You can earn 0.3 cents for every kilowatt-hour of electricity used. Is Europe's negative electricity price really beneficial to consumers?

Negative electricity prices do not benefit ordinary European residents; for electricity consumers such as industrial and commercial enterprises, negative electricity prices are a double-edged sword.

The shadow of the COVID-19 pandemic still looms over the European continent. At the same time, the European electricity market is also going through a major test.

Since April, the day-ahead electricity price in the German-Luxembourg region of the European electricity market EPEX Spot has plunged to below negative levels many times, from -0.5 euro cents per kilowatt-hour to -3.5 euro cents per kilowatt-hour and even to -4 euro cents per kilowatt-hour. This is equivalent to electricity consumers getting about 0.3 yuan for every kilowatt-hour of electricity used.

Negative electricity prices are not only common in Germany, but also in other European countries.

Since the European electricity spot market EPEX Spot allowed negative electricity prices in 2008, the frequency and duration of negative electricity prices in electricity markets in European countries have gradually increased, and it has become the region with the most frequent negative electricity prices in the world.

Currently, California, Texas and New England in the United States, Australia and the European Union are the only three regions in the world where negative electricity prices occur on a large scale.

Europeans are also constantly breaking through the floor of negative electricity prices. Calculating only the electricity prices in the day-ahead market, the lowest price in the German and Luxembourg markets in 2019 was -9 euro cents per kWh; the lowest price in Europe was -13.4 euro cents per kWh set by the Belgians on June 8 last year.

Negative electricity prices have appeared more frequently since the beginning of 2020. In Luxembourg, Germany, negative electricity prices occurred for ten days in mid-March, and the cumulative negative electricity price duration this year has exceeded 133 hours; France, the Czech Republic, the Netherlands, and Austria have experienced negative electricity prices for several hours twice this year, and Belgium, where the EU headquarters is located, has experienced negative electricity prices for five consecutive times.

The primary reason for the frequent occurrence of negative electricity prices this year is the outbreak of the new crown epidemic.

On the demand side, all factories in France have been closed since March 16, and in Germany since March 23, and almost all civil servants have started working from home, causing a sharp drop in electricity demand in industrial enterprises and commercial buildings. According to data from the German Federal Energy and Water Association BDEW, electricity demand in Germany has shrunk by about 10% year-on-year.

In addition, the unusually sunny weather since March and the halving of rail transit frequency have also led to a significant drop in electricity consumption for heating and transportation, respectively.

On the supply side, wind power generation has hit new highs since Typhoon Sabina swept across Europe in February. On February 8, the weekend when the typhoon was at its most severe, wind power, which had surged in power generation, once covered 60% of Germany's electricity demand, reaching 43.7 GW. The abnormally frequent occurrence of sunny weather in March also led to a significant increase in photovoltaic power generation.

According to data from the German Electricity Network Agency, in the first quarter of this year, renewable energy generation covered 52% of the country's electricity demand. This is the first time that renewable energy has covered more than half of Germany's electricity demand. The figure was 44% in the same period last year.

The supply of electricity exceeds the demand, but there is a lack of sufficient energy storage space, resulting in a large amount of excess electricity during the low electricity consumption period. If the power generation is stopped, the cost may be higher, so the power generators are more willing to sell at negative prices.

The emergence of negative electricity prices also requires that the electricity market allows the breaking of price limits. Currently, there are upper and lower limits in China's electricity market, so negative electricity prices have not yet appeared.

It is worth mentioning that negative electricity prices do not benefit ordinary residents in Europe.

In Germany, where there are many electricity supply options, ordinary residents, whether they purchase electricity from municipal companies that own the distribution network operation rights or from power sales companies of power generation companies, are subject to a package fixed electricity price that is completely decoupled from electricity market prices.

Currently, of the electricity price of about 30.4 euro cents per kilowatt-hour in Germany, only 23% is the cost of power generation, and the rest is taxes, grid fees and renewable energy charges.

