German spot electricity prices went negative

by: Farah Abi Morshed

  • German electricity prices: high volatility and negative prices over Easter holiday
  • High renewable energy output usually takes the blame for negative prices…
  • …however, part of the responsibility goes to inflexible base-load production
  • This volatility in prices signals a lack of flexibility sources
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The blame goes beyond high renewable energy output

Electricity prices in Germany fell below -€80/MWh over the weekend on the back of high renewable energy generation (wind and solar output) and lower demand due to Easter holidays (see Figure 1). Usually the lowest bid determines the clearing price in the merit order and that’s why renewables take priority over conventional power sources. However, they also take the first blame for the negative prices. The other part of the blame goes to inflexible base-load production (e.g. nuclear power plants, coal power plants etc.) which continues to produce and send to the grid. The inflexibility or financial infeasibility to shut down or ramp up/down base-load power stations – during hours of high renewable energy generation – only aggravates the imbalance between demand and supply. It might seem counter intuitive, but in some cases paying the buyer for purchasing electricity is cheaper than turning off power stations. This volatility in spot electricity prices is an indication of the imbalance, the lack of flexibility sources on the grid, and proper remuneration scheme for flexible sources.

The increased need for flexibility sources

Flexible energy sources enable the distribution of the load over the day rather than feeding it into the grid. From the demand side, incentivizing appliances and industrial processes to make use of the excess supply can help mitigate such imbalances. As depicted in figure 2, if industrial processes are flexible enough to match excess of supply, the surplus energy will not feed into the grid and create imbalances. This requires Small & Medium Enterprises (“SME”) and larger corporates in different sectors to change behavior by using their buffers within their manufacturing processes, other cooling/heating processes etc. From the supply side, managing decentralized generation (e.g. roof solar panels) to go in tandem with demand (e.g. flexible electric vehicle charging) is one way to mitigate a supply and demand mismatch. Another way is having sufficient storage capacity in place that enables centralized generation to store the excess of electricity.  In essence, flexibility from both demand side management and  supply side management, together with storage technologies are increasingly needed to avoid negative prices moving forward.