AleaSoft Energy Forecasting, September 11, 2024. Interview by Emiliano Bellini, from pv magazine, with Antonio Delgado Rigal, PhD in Artificial Intelligence, founder and CEO of AleaSoft Energy Forecasting. The interview analyzes the increase of negative price hours in European electricity markets, which is the result of a mix of factors, including high renewable energy production and low demand. In addition, it highlights the importance of energy storage and flexibility to reduce negative prices.
European energy markets are experiencing more hours of negative prices – a trend often associated with the rapid expansion of renewable energy. However, this increase stems from a mix of factors.
“While the deployment of more solar and wind is one of the main drivers, it is not the only one,” Antonio Delgado Rigal, chief executive of AleaSoft Energy Forecasting, told pv magazine. “Demand also plays a crucial role.”
He said that negative prices typically occur during midday when solar production is high, on windy days with strong wind output, or periods of high hydroelectric production. These conditions often align with low demand, such as weekends, holidays, or milder seasons like spring.
“It is the combination of high renewable production and low demand that leads to negative prices,” he added. “The rapid increase in installed renewable energy capacity seen in Europe together with a falling electricity demand as a result of the Covid crisis in 2020 and the subsequent energy price crisis in 2022 and 2023 has led to the number of negative price hours increasing in recent years.”
Generators sometimes offer their energy at prices below zero to ensure its sale in the market, leading to negative prices.
“This is possible due to the marginalist design of the electricity market, where offers are listed in ascending order according to the price offered, and the lowest are the first to be matched,” Delgado Rigal explained. “Although it may seem counterintuitive, generators have reasons to offer at negative prices. One of them is that they receive a fixed payment for producing energy, regardless of the market price, if they have a Power Purchase Agreement (PPA) or have been the winners in an auction. In addition, some generators may have an inescapable commitment to a counterparty that buys that energy. Another reason is that some generators, such as nuclear power plants, cannot easily reduce their production, as is the case in France and Spain, where nuclear plants must continue generating due to their technical characteristics.”
Delgado Rigal called for more storage capacity to prevent this phenomenon from happening more frequently. Batteries can absorb surplus renewable energy during low demand and release it when needed.
He said that the number of hours with negative prices will likely rise over the next two to three years. This is mainly due to the rapid expansion of renewables and slower-than-expected demand growth, which affects decarbonization and emission-reduction targets.
“However, in the long term, hours of negative prices are not expected to represent a significant risk to project profitability,” he stated. “Although negative prices will continue to occur, they are not expected to be frequent or recurrent enough to jeopardize the financial viability of renewable energy investments.”
For this to happen, key actions include implementing energy storage technologies, improving demand flexibility, increasing electrification in sectors like industry, transport, and heating, and scaling up the production of green hydrogen and its derivatives.
“This would allow renewables to remain competitive and profitable, even in an environment where negative prices are occasionally recorded,” said Delgado Rigal.
Negative prices have historically appeared in markets like Germany, which deploys large capacities of renewable energy. In contrast, markets such as the United Kingdom, which relies heavily on gas and coal, and France, which depends on nuclear energy, have experienced negative prices less frequently.
“Negative prices tended to occur sporadically, especially in times of low demand, such as during the Covid crisis in 2020 or the years following the financial crisis of 2008,” said Delgado Rigal. “In the case of the Spanish market, negative prices had not occurred until April of this year and so far the lowest price has been €2 ($2.21)/MWh. This is because in Spain, PPA and auctions have non-payment clauses in the event of negative prices, which discourages renewables from producing at such times.”
In countries like Germany, renewable energy generators can still receive agreed payments even if market prices turn negative, provided that the negative prices do not last for more than three consecutive hours.
“From 2023 onwards, the number of hours with negative prices has started to rise significantly in almost all markets,” Delgado Rigal said. “The key factor has been the rapid growth of solar PV and a falling demand after the price crisis of 2022 and 2023. In most markets, the number of hours with negative prices so far in 2024 has already exceeded the number of hours recorded during the whole of 2023. And then there are cases such as the Italian market, where most of the demand is covered by gas-fired combined cycles and energy imports. In these markets, negative prices are very rare and practically non-existent.”
In the future, markets that integrate and adapt their energy systems more effectively will be better protected from the risk of recurring negative prices.
“Markets with greater energy storage capacity, such as batteries, pumped hydro storage or green hydrogen storage capacity, will be able to store excess renewable energy in times of low demand and release it when needed,” said Delgado Rigal. “This will help reduce the frequency of negative prices, as the energy will not need to be sold at any price on the market. Markets with more capacity in electrical interconnections with their neighboring countries will be able to export their excess production when domestic demand is low, thus avoiding system saturation and negative prices. This will allow supply and demand to be balanced, avoid energy spills and reduce price volatility.”
Green hydrogen production capacity could play a crucial role by using surplus renewable electricity to produce hydrogen. This hydrogen can be stored and used as an energy source or raw material in industrial sectors, reducing the need to sell energy during times of negative prices.
“Markets that encourage greater flexibility in demand, through demand management programs or dynamic tariffs, will be able to adjust consumption based on the availability of renewable energy,” added Delgado Rigal. “This will allow demand to better respond to supply, reducing the risk of negative prices. These elements will provide greater stability in the system and allow maximum use to be made of renewable generation without generating distortions in market prices.”
He said that negative prices, although not ideal, should not be viewed as a problem needing direct market intervention. Instead, they signal temporary market inefficiency, often due to a mismatch between renewable energy supply and demand. Intervening to prevent negative prices would distort the market’s natural signals and incentives needed for efficient self-regulation.
“Rather than trying to avoid negative prices through restrictive regulations, it is better to incentivize hedging and long-term contracts such as PPA,” he said. “In this way, price risk is mitigated for both producers and consumers, while the market gives, at all times, the correct price signal. It is not a good idea to intervene directly in markets to avoid negative prices, as they are an important market signal to stimulate innovation and investment in solutions such as storage and demand management.”
Delgado Rigal also said that negative prices largely reflect cannibalization at the moment in the renewable energy sector, especially PV. “The same solar power plants compete with each other, driving down prices when production is abundant,” he said, noting that, especially for the industrial sector, negative prices represent an opportunity to access energy at extremely competitive prices. “If industries can adapt and adjust their consumption to take advantage of these hours of excess supply, or if they relocate to markets where renewable energy is less expensive thanks to abundant installed capacity, they will be able to significantly reduce their energy costs. This flexibility will be key to taking advantage of the energy transition.”