In France, where Electricité de France (EDF) is the only dominant player in the market, only 35% of the electricity price of about 18 euro cents per kilowatt-hour is attributed to the cost of generating and selling electricity.

For electricity consumers such as industrial and commercial enterprises, negative electricity prices are a double-edged sword.

Because only a small number of companies have previously avoided risks through hedging transactions in the electricity futures market. Most industrial production companies have stipulated ceilings and floors for electricity usage in their contracts with power suppliers or electricity sales companies, and the range is generally between 10% and 30%.

For these companies that have signed contracts, if they do not use enough electricity to meet the floor, they will face penalties. However, during the epidemic, their electricity consumption has decreased, so selling at a loss in the electricity market is the only option.

This has pushed up electricity costs for these companies further, adding to their already tight cash flow burden during the pandemic.

But on the other hand, the decline in electricity spot market prices has also led to a simultaneous decline in electricity futures market prices.

Since April, the price of electricity futures in Europe for 2021 has dropped from 3.9 euro cents per kWh to 3.4 euro cents per kWh, compared with a high of about 5 euro cents in the same period last year. Industrial companies can therefore take this opportunity to secure relatively cheap electricity supply for next year.

Negative electricity prices have always been regarded by Europe as a normal market-based means of electricity peak regulation and promoting energy transformation.

From 2007 to 2010, Germany and France allowed negative electricity prices in the day-ahead and intraday markets, with the aim of stimulating traditional power plants such as coal and nuclear power to actively cooperate with renewable energy and generate electricity flexibly. According to the relevant renewable energy laws, the power grid is obliged to give priority to renewable energy generation.

Coal-fired power generation and nuclear power are the focus of the energy structure of Germany and France. In 2019, 29% and 14% of Germany's electricity came from coal-fired power generation and nuclear power, respectively; while 71% of France's electricity came from nuclear power plants.

However, the incentive effect of negative electricity prices on coal-fired power and nuclear power is still relatively limited.

First, coal-fired power plants and nuclear power plants that are not suitable for frequent and rapid start-up and shutdown are not willing to take the initiative to bear the start-up and shutdown costs due to the "incentive" of negative electricity prices for a few hours. For coal-fired power plants close to cities, the benefits of remote heating in cogeneration in winter further dilute the incentive of negative electricity prices.

Secondly, both coal-fired power plants and nuclear power plants have safeguard clauses in their power supply contracts. Generally speaking, coal-fired power plants must meet a minimum of 42% of their rated power, and nuclear power plants must meet a minimum of 49% of their rated power. This makes the operating space of coal-fired power and nuclear power extremely limited.

In addition, coal-fired power plants and nuclear power plants of a certain scale are also required to undertake the task of system frequency regulation, which is also a task that distributed wind and solar power generation cannot accomplish.

At a time when negative electricity prices occur frequently, another practical question is: Can renewable energy, which is at a loss, continue to enjoy government subsidies?

After all, the direct cause of negative electricity prices is the instability of wind and solar power generation.

Taking the lowest negative electricity price in Germany of -9 euro cents per kWh on April 22, 2019 as an example, at 2 p.m. that day, sunny weather caused about 30 GW of photovoltaic power to flow into the grid, which, combined with the reduced electricity demand during the Easter period, resulted in a large surplus of electricity.

Whether or not subsidies can be obtained is closely related to the form of subsidies and the country of residence.

According to the relevant provisions of the EU's 2014 version of the "Environmental and Energy State Aid Regulation", renewable energy subsidies are subject to the six-hour principle. That is, if there are six consecutive hours or more of negative electricity prices in the electricity market before the day, all subsidies during that period will be cancelled.

This principle is also reflected in Germany's Renewable Energy Act and in countries such as the Netherlands and Belgium.

However, in France, where the requirements are more stringent, renewable energy subsidies are invalidated during any period of negative electricity prices, which means that French renewable energy projects need to fully bear the risk of negative electricity prices.