Capitalising on the opportunity: pricing in the British Wholesale Electricity Market

POSITIVELYNEGATIVE HowtocapitaliseontheopportunitypresentedbynegativepricingintheBritishWholesaleElectricityMarket Executivesummary Negativepricingisanagentofchange,supportingthetransitiontothemoreflexibleenergysystemneededtodeliverthecleanenergytransition. Negativepricesareexactlyastheysound,theatypicalsituationwherethepartythatisnormallythesellerpaystheircustomertoconsumetheirproduct.Inthiscase, theproductiselectricity,thesellersaregeneratorsandsuppliersarebuyingonbehalfofhomesandbusinesses. Negativepricinginwholesaleelectricitymarketsrepresentsanopportunityfortheownersofflexibleenergyutilisingadynamicapproachtoassetoptimisation. Toinflexibleenergyresources,unabletoreactinatimelymannertotheclearpricingsignals,toreducetheirelectricityoutput,negativepricingisathreat. Theownersofflexibilityresourcesmustensurethattherightroutetomarketstrategyisinplaceinordertofullycapitaliseontheopportunitycreatedbynegativeprices.AccesstotheBalancingMechanismandtheImbalancesmarketiskey,asmostofthenegativepricing opportunityisinthesemarketsatpresent. Investmentshouldbefocusedonincreasingflexibilityinexistingenergyresourceswherepossibleandinthedevelopmentofhighlyflexiblenewentrantsolutionsbothonthesupplyandthedemandside.Timingiseverythingandseekingadviceregardingwhentodeployisalsocruciallyimportant. Thispaperexploresthe;what,where,whenandwhyofnegativepricinginwholesaleelectricitymarkets.Inaddition,weexaminetheimplicationsandopportunitiesthatnegativepricingpresentsparticipantsinthewholesaleelectricitymarket,asthesupplydemandcontextevolvesaswenegotiatethecleanenergytransition. Negativepricesarenottheproblem,therearemerelyasymptomoftherealprobleminpowersystems/markets;thelackofflexibilityinboththeproductionandconsumptionofelectricity.Negative pricingcatalysesthetransitiontothemoreflexiblepowersystem/marketrequiredforthelow-to-zerocarbonelectricitysystem/market,providingopportunityandthreattoflexibleandinflexibleenergyresourcesrespectively. NEGATIVEPRICINGINTHEBRITISHWHOLESALEELECTRICITYMARKET1 Introduction OnSunday8December2019,theGreatBritain(GB)wholesaleelectricitymarketobservednegativepricesforarecord,tencontinuoushours,frommidnighttotenAM.Intheoversuppliedmarketplacethatexistedduringthattime,electricityproducerswereeffectivelypayingtheircustomerstoaccepttheenergytheyweregenerating. Thisapparentlyupside-downturnofeventswasbynomeansunique.WholesaleelectricitymarketpriceshaveincreasinglybeendippingintonegativeterritoryinGB,atrendwehaveseeninothermarketsacrossEurope.In2019,theGBmarketsawnegativepricingforaround112hoursintotal,acrossthedifferentmarkets. Negativepricingisnotabadthing,itismerelyasymptomofanunderlyingproblem.Therootcauseofnegativepricingisalackofflexibility,orinflexibilityinelectricityproductionandconsumption. Inthispaperweexplorewhatnegativepricesareandwhere,whenandwhytheyoccur.Wealsoexaminetheimplicationsandopportunitiesthatnegativepricingpresentsparticipantsinthewholesaleelectricitymarket,asGBnegotiatesthecleanenergytransitiontowardsnetzerocarbonemissions. 2NEGATIVEPRICINGINTHEBRITISHWHOLESALEELECTRICITYMARKET IMAGETOBE SOURCED Whatarenegativeprices? InApril2020,WestTexasIntermediate(WTI)May2020crudeoilfuturesplungedintonegativeterritory,thefirsttimethemarqueefrontmonthcrudeoilfuturescontracthaseverbeenrecordedinnegativepriceterritory.Theattentionthiseventgainedandthecommentarythatfollowed,shouldnowmeanthattheexplanationofconceptofnegativepricingofferedhere‘goesdown’moreeasily. Negativepricesareexactlyastheysound:asituationwherethepartythatisnormallythesellerpaystheircustomertoconsumetheirproduct. Aformofnegativepricingtakesplaceintheaviationindustrywhenanairlineoverbooksaflightandpayscompensation(overandabovetheoriginalpricepaid)tocustomerswhoagreetogiveuptheirseats. NEGATIVEPRICINGINTHEBRITISHWHOLESALEELECTRICITYMARKET3 4NEGATIVEPRICINGINTHEBRITISHWHOLESALEELECTRICITYMARKET ©Arup Wheredonegativepricesoccur? Inthewholesaleelectricitymarkets,energyistradedbetweenproducersandconsumers‘overthecounter’orviaanexchange.Tradingcanoccurasmuchastenyearsinadvanceofdelivery,inpracticeitismorecommonlyuptofouryearsinadvanceofdelivery.Tradingcanoccuronthedayofdelivery,aslittleasonehourinadvanceofdelivery.Inthelast‘market’,theelectricitysystemoperatorsbuysandsellsenergyinordertobalancethesystem.Imbalancechargesareleviedonproducersandconsumerswhohaveunderoroverdeliveredarechargedacostreflectiveofthatincurredinbalancingthesystem. NegativepricescanoccurinanyofthesemarketsbutismuchmorelikelytohappenintheDay-AheadandImbalancesMarkets. BILATERAL,OTCBROKEREDDEALSANDEXCHANGES ELECTRICITY SYSTEMOPERATOR ELECTRICITY MARKETOPERATOR FORWARDS, FUTURESANDOPTIONS DAYAHEADAUCTIONMARKET INTRA-DAYMARKET IMBALANCES WELLAHEAD 4YEARSAHEAD-DAYSAHEAD DAYAHEAD 1DAYAHEAD HOURSAHEAD TODAY- 1HOURAHEAD PASTTIME PASTTIMEIMBALANCESANDBALANCINGCOSTSARESETTLED GATE CLOSURE 1HOURAHEADOFDELIVERY DELIVERY REALTIME SYSTEMOPERATORPERFORMSBALANCINGACTIONS MECHANISM BALANCING PHYSICALPRODUCTS PHYSICAL&FINANCIALPRODUCTS FIGURE1 GBWholesaleElectricity‘Markets’ FOR