The Night They Drove the Price of Electricity Down
September 22, 2015 in Current Events, Economy, Environment, News, U.S. News by SladSlate | By Daniel Gross
Wind turbines at a wind farm on March 27, 2015, in Taft, Texas. Photo by Spencer Platt/Getty Images
In the wee hours of the morning on
Sunday, the mighty state of Texas was asleep. The honky-tonks in Austin
were shuttered, the air-conditioned office towers of Houston were
powered down, and the wind whistled through the dogwood trees and live
oaks on the gracious lawns of Preston Hollow. Out in the desolate flats
of West Texas, the same wind was turning hundreds of wind turbines,
producing tons of electricity at a time when comparatively little supply
was needed.
And then a very strange thing happened: The so-called spot price of electricity in Texas fell toward zero, hit zero, and then went negative for several hours.
As the Lone Star State slumbered, power producers were paying the
state’s electricity system to take electricity off their hands. At one
point, the negative price was $8.52 per megawatt hour.Impossible, most economists would say. In any market—and especially in states devoted to the free market, such as Texas—makers won’t provide a product or service at a negative cost. Yet the circumstances that led to this drop could only have happened in Texas, which (not surprisingly) has carved out its own unique approach to electricity. Consider these three unique factors about Texas.*
It should be noted that free or negative wholesale power prices can and do occur elsewhere in the U.S. electricity system, when there is a significant mismatch between supply and demand. The Energy Information Administration identified 84 instances of negative prices in the Northwest U.S. in 2011 thanks to abundant hydropower at periods of low demand. However, the unique structure of Texas’ power market makes such events far more likely in the state—and far more likely to persist for longer periods of time.
First, Texas is an electricity island. The state often behaves as if it is its own sovereign nation, and indeed it was an independent republic for nearly 10 years. Alone among the 48 continental states, Texas runs an electricity grid that does not connect with those that serve other states. The grid is run by Electric Reliability Council of Texas, or ERCOT. By contrast, most states are part of larger regional bodies like PJM (which covers 13 states in the Midwest and Middle Atlantic) or MISO, which oversees the grid in a big chunk of the middle of the country. Being an island has given Texas greater control over its electricity market: Texas won’t suffer blackouts if there are problems in Oklahoma or Louisiana. But it also means that electricity produced in the state has to be consumed in the state at the moment it is produced—it can’t be shipped elsewhere, where others might need it.
Second, Texas has way more wind power than any other state. In 2014, wind accounted for 4.4 percent of electricity produced in the United States. Texas, which has more installed wind capacity (15,635 megawatts) than any other state and is home to nearly 10,000 turbines, got 9 percent of its electricity from wind in 2014. But that understates the influence of wind. Demand for electricity varies a great deal over the course of the day—it rises as people wake up, turn on the lights, and go to work; peaks in the late afternoon; and then falls off sharply at night. The supply of wind can change a lot, too, depending on how much the wind is blowing. So, in the middle of the night, if the wind is strong, wind power can dominate. On March 29 at 2:12 a.m., for example, wind accounted for about 40 percent of the state’s electricity production. There’s another nice feature about wind. Unlike natural gas or coal, there is no fuel cost. Once a turbine is up and running, the wind is free.
Third, Texas has a unique market structure. It’s complicated, but ERCOT has set up the grid in such a way that it acquires a large amount of power through continuous auctions. Every five minutes, power generators in the state electronically bid into ERCOT’s real-time market, offering to provide chunks of energy at particular prices. ERCOT fills the open needs by selecting the bids that are cheapest and that make the most sense from a grid-management perspective—i.e., the power is being fed into the grid at points where the distribution and transmission systems can handle it. Every 15 minutes, the bids settle—at the highest price paid for electricity accepted in the round. So if 100 MW of electricity are needed, and some producers offer 60 MW at $50 per megawatt-hour, some offer 30 MW at $80 per megawatt-hour, and others offer 40 MW at $100 per megawatt-hour, all the bidders will receive the highest price of $100. (Note: The price ERCOT pays is the wholesale generation charge.)
That gave wind-farm owners a great incentive to lower their prices. The data show that the clearing price in the real-time market went from $17.40 per megawatt-hour for the interval ending 12:15 a.m., to zero for the interval ending 1:45 a.m. Then it went into negative territory and stayed at zero or less until about 8:15 a.m. For the interval ending 5:45 a.m., the real-time price of electricity in Texas was minus $8.52 per megawatt-hour.
How could this be? I mean, even the most efficient producer couldn’t afford to provide electricity for free or pay someone to take it.
Well, there’s one more wrinkle. Typically, wind is bid at the lowest prices—because you don’t need fuel, it doesn’t really cost that much money to keep wind turbines moving once they’ve been built. But wind operators have another advantage over generators that use coal or natural gas: afederal production tax credit of 2.3 cents per kilowatt-hour that applies to every kilowatt of power produced. And that means that even if wind operators give the power away or offer the system money to take it, they still receive a tax credit equal to $23 per megawatt-hour. Those tax credits have a monetary value—either to the wind-farm owner or to a third party that might want to buy them.
As a result, in periods of slack overall demand and high wind production, it makes all the economic sense in the world for wind-farm owners to offer to sell lots of power into the system at negative prices.
Only in Texas, folks. Only in Texas.
Correction, Sept. 21, 2015: This article and one of its headlines originally misstated that negative electricity prices could only happen in Texas. Negative prices are an occasional feature of energy markets elsewhere. The article has also been updated to include more information about energy markets outside of Texas. (Return.)
Correction, Sept. 21, 2015: This article and one of its headlines originally misstated that negative electricity prices could only happen in Texas. Negative prices are an occasional feature of energy markets elsewhere. The article has also been updated to include more information about energy markets outside of Texas. (Return.)
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