The what, when and how of Texas electricity prices going negative

CleanTechnica

It’s well known that wind power is becoming ever more price-competitive with traditional sources of energy. Already considered a mature industry, but with plenty scope for further evolution, wind power is a cost-effective solution in our transition to a sustainable future.

Against this background it’s hardly surprising that the wind industry is a fast-paced environment, flush with developments and attention grabbing news. But amongst it all, there are stories that stand out.

Earlier this month there occurred such an event: when wind generation in Texas was so high that it actually pushed wholesale electricity prices into the negative — meaning that producers were actually paying for their energy to be taken. Prices bottomed out at the negative price of $8.52 per MW/h.

The peculiar event took place during the early hours of Sunday the 13th of September, when, according to the organization managing the state’s power grid, wind farms at one point generated 11,467 MW of electricity — enough electricity to supply around 30% of all electricity consumed on the grid at that time and in itself a new wind generation record for the state.

How Is This Possible?

Well, it’s worth pointing out to begin with that this has happened before. Many times in fact. For instance, no fewer than three nights in March witnessed negative electricity prices in Texas. And it’s not even just in Texas; negative pricing has occurred in the broader US electricity market too.

It just so happens that various aspects of the Texan electricity system render it susceptible to negative pricing — not the least of which is its high share of plentiful wind power.

With over 15,635 MW of installed wind capacity, Texas is the leading US state in regards to wind power — dwarfing second-place California, which has less than half of Texas’ capacity (AWEA, mid-2015 report).

Unsurprisingly the development of the wind industry in the Lone Star State has had considerable influence on electricity prices over the years, pushing them ever lower.

In the simplest of terms, negative pricing arises from a severe contrast between supply and demand — the two critical determinants of electricity spot prices. Spot prices being the close-to-real-time cost attached to electricity being traded on an electricity market, typically priced per MWh.

When supply is high and demand is low, spot prices generally fall — this is especially true in markets with high shares of renewable energy. Cheap electricity is one thing; but negative prices are clearly another. What precipitates negative pricing are conditions which encourage energy producers to sell at an apparent loss, knowing that in the longer term they will still profit.

To understand the confluence of such conditions at work, first consider supply. Texas has an extraordinarily high level of installed wind capacity — over 15,500 MW. Put another way, in 2014 wind turbines produced 4.4% of all US generated electricity; in Texas, 9% of its electricity was generated by wind — enough to power 3.6 million homes.

Looking at the WWEA’s mid-2014 report, if it were a country, Texas’ installed wind capacity would rank around sixth place.

With such massive amounts of wind capacity available, when the wind blows, Texas can expect an abundance of cheap electricity.

At this point it’s important to understand why the electricity is cheap. Yes, wind turbines don’t require fuel and are relatively inexpensive to run — allowing producers to sell their electricity very cheaply, whilst still turning a profit. But there’s another aspect, involving how electricity is sold in Texas, that must be acknowledged.

Because Texas is something of an energy island — with limited importing or exporting electricity to its neighboring grids — most energy produced in Texas stays in Texas.

The Texas grid is called ERCOT, and it’s managed by the energy agency of the same name. Although in the latter instance it makes more sense to understand that ERCOT is an acronym for the Electric Reliability Council of Texas. In any case, ERCOT manages its grid like any other Transmission System Operator (TSO): ensuring demand is met through sourcing supply from energy producers on an electricity market.

The market functions through auctions, where energy producers place a competitively priced bid to supply some amount of energy at a particular time and particular price. Every 15 minutes bidding closes, and ERCOT selects suppliers from the bids to fulfill grid demand.

Those suppliers are free to bid at whatever price they choose. But they’ll generally do so within the bounds of what’s profitable, whilst remaining cognizant of their competitors and the overall levels of supply in the grid.

Now here’s the kicker: various subsidies — including US federal production tax credits and state renewable energy certificates — compensate wind power producers for generating clean energy to such an extent that it allows wind farms to continue to make money even when selling at negative prices. The Federal tax credits, for instance, provide 2.3 cents per kW/h, or $23 per MW/h.

The situation means that wind power producers not only have incentive to sell at negative costs, it actually makes economic sense for them to do so.

Things Go Negative

So it was that in the early hours of Sunday, 19 September, with state power demand low, wind farms across Texas found themselves producing lots of energy. In consequence to an abundance of low bids coming in from wind producers, spot prices fell…hard.

Clearing price in the spot market went from $17.40 per MW/h for the bidding-window ending 12:15 am., to zero for the window ending at 01:45 am. Prices then remained in the negative (or zero) until about 08:15 am. At its lowest, the window ending at 5:45 am., the spot price of electricity in Texas was negative $8.52 per MW/h.

Concluding Thoughts

As it happens, negative pricing in Texas used to be even more common than it has been this year. But a change came in 2013 after completion of a $7 billion high voltage transmission network to enhance grid capacity across the country — allowing wind producing west Texas to send surplus energy to major cities, including Dallas and Houston in the east.

Still, expansion of the Texas grid hasn’t ameliorated the problem entirely; negative pricing still occurs with considerable frequency, as March and this latest event demonstrates.

One could debate at length over the relative negative and positive consequences of subsidies provided to the wind power industry. And indeed incidents of negative pricing in Texas and elsewhere would bring substance to such a discussion.

That cheap wind power continues to push electricity prices down can have a deleterious effect on energy markets, and the wind industry itself for that matter. It can for instance, leave investors more reluctant to invest in projects with such low returns.

In the meanwhile, however, it seems that not only will staggering low prices of electricity in Texas be seen on many days in the future, but that investors aren’t put off by this. After all, the state is by no means finished with expansion of its wind capacity — approximately 50% of all ongoing US wind power installation is located within Texas (>6,800 MW), an amount greater than installed capacity of any other state to date.

Source: CleanTechnica. Reproduced with permission.