Electricity oversupply makes price drop below zero
Due to the corona crisis, there is an oversupply of electricity in Belgium, and wholesale prices drop below zero weekend after weekend. As a result, wind farms or power stations have to pay for every megawatt-hour they produce.
“We shut down wind farms at sea on Monday because the electricity they produced only costs us money,” says Pieter Verlinden, purchasing manager at the green energy supplier Eneco in the newspaper De Tijd.
“I don’t remember ever experiencing such a dramatic price dip,” says Kris Voorspools, manager of the 70GigaWatt energy consultant. “Monday’s prices were negative for thirteen hours. That’s unseen.”
Supply and demand
The lockdown has significantly reduced the demand for electricity. Many companies are at a standstill or are only running at half power, causing electricity consumption in Belgium to fall by 16 percent. Particularly on Sundays and public holidays, when consumption is already lower anyway, there is overcapacity.
Electricity is difficult to store, so supply and demand must be in balance at all times. The negative prices serve to eliminate oversupply so that the grid does not become overloaded. By making producers on the wholesale market pay for the electricity they supply, they are encouraged to reduce their production.
Consumption pays off
The mechanism also works in the other direction. Large industrial consumers can earn money in case of negative prices by purchasing extra power. Next Kraftwerke bundles the installations of several large customers and switches them on and off to respond to substantial price fluctuations.
“Horticultural companies, for example, switch on all the lighting in their greenhouses. Food companies switch on their freezing equipment a few degrees colder because they get money for the extra power they consume,” says Jan De Decker, co-CEO Benelux of energy management company Next Kraftwerke.
Solar parks and windmills can also be shut down, but much depends on the applicable subsidy mechanism. Indeed, the oldest solar panels and windmills sometimes still have generous levels of support, which means that prices have to drop well below zero before the installations are driven out of the market. These subsidies also weigh on the consumer’s energy bill. This is different for the youngest offshore wind farms. Because they no longer receive support when prices plunge below zero for a long time, they are more inclined to switch off more quickly.
The price crash leads to fierce discussions in the energy world. Negative prices typically arise when demand is low and there is a lot of solar and wind energy. Some people see it as a signal that renewable energy has hidden costs because you cannot choose when the sun shines and the wind blows. Low prices might lead to fewer investments in renewable energy. Others mainly blame nuclear power plants, which continue to operate undisturbed even with negative prices.
Nuclear power plants
The Belgian nuclear power stations always supplied 4 gigawatts of electricity on Monday. But in the afternoon, more than 1 gigawatt of wind production was switched off to avoid overloading the grid. “It’s very strange that when there’s a lack of flexibility, the nuclear power plants continue to run at full capacity,” says Voorspools. In neighboring countries, nuclear energy production was reduced.
Engie Electrabel, the operator of the Belgian nuclear power plants, refers to the corona measures. “The nuclear power plants are currently operating with two-thirds fewer people,” says spokesperson Anne-Sophie Hugé. “In these special circumstances, we want to minimize the disruption to the power plants and keep them stable at 100 percent. Only if the grid is in danger and Elia asks us to do so, we will modulate the production, but we are not going to do so for economic reasons.”
Usually, negative prices occur a few times a year, but because of the corona crisis, it is now every Sunday. It creates substantial losses for suppliers. In the sector, the question sounds about whether all players will survive the turbulence.
“We’ve been buying power volumes long in advance to supply our customers,” says Verlinden of Eneco. “But because of the corona, pandemic, consumption is much lower than expected. We have to sell some of the overbought volumes. In a market where prices are low and even negative, that leads to heavy losses. This situation is not healthy for anyone.”