy, average hourly prices in March ranged from $14 a megawatt-hour to $45 a megawatt-hour. Now it’s less than zero.
That has companies that own coal, natural gas and nuclear power plants furious, because unlike renewable energy companies, they have to pay for their fuel costs and pollution control equipment to generate electricity. And coal and nuclear plants can’t shut down and restart quickly, which means they have to keep spinning even when prices go negative.
“Negative prices usually result when generators with high shut-down or restart costs must compete with other generators to avoid operating below equipment minimum ratings or shutting down completely,” the EIA reports.
Coal and nuclear plant owners say they can’t compete with tax credits and complain that they distort what is supposed to be a free and fair wholesale market.
Not so fast, says John Hall, clean energy director at the Environmental Defense Fund. When Texas switched to a competitive wholesale market, and away from the old regulated market, the state gave traditional generators $6 billion in the early 2000s to make up for stranded resources. Federal tax laws still give fossil fuel and nuclear generators all kinds of advantages, just not tax credits.
“We say let’s do away with all of the subsidies for everybody,” Hall said. “We think bailing out coal again is bad public policy and will have a huge economic impact on the state. The fact is that they can’t compete.”
It’s easy to blame the negative pricing on wind and solar during the periods when they are most productive, but the truth is that the prices wouldn’t go negative if coal and nuclear power plants could shut down at night. Their inability to switch on and off quickly is what creates the surplus electricity on the grid.
“The grid of the future will be flexible and composed of resources that can ramp up or down and still economically operate,” Hall said. “Large base-load plants where you simply can’t shut them down quickly and can’t bring them online quickly, and that aren’t price competitive with natural gas and renewables, are destined to fail.”
We’re already seeing this trend in the market place. Nuclear and coal plants are shutting down, natural gas plants are more popular than ever, and 80 percent of the world’s new generation capacity this year will be from renewable sources.
Two years ago, Congress voted to begin phasing out tax credits for wind and solar energy. The tax credits start dropping next year and all new projects after 2020 will receive none at all.
The big question is whether the fossil fuel and nuclear industries will be ready to give up their tax advantages, too, or will they remain dependent on government handouts?