Imbalance prices turn negative for six straight hours

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.

Related thinking

Low carbon generation

Our Renewables Pipeline Tracker: In with the new – scoping projects and progression through planning stages

Our latest Renewables Pipeline Tracker was published on 11 June, and this blog provides a summary of some of the recent developments in our coverage of the pipeline for new build and repowering renewables assets in GB. What’s new? Seabed leasing rounds, scoping projects and CfD announcements Since our previous...

Regulation and policy

Calm before the storm? 2021 energy supplier compliance developments

The latest update to our Energy Supplier Compliance Portal went live on 4 May and includes changes to the compliance landscape during February to April 2021. While the previous quarter’s update reflected new principles resulting from Ofgem’s Supplier Licensing Review (SLR) and protections for prepayment meter customers facing self-disconnection, Q121...

Commercial and market outlook

In the midst of the Australian Energy Transformation Process

Australia is in the midst of an energy supply and distribution transformation. This transition is twofold and includes not just bridging the gap from conventional fossil fuels to renewable technologies (due to their reduced carbon footprint, lower levelized cost of energy and improved reliability levels by comparation), but also requires...

Low carbon generation

Nuclear energy and its potential importance for net zero

This article was originally written as a longer piece in Energy Spectrum on 21 March 2021. To find out more about a subscription to Energy Spectrum, please contact Nick on n.palmer@cornwall-insight.com. Nuclear energy has been an integral part of the UK’s electricity system for many decades. Currently, nuclear provides around...

Energy storage and flexibility

Glory Days – T-1 auction clears at £45/kW

To say the T-1 Capacity Market (CM) auction clearing at £45/kW per year was a surprise feels like an understatement. It looks like a major windfall for successful participants in the auction –  many are asking just what happened? Easy money Until February, it looked like prices would clear at...

Announcement

The top 5 podcasts of 2020

We released 13 podcasts in 2020 covering all aspects of the energy market, from the Capacity Market and Electric Vehicles to Faster Switching and heat networks. Here are our top five podcasts of the year, ranked by the number of people who listened. 5. The Impact of COVID-19 on System...

Commercial and market outlook

The PM’s 10-point plan: Further thoughts from our Energy Spectrum webinar

In our regular Energy Spectrum webinar on Tuesday 24 November, Senior Writer Nick Palmer and Head of Relationship Development Robert Buckley discussed the government’s 10-point plan for a green industrial revolution. They considered what has led to this point, what is in the plan, what the reaction was to it...

Business supply and services

Plus ça change, plus c’est la même chose: the RO late payment deadline

Today (11 November 2020) Ofgem has confirmed that there will be mutualisation of the 2019-20 Renewables Obligation. On Monday, in our 'Energy Spectrum' Perspective, we explained to customer’s why this was important and likely and what it means for the energy industry. Find out more about a free trial to Energy...