European power market: Turning negatives into positives

Author Justin Colley, Editor

Government lockdowns in response to Covid-19 have seen negative prices become a feature of the EU power market outside of the extended holiday periods during which they usually occur, offering a glimpse into a possible exciting new future for power trading in Europe.

Day-ahead trading platforms for physical electricity form prices based on the marginal cost of supply. As multi-regional power exchange Nord Pool explains, the cleared price is “the price that the consumer is willing to pay for the final kWh required to satisfy demand” — fairly standard price formation for any tradeable commodity. But electricity is unique in that it cannot be stored — mostly, yet — and a structural shift in the short-term supply-demand balance can lead to negative prices, where the producer pays the consumer to be able to offload their surplus supply.

How are market landscapes developing to respond to negative prices? How long will it take for a technological and behavioural shift to capture and adapt to this market phenomenon? And, since we’re talking about negatives, how many photography puns can I crowbar into one blog? Ok, let’s focus…

On 6 April (am), electricity in Germany for delivery in the 15-minute block of 00:30-00:45 traded at €520/MWh. Less than two hours later, electricity delivered in the 15-minute block of 02:15-02:30 traded at minus €385/MWh. In less time than it takes to watch two episodes of the Tiger King, traditional market dynamics — where a consumer pays a producer for a product — flipped completely.

Negative power prices, typically a flash phenomenon occurring around Christmas or Easter holidays, have spread across Europe, as the rate of decline in power consumption resulting from government lockdowns to combat coronavirus outweighed the flexibility of the generation stack.

Spanish power prices turned negative in several hours in the intra-day market over the past weekend — a phenomenon that only occurred once previously, in December last year.

A similar trend was seen in the UK — wholesale power prices turned negative in some hours on a day-ahead basis over the weekend and moved further into negative territory in the shorter-term balancing market, falling to minus £66.25/MWh on 5 April.

Negative pricing is representative of an inflexible marketplace, traditionally targeting the supply side. Your average electricity consumer has had little exposure to the concept of negative pricing, but UK supplier Octopus Energy’s Agile tariff broke ground by offering negative prices to household users on 5 April. With half-hourly prices offered as low as minus 3.15p/kWh, Octopus customers that boil their kettles 10 times could have made a cup of tea pretty much for nothing — assuming a tea bag cost of 3p and 5ml of milk at 0.25p — in the afternoon.

Now, let’s assume a full electric car battery can accept 50kWh and you have a rapid 50kW charger. You reach full charge in one hour and you wisely choose to do this when prices were minus 3.15p/kWh, earning you £1.58. Oh, and you also have a vehicle-to-grid connection installed, and because you’re respecting the government’s social distancing policy and not driving anywhere on 5 April, you sell that power back into the grid when prices return to positive territory at 3p/kWh, netting you a profit of £3 for charging and discharging.

No-one is going to be considering early retirement on such a windfall, but scale this up to a commercial level and you start to balance out the short-term peaks and troughs of oversupply. There is a long way to go before large-scale storage and discharge projects such as batteries become economic and competitive in the market. Less than 5pc of capacity that was awarded payments in the UK T-4 capacity market auction was storage or demand-side measures. And upgrading distribution grid outlets with two-way connections costs money, and takes time.

Blogs and articles are circulating the internet talking about how current western European power market dynamics are acting as a lens into the future — where a higher penetration of renewables is mostly balanced by gas-fired power plants. True. But beyond that vision, we have received a taste of how a decentralised power system can work in practice as consumers are upgraded to prosumers, and it’s pretty exciting! In 30 years, what apps will we have as standard on our phones to control our electric goods and to track retail power prices? Will this help the power industry reach carbon neutrality? And how long before everyone can update their CVs to say car owner/power trader?

Oh, and how many photography puns did you count in this blog? Seven? Snap!

Justin Colley tracks the power markets daily as editor of Argus European Electricity. Learn more about this service.