Danish spot hits negative value for first time

Source: Heren

2009/12/22

Electricity spot prices on the Danish market plummeted into negative territory for the first time on Sunday, Nordic power exchange Nord Pool figures revealed. But some analysts say prices on the Nordic market should be allowed to fall further.

The negative price was seen in Nord Pool's West Denmark price area, known as DK1, at 6:00-7:00 Central European Time, when prices slid to -€7.40/MWh on the Elspot Day-ahead market.

Danish transmission system operator (TSO) Energinet.dk put the event down to a combination of low demand due to the time of day and the day of the week, coupled with strong wind generation.

Cold weather was a further contributing factor, the TSO said, because Denmark has a comparatively large number of combined heat and power plants, so the large production of heat from such plants came with a large co-production of electricity.

Traders told ICIS Heren that the impact on the market had been limited, but further negative pricing may be around the corner.

"It didn't really impact as yet," one source said. "But we will have to wait and see if prices dip into further negative ground during the Christmas holiday period, because demand will be down as expected."

Negative pricing

Legislation allowing negative prices was introduced to the Elspot market from 30 November, with the goal of promoting renewable energy by employing market forces to regulate production in relation to wind power.

When prices enter negative territory, manufacturers must pay to dispose of the electricity they produce, which hits owners of large-scale plants the hardest.

"The instrument is primarily geared towards large power plants and decentralised cogeneration plants to lower production in the few hours a year where strong winds mean a surplus of electricity in relation to consumption," said Energinet.dk chief Nicolaj Petersen. "Negative electricity prices are one among many instruments to promote renewable energy in Denmark," he added.

According to Energinet.dk, over the past seven years, electricity production has outweighed consumption to the extent that zero prices have been seen - or negative prices from 30 November - on a maximum of 85 one-hour blocks in a single year, or no more than 0.97% annually.

Denmark had a total installed wind capacity of 3.16GW as of January 2009, and the introduction of further wind power - the country has plans to install a further 3GW of capacity while phasing out coal-fired generation by 2025 (see EDEM 1 December 2009) - will lead to more frequent negative pricing, Petersen said, unless further steps are taken.

Supply could be more closely matched to demand despite the increased contribution from wind power, Petersen said, through the geographic spread of new wind farms coupled with further grid modernisation and, over the longer term, the introduction of electric heat pumps and electric cars to level out demand.

Market coupling

Further pressure can be heaped on Danish spot prices in the form of high levels of wind power generation in Germany.

Market coupling was launched between Denmark and Germany in September 2008, and subsequently re-launched on 9 November this year following technical hitches (see EDEM 10 November 2009).

Peter Styles, chairman of the European Federation of Energy Traders (EFET), said that one of the reasons negative pricing was introduced to Nord Pool was because loop-flows into Denmark from Germany during periods of high wind power generation were "really interfering with the market coupling mechanism".

But Styles said the negative pricing, which Nord Pool confirmed is currently governed by a -€200/MWh floor, should have room to drop further.

"The theoretical floor on the German spot market (EPEX) is -€3,000/MWh," he said. "So there is potential for a constraint occurring in the form of a mismatch when the -€200/MWh limit is reached [on Nord Pool]."

According to European Energy Exchange figures, intra-day spot prices in Germany plunged as low as -€1,499/MWh at 00:00 -1:00 Central European Time on 4 October this year.

"We question whether the Nordic regulators, power exchanges or TSOs shouldn't be taking a more robust attitude to the way renewable power is accommodated on the grid if they want to make volume coupling work," Styles said. JS