Photo credit: www.renewableenergyworld.com
Contributed by Divita Bhandari, senior research scientist, REsurety
Recent years have witnessed a notable rise in instances of negative power prices within the domain overseen by the California Independent System Operator (CAISO), especially in Southern California. These negative prices impact the average cost of electricity during specific times of the day, significantly affecting revenue for energy resources like solar and storage, and ultimately impacting anyone involved with wholesale energy markets, including project developers and Power Purchase Agreement (PPA) participants.
Understanding the Drivers of Negative Power Prices
Negative power prices arise from multiple factors that result in excess generation within the grid. Key drivers include minimal demand, rigid conventional thermal generation, a surge in renewable resources like solar and wind, and transmission limitations. CAISO has been at the forefront of solar energy development, which has been pivotal in the emergence of negative prices. However, similar trends can now be observed in other markets like the Electric Reliability Council of Texas (ERCOT) and the Midcontinent Independent System Operator (MISO), signaling a possible future scenario for those areas if solar capacity expands at this rate. This article delves into the causal elements behind negative pricing in CAISO and examines broader ramifications.
Figure 1: Frequency and magnitude of negative price occurrences in 2023 and 2024.
As depicted in Figure 1, the frequency and severity of negative price occurrences have surged, with approximately 1,180 hours in 2024 experiencing sub-zero prices (about 13% of the year) compared to roughly 530 hours in 2023 (around 6%). Furthermore, in 2024, the median negative price reached approximately – $17, as opposed to – $10 in 2023, signaling an increase in both the occurrence and severity of negative pricing over the past year.
Supply and Demand Dynamics Leading to Negative Prices
The core reason behind negative prices is the oversupply of electricity during periods of low demand. Several factors contribute to this oversupply. Conventional generators like nuclear and specific thermal plants are limited in their ability to adjust output in response to load changes. Solar and wind generation is inherently variable, relying on weather conditions. Transmission constraints also prevent the delivery of surplus generation to areas of need, leading to periods where renewable output exceeds demand. Within CAISO, utility-scale solar capacity has expanded by approximately 8 GW from 2020 to 2024, largely in Southern California. This considerable installation of both utility-scale and behind-the-meter (BTM) solar exacerbates oversupply conditions, particularly during high solar generation and low net demand scenarios, often resulting in curtailments or negative pricing. Figure 2 illustrates how net demand, after accounting for both wind and solar output, has drastically dropped by 45% during midday hours from 2020 to 2024.
Figure 2: Demand net of all wind and solar generation within CAISO between 2020 and 2024.
Solar Generation’s Role in Energy Pricing
The interplay between solar generation and energy pricing is critical. Wholesale electricity prices are influenced by the marginal costs of generation—that is, the cost associated with producing an additional kilowatt-hour (kWh) or megawatt-hour (MWh) of energy. Generators are dispatched based on merit order principles, favoring those with lower marginal costs. Solar energy, with its low or zero marginal production costs, helps reduce wholesale energy prices, especially during periods of oversupply.
Negative pricing occurs when certain generators submit bids below zero. This essentially indicates a willingness to pay the grid operator for supplying energy rather than receiving payment, as these generators may have other revenue streams (e.g., tax credits, Renewable Energy Credits, or long-term fixed-price contracts) to sustain profitability during periods of negative pricing. This highlights that generators can continue operating despite low or negative wholesale prices because of diversified income sources.
Transmission infrastructure presents another critical factor influencing price dynamics. Negative pricing is often exacerbated by congestion during peak solar generation hours. Many excess generation resources could be exported to other regions to meet their energy needs, but high solar output in Southern California limits exporting options, creating a bottleneck that contributes to local oversupply and plummeting prices.
Developers face significant risks due to negative prices, particularly as they can influence revenue outcomes through high rates of renewable curtailment. Under typical circumstances, a drop in net demand would prompt a decrease in generation to align with actual demand; however, inflexible thermal power plants (like nuclear, gas, and coal) often cannot adjust swiftly, necessitating curtailments of more flexible resources like solar and wind to maintain balance. This mitigates the ability for curtailed generation units to earn revenue based on energy produced.
Negative pricing also poses risks for energy off-take agreements, including long-term PPAs. If a fixed-price PPA’s rate consistently exceeds the prevailing wholesale energy prices, it can result in financial losses for buyers, especially if they are compelled to purchase energy at higher contractual rates when market prices fall. Alternatively, in the context of contracts-for-differences (CFDs) or virtual PPAs (VPPAs), if market prices sink beneath the established strike prices, buyers may encounter adverse financial conditions. Therefore, it’s crucial to comprehend potential negative price exposures and implement protective measures, such as price floors, to mitigate financial risks.
Annual solar capture rates—reflecting the ratio of solar generation revenues to around-the-clock (ATC) annual prices—serve as indicators of the financial viability of solar projects. Deteriorating capture rates, like those observed with annual rates dropping below 30% in SP15 for 2024, signify that utility-scale solar resources are earning significantly reduced revenues compared to more consistent generation resources. Figure 3 provides a comparison of solar capture rates in NP15 and SP15.
Figure 3: The comparison of solar capture rates in NP15 and SP15.
Future Outlook for Solar and Storage Growth
Despite the challenges presented by low capture rates, continued solar development in CAISO seems likely, provided alternative revenue avenues can compensate for low energy revenues, which tend to drive negative pricing. Additionally, these low wholesale prices may encourage the expansion of energy storage systems since batteries can be charged during times of low-cost solar output. CAISO’s battery capacity has reportedly risen from approximately 4 GW in December 2022 to over 11 GW by June 2024, encompassing various configurations, including standalone and hybrid resources. Such storage solutions can alleviate negative pricing conditions by utilizing curtailed solar output, ultimately lifting solar capture rates while also supporting emission reductions by discharging energy during peak demand periods, thus reducing reliance on less efficient peaking plants.
Furthermore, the trends observed in California may soon parallel developments in ERCOT and MISO, where significant solar deployment is anticipated; projections suggest upwards of 57 GW to 107 GW may be added in MISO by 2042, and around 29 GW in ERCOT by 2039. Present trends indicate the potential emergence of similar challenges related to surplus solar generation driving down midday market prices, commonly referred to as the “duck curve.” The impact on solar energy valuation in these regions will hinge on various factors that influence price formation, including net demand growth, Renewable Energy Credit (REC) values, the availability of production tax credits (PTCs), solar adoption rates, and the diversity of supported resources on the grid like wind and storage.
Considering the shifting landscape, the risks for both buyers and sellers in this evolving market necessitate careful quantification and risk management. As solar becomes increasingly prominent in the energy mix, solutions such as enhanced storage capabilities and expanded grid infrastructure will be critical in navigating these complexities while steering toward a more sustainable energy future.
This article reflects information pertinent to REsurety, Inc. regarding the services provided and includes data believed to be reliable but does not guarantee accuracy or completeness. The risk inherent in trading commodity interest derivatives can be significant. Each stakeholder must assess whether this type of investment aligns with their goals.
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