Negative Hourly Electricity Prices - Who Pays in the End?

April 2009

• While negative hourly spot prices for electricity have occurred before, the notable feature of recent experience is how often they occurred from March 28 to April 17.
• One factor which contributed to the recent negative pricing is the fixed prices paid to many generators.
• Persistent negative or otherwise low prices may in the longer-term lead to increased costs for consumers since only generators receiving some cost guarantee will enter the market.

Recent Negative Prices

Over the past few weeks, various articles in the press have discussed the noticeable decline in hourly spot prices in Ontario's electricity market. Indeed daily average prices often approached zero and on a few days, the daily average price was negative. With negative prices, the power consumer is being paid by the power generator to take the generator's output.

While negative hourly spot prices for electricity have occurred before, the notable feature of recent experience is how often they've occurred. Between March 28 and April 17, 2009, the hourly spot price was negative 40% of the time (204 out of 504 hours). The lowest price was attained between 1 and 4 a.m. on March 29 when the hourly price was negative $51/MWh in each of the three hours.

In general, electricity prices tend to be lowest in the spring when temperatures are mild enough to discourage the use of both space heating and air conditioners. The recession has also adversely affected the manufacturing sector, resulting in lower industrial and overall demand.

On the supply side, the spring thaw pushes hydroelectric flow rates and reservoirs to levels that allow those generators to operate at higher capacity. As well, restrictions on a key intertie limited the ability to export power between March 24 and April 17, 2009. The result was more generation available to supply Ontario load than would otherwise have been typical.

A less obvious factor that contributed to the recent low and negative prices is the fixed prices paid to many generators. Generators of all types receive fixed prices, but the most readily identifiable are nuclear and wind generators.

Nuclear Generation

Most nuclear generators deliver power under fixed-price contracts and are largely indifferent to supply-demand signals given by fluctuations in the Hourly Ontario Energy Price (HOEP). Contract prices vary between $50 and 70/MWh and are significantly higher than recent spot prices. Given the nature of nuclear power, the marginal price is low and it is usually undesirable to vary generation output. Still, analysis shows that when prices are very low or negative, nuclear generators can and will reduce output up to approximately 35%. Generators with fixed-price agreements however have no incentive to reduce output. An analysis of a specific hour - April 3, from 2 to 3 a.m. - showed that because of nuclear generators' fixed-price contracts, the supply side had about 2,500 MW less of price-responsiveness than it would otherwise have had. This caused relatively low-priced generation to be pushed up in the generation price stack, and the supply-demand equilibrium price to then be lower than it would otherwise have been.

Wind Generation

Analyses of wind-powered generation also point to the same impact on prices. In general, there is a negative correlation between HOEP and wind output. This suggests that wind output is highest when demand and prices are lowest. As well, virtually all wind generators are paid a fixed price for their output, so they have no incentive to reduce their output when prices are low. In the specific hour noted above, there was about 400 MW of wind output when, if all wind output was responsive to price, there would have been zero.

Who Pays?

On the surface, negative and otherwise low prices look to be a bonanza for customers. This ignores the fixed-price agreements with nuclear, wind and other generators that ultimately are paid for through the monthly Global Adjustment (Provincial Benefit for LDC-served customers) mechanism. Most of the apparent spot price benefit is then wiped out by a correspondingly higher Global Adjustment.

As well, the nuclear and wind power generation examples highlight that prolonged periods of low and/or negative prices may in the longer-term lead to increased costs for consumers. Extended periods of such prices and their reducing impact on average spot prices reduce the likelihood new generators will be able to realize a return on their investments from the spot market alone. This means only generators receiving some cost guarantee, such as that provided by an Ontario Power Authority contract, will enter the market. The OPA will tend to have "more on the shelf" rather than less, leading to higher Global Adjustment charges and higher net prices.

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