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Imbalance prices turn negative for six straight hours

Tim Dixon Tim Dixon Team Lead
26th March 2019

Imbalance prices turned negative for 13 consecutive settlement periods on Sunday, as low electricity demand and high levels of wind output led the System Operator to reduce generation output from a variety of wind, combined cycle gas turbines (CCGT) and biomass power stations.

The imbalance price dropped below zero in period 21 (starting 10:00am) and remained negative for 13 periods until period 33 (up to 16:30pm), with the price falling as low as -£70.24/MWh in periods 28 and 29.

What happened?

On the day, wind output on the transmission system averaged an elevated 7.2GW, meeting 28% of transmission system demand, which averaged 26.0GW. This led National Grid to take action on the Balancing Mechanism (BM) and turn down a variety of power stations.

The fact that many wind farms are located in Scotland exacerbated the requirement to turn down output in certain locations, as there is not enough capacity to transport all the electricity to Southern England, where electricity demand is highest – known as ‘constraints’ in grid terminology.

As shown in Figure 2, the majority of the capacity turned down by National Grid was from wind farms, but with some biomass and CGGT plant also reducing output. Wind farms and biomass in particular will be in receipt of subsidy payments, and therefore require a payment to decrease output.

With many of these actions taken to manage constraint issues in Scotland, rather than because there was simply too much generation, much of the output that was turned down needed to be offset by increasing the output of other plants. This can also be seen in Figure 2, with National Grid turning up CGGT plant at the same time as wind farms were being asked to turn down.

Figure 2 shows the volume of electricity that National Grid accepted in the BM to turn up (known as accepted offers), and the volume of electricity National Grid turned down (known as accepted bids), by technology. The accepted bid volumes were significantly greater than the accepted offer volumes, indicating there was too much generation on the system and ultimately resulting in negatively priced actions being accepted to balance the system.

In addition, the way the imbalance price is calculated changed in November 2018. Under the new arrangements, the Single Imbalance Price (SIP) for each settlement period is effectively calculated using the costliest 1MWh of actions that National Grid takes to balance the system. This is the Price Average Reference (PAR) volume, which changed from 50MWh (PAR 50) to 1MWh (PAR 1) last November. Under the new methodology, it is more likely that imbalance prices will outturn negative, with the potential that only one negatively priced action on the BM will result in a SIP below zero.

Who got paid what?

The average accepted bid price (the price to turn down generation) from wind farms was -£75.9/MWh, with Walney offshore farm – which is accredited to the Renewables Obligation (RO) – receiving the lowest price of -£188.9/MWh. Biomass power stations, most notably Drax which also receives RO payments, had an average accepted bid price of -£61.2/MWh.

For the majority of negatively priced periods, it was either Drax’s biomass units or onshore wind farms setting the imbalance price, with CCGT and hydro plant occasionally setting the price.

Conversely, the average accepted offer price (the price to increase output) from CCGT plant was £62.3/MWh, the highest of which came from Pembroke at £621.0/MWh. During the day, accepted offers were rarely used to set the imbalance price as the volume of bid actions outweighed the volume of offer actions.

The wider impacts of negative prices

While negative pricing in the BM is not a new phenomenon, it is a trend that is on an increasing trajectory, as more intermittent renewables are added to the system and changes to the imbalance price calculation has made it easier for the SIP to outturn below zero.

However, negative pricing events have not yet had a significant impact on the wholesale power market. While there have been some occurrences on the within-day wholesale market, day-ahead auction prices have never fallen below zero, with the lowest being £1.57/MWh for a single one-hour block, which occurred in 2017. But Sunday’s events do highlight the increasing impact of price cannibalisation – the depressive effect that high levels of intermittent renewables output have on the wholesale power price – which can significantly reduce revenues for renewable generators.

Our analysis expects a rising number of negative wholesale price occurrences in the future, as intermittent renewables capacity rises. This is shown in Figure 3, which shows that by 2034 14% of half-hourly settlement periods could outturn negative at negative prices.

The cannibalisation effect will have a significant impact on the business case for new build renewables, as projections that this phenomenon will increase have lowered projected revenues for merchant plant and hindered the ability for offtakers to offer investible floor prices in long-term Power Purchase Agreements.

The impacts are not limited to subsidy-free renewables reliant on the wholesale price, but also to RO stations that are also exposed to wholesale prices. Furthermore, while Contracts for Difference (CfD) generators are largely protected against price cannibalisation, any generators from Allocation Round 2 and onwards will not receive their subsidy payments if day-ahead auction prices turn negative for six consecutive hours or more.

Negative pricing, both in the BM and on the wholesale market, is a trend to watch out for as more intermittent renewables capacity comes online.

Cornwall Insight tracks the Balancing Mechanism daily through its daily BM Report, and wholesale power price trends in its weekly Energy Market Bulletin. Please contact t.dixon@cornwall-insight.com for more information.