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Today in Energy

June 18, 2012

Negative wholesale electricity prices occur in RTOs

NOTE: The original chart and associated discussion of the frequency of negative prices in RTOs originally published on June 18, 2012 has been removed because of incomplete data from an external source.

Under certain conditions, electric generators in regional transmission organizations (RTOs) actually pay to produce power as reflected in a price below zero. This situation can arise because some types of generators, such as those providing nuclear, hydroelectric, or wind energy, cannot or prefer not to reduce output for short periods of time when demand is insufficient to absorb their output.

RTOs use locational marginal pricing (LMP). Prices are determined at thousands of locations. Prices are also determined hourly and on a 5-minute basis.

Technical and economic factors lead power plant operators to run generators even when power supply outstrips demand. For example:

  • For technical and cost recovery reasons, nuclear plant operators try to continuously operate at full power.
  • The operation of hydroelectric units reflects factors outside of power demand, for example, compliance with environmental regulations such as controlling water flow to maintain fish populations.
  • Eligible renewable generators can take a 2.2 cents/kWh or $22/MWh production tax credit (PTC) on electricity sold. This means that some generators, primarily those operating wind turbines, may be willing to sell their output at negative prices to continue producing power.
  • There are maintenance and fuel-cost penalties when operators shut down and start up large steam turbine (usually fossil-fueled) plants as demand varies over a day or a week. These costs may be avoided if the generator sells at a loss when demand is low.

In these situations, generators may seek to maintain output by offering to pay wholesale buyers to take their electricity. While generators will rarely be willing to pay to generate for a whole day to avoid shutting down, many are more willing to do so when they only have to pay for 5 minutes or an hour. Also, the market and operating conditions that give rise to negative prices are more likely to occur for short periods of time.

Negative prices generally occur more often in markets with large amounts of nuclear, hydro, and/or wind generation. The operators of these types of generators may be less willing to ramp up and down for the reasons mentioned above.

In a previous article, we focused on negative daily bilateral spot prices in the Pacific Northwest in 2011.