Free Electricity At Night?
New York, NY – If you’ve read our Energy Markets Explained Report, you know that electricity prices are determined on a marginal basis with the next lowest cost generation dispatched to meet incremental demand. Depending on the hour of the day and the overall demand, this could be natural gas generation, nuclear, coal, or renewable sources.
But did you know that in some cases, the marginal cost of electricity could actually be negative? When there’s far more supply than demand (typically overnight), prices can head towards zero dollars, and even into negative territory. How is this possible you may ask? Tax credits allocated to renewable sources, such as wind generation, allow operators to make money even when prices are negative (and the cost of marginal generation for wind is zero since wind is free). For example, if the locational market price of energy is -$13/MWh, but a wind farm is receiving $23/MWh in tax credits, then they’re actually making $10/MWh. This has occurred quite a few times in Texas due to the abundant wind generation in the state (this also occurs elsewhere with wind and hydro generation), as well as the fact that ERCOT is basically an electricity island (power generated in TX has to be consumed in TX, not shipped to nearby markets where there may be more demand, such as in more connected markets like PJM).
Wind generates about 10% of the power in Texas, far more than any other state (US average is 4.4%), and at times when the wind is blowing strong, it can generate as much as 40% of the power at a given time (again, usually overnight). Texas utilities are rolling out programs offering free electricity at night (TXU’s plan is 9pm to 6am) to entice customers to shift demand and usage to later hours when power is plentiful and cheap (these programs charge slightly higher prices during the day, so you’re essentially penalized if you don’t actually shift your consumption pattern). This is a win-win for customers and for the grid. Customers can benefit from the abundant, cheap, renewable, wind power, while the grid benefits from shifting demand to where power is available and avoids having to construct peaking power plants (e.g. natural gas) to meet daytime peaks.
An interesting consideration for situations like this is the increasing potential of battery storage. Unlike any other commodity (e.g. natural gas, oil, wheat, gold), power cannot be stored (at least not economically right now). It has to be consumed when it’s generated and generated when it’s needed. In the future, when battery storage is more economical, rather than giving away free power, the power generated cheaply/freely overnight could be stored, than distributed during the peak hours of the day when demand is higher and power is more expensive. As market structures, regulations, incentives, and technology continually evolve, opportunities (and risks) will also develop, so it’s more important than ever to find a trusted partner with knowledge and involvement in both the regulated and deregulated sides of the electricity market.
Andy Anderson, LEED AP O+M, CMVP
1261 Broadway, Suite 510
New York, NY 10001
Since 2000, EnergyWatch has helped commercial and corporate real estate portfolios simplify their energy reporting, reduce energy expenses, and increase energy income. Through energy procurement, preparation of annual utility budgets, monthly variance reporting, and benchmarking, our utility experts help you navigate the increasing complexity of the energy markets, sustainability reporting mandates, and commodity price volatility. By leveraging our expertise and our integrated energy management platform, watchwire, EnergyWatch provides you with the data-driven analytics and tools needed to optimize expense, consumption, and emission reductions while maximizing energy income, tenant recoverables, and efficiency project payback.