In 2022, negative prices occurred during 69 of the total of 8,760 hourly prices in German day-ahead trading. Last year, there were 139 cases of hours when utilities had to pay to give away electricity. This adds to the high price of electricity in Germany, but it doesn’t explain it. Paul Hockenos has the details.
In Germany, the price of electricity can drift into negative territory creating a situation in which power suppliers – namely marketers of renewable power or conventional power stations like nuclear and lignite plants – have to pay for the excess power to be taken off their hands. (Unlike consumer goods, electricity can’t simply be destroyed.)
Negative pricing is a complicated phenomenon and the source of much controversy as it is the consumer that winds up paying for the conundrum, rather than benefitting from it. Ultimately, there’s a collision happening between two systems: old and new. The inflexibility of the existing generation fleet combined with insufficient demand side flexibility has Germany in a precarious situation, very different from other countries with large shares of renewables. In stark contrast, in the UK and Australia consumers can tap into ultra-low prices during the daytime when solar and wind are abundant. These price signals have effectively not existed for most customers in Germany until very recently.
“Germany has been completely asleep at the wheel on flexible pricing and time-of-use (TOU) rates compared to other countries,” explains Toby Couture of E3, a Berlin-based think tank. “Many developing countries have more flexible and dynamic TOU rates than Germany. This is a change that is absolutely pivotal to avoiding more negative pricing in the future – and allowing customers to benefit from low prices.”
The reason there can be surplus power in the system is manifold – and not exclusively the fault of renewables, as it is often posed.
For one, over the past two decades there’s been a steep increase in the renewable energy in Germany’s power system. It now covers 47% of consumption, an all-time high. Since the bulk of this green energy is wind and solar, it comes intermittently into the grid – at times more, at others less. There are hours when the sun is shining, the weather is blustery, and at the same time demand for power is low, for example as was the case on the last day of 2022: December 31. It was the stormy weather than drove the turbines’ rotors so hard that the German grid became overloaded with too much electricity.
This is problematic because a power grid has to be balanced: supply meeting demand, or the system can break down, causing outages. There are a number of ways to balance a grid: one is a balancing power market that helps to ensure security of supply even when there is a lull in the wind or on gray days.
In times of excess supply, it’s possible to halt the generation of either renewables or conventional energy sources. But coal and nuclear plants aren’t particularly flexible: utilities can’t ramp them up or turn them off easily. (The most modern gas plants are more flexible than the older ones.) When they are ramped up or down for short periods, this costs them money. Ultimately, since renewables have priority in the power grid, it is conventional electricity that has to make room for it, and not the other way around.
“What we have here,” explains Couture of E3, “is a transitional problem, one that arises from — and is symptomatic of — the collision of two power systems: the old, relatively inflexible, baseload-heavy, and fossil-dominated system, and the new, variable, weather-dependent, renewables-dominated power system.”
Given this state of affairs, there are other options, such as storing the surplus, for example. Excess power can pump water up an incline where it is stored in a reservoir until a time when there is too little power in the system. It then rushes downhill and through hydroelectric turbines, which generate electricity. Batteries, too, store electricity, and in fact there are dozens of other ways that electricity can be saved and used later, including compressed air energy storage, flywheels, flow batteries, supercapacitors, and superconducting magnetic energy storage.
Yet another option is to store more electricity in the form of heat – linking it to the Wärmewende, or heating transition. With hot water tanks, and growing numbers of heat pumps, the heating sector can “soak up” growing amounts of abundant power.
But although Germany’s storage capacity and heating options are growing, together with a market for storage, it is not currently enough to take in all the excess power when supply greatly exceeds demand, as it did in 2022. The power has to go somewhere and thus another option is neighboring countries, which either need it at that moment or can store it themselves.
Austria and currently France too are grateful customers because German electricity is sold to them at low prices, and France is in great need in light of the closure of so many of its nuclear plants. The Alpine republic is flush with pumped storage power plants and is therefore well placed to absorb surplus (and thus less costly) electricity. In this way, Germany contributed directly to the lower electricity prices of its neighboring countries.
In fact, last year Germany produced so much “extra energy” that it was a net exporter. The total balance of exports and imports resulted in the net export of 62 billion kWh – a 51% increase over last year. This padded Germany’s balance of accounts by 2.9 billion euros, according to the Federal Network Agency. (This figure alone, though, is nothing to cheer about since half of that supply was generated by conventional power plants, mostly coal-fired.)
But what happens when none of Germany’s neighbors really need electricity? This is when the grid operators start reducing the price until zero, and then in worst case scenarios, pay utilities at home and abroad to take it. Last year, this happened on 24 days for 69 hours. In 2021, during 139 hours. And in 2020, during 298 hours on 51 days. (The curtailing of production during the pandemic in 2020 contributed to the high number of cases of hours with negative prices. On December 31, 2022, German energy producers paid buyers operating on the exchange 79 cents a kilowatthour to take the surplus off its hands.
One might think that low wholesale energy prices would benefit German consumers. But this is not the case. The reason is that consumers finance the fixed feed-in tariffs for renewables through the EEG surcharge. Renewables producers receive guaranteed feed-in payments for all of the energy they produce. The Renewable Energy Sources Act (EEG) guarantees operators of wind, solar or biomass power plants that they can sell every kilowatt of the green electricity they produce into the grid – at any time at a fixed rate.
If this is not possible, because the grid is overloaded, then they receive compensation payments at the same price. Meanwhile, grid operators have to give preference to green electricity over conventional electricity and to sell surpluses on the stock exchange. In this way, there can be a glut of electricity when weather conditions are optimal and demand is low, like on holidays.
The difference between the feed-in tariffs that grid operators have to pay and the revenue they earn from selling the electricity forms the basis for calculating the EEG surcharge. In a nutshell: if the price of electricity on the exchange is low, consumers pay more. When it is negative, they pay the most.
It would be nice to think that the drop in the number of negative-price hours is nothing but good news for Germany’s energy system. But the reason for it is more the higher electricity price as a result of geopolitics. “Extremely high electricity prices can temporarily move previously infeasible storage technology to the list of the current options or make some conventional generators profitable as well,” explains a South Westphalia University of Applied Sciences study.
Energy experts, though, say the key is developing an energy system that is inherently more flexible. “More flexible demand, this is key,” says Couture. “Universally it is periods of low demand that trigger negative prices. If low demand is the problem, then we need to shift more demand to those low demand periods. Shift it from peaks, to troughs.” Also: better storage capacity, smarter grids, developed virtual power plants, and more agile conventional producers that can ramp up and down more efficiently. This is going to be ever more critical as more renewable energy comes online.