Solar gets all the attention, but another explanation is at least as important.
Even during extreme promotions like “Black Friday” and “Cyber Monday”, it is rare to see anything sold for a negative price. Low prices, sure. But truly negative prices are rare. You only see this when a seller is really desperate to get rid of something. 1-800-GOT-JUNK made $200 million in revenue last year getting paid to haul away junk. Turns out all that stuff in your attic isn’t priceless after all — it has a negative price.
Source: 1800gotjunk.com. Look how happy this guy is about negative prices.
This Spring, California electricity generators have been doing the electricity market equivalent to calling 1-800-GOT-JUNK. Between March and July, there were over 100 hours in which wholesale prices were below zero. These negative prices have received lots of attention, and the discussion has almost universally attributed negative prices to California’s ramp up in solar generation.
Solar is indeed part of the story, but another explanation is at least as important. Over the last decade, hydro, not solar, has been the primary driver of negative electricity prices in the United States. The year 2017 is no exception. Spring 2017 was among the rainiest in history, and it is this combination of hydro and solar that has pushed prices below zero.
Let’s Look at the Data
So far in 2017, California wholesale electricity prices have been negative in 2.5% of all hours, more than 130 total hours.
Note: This figure was constructed by Lucas Davis (UC Berkeley) using hourly wholesale prices from SNL Financial. The underlying data are complete for NYISO, MISO, PJM, and ISONE, but start in 2009 for CAISO, and in 2010 for ERCOT so there may have been negative prices in those markets prior to those years. Also, for 2017 data is only available until mid-August, so the percentage is calculated over only part of the year.
Increased solar generation is definitely part of the explanation for what’s happened in California in 2017. Solar capacity in California, including both distributed and utility-scale systems, has grown from less than 1GW in 2007, to 14 GW today. Also, the timing of negative prices in 2017 points squarely at solar. Negative prices peaked in March and April between noon and 5pm, on sunny days with high levels of solar generation.
Make it Rain
But for me the big surprise in the figure above is 2011. Although it didn’t receive as much attention, there were over 100 hours during 2011 with negative electricity prices in California. But why? Back in 2011 there was just a fraction of the solar generation that we have today. So what pushed prices below zero?
The answer is hydro. The two wettest years in the last decade? 2011 and (probably) 2017. During just the first 5 months of this year California has already generated 22 million MWhs from hydro, about equal to typical hydro generation for an entire year. If the rest of 2017 matches hydro generation from last year, 2017 will end up being the second highest hydro year in the last decade.
Note: This figure was constructed by Lucas Davis (UC Berkeley) using annual California hydroelectric generation from EIA. The prediction for 2017 uses actual generation Jan-May and Jun-Dec generation from 2016.
Interestingly, the negative prices in 2011 are very different from the pattern in 2017, and very much fit the pattern for hydro. In 2011, negative prices peaked in May and June, considerably later in the year than in 2017. Also, 60% of negative prices in 2011 occurred between 4am and 6am, wee morning hours when electricity demand is at its lowest level.
Northwest power prices provide another good example of U.S. electricity prices responding to hydro. The year 2011 was a record year for hydro generation up and down the west coast, and in the Pacific Northwest prices were often negative. The Northwest doesn’t have an ISO so I didn’t summarize these prices in the graph above, but a couple of years ago EIA made this nice figure:
Source: EIA, Today in Energy, “Negative Prices in Wholesale Electricity Markets Indicate Supply Inflexibilities”.
Off-peak prices were frequently negative during Spring 2011. This was particularly true at the Mid-Columbia Hub (“Mid C”), right at the Washington/Oregon border. Washington and Oregon both have large amounts of hydro generation, so during rainy years supply can outstrip demand resulting in negative prices.
California, Oregon, and Washington lead all U.S. states in hydroelectric generation and it is no coincidence that negative prices have occurred most often in these states. Contrast this with Texas, for example. I was surprised in the figure at the top of the blog to see virtually no negative prices in ERCOT. Texas has twice as much installed wind capacity as any other state so you might have expected to see negative prices during high wind periods. This may well happen in specific transmission-constrained locations (e.g. West Texas), but negative prices throughout the state are rare.
Why Not Just “Spill” Water?
But why are hydro generators calling 1-800-JUNK? Why don’t hydro operators instead just leave the water in the reservoir? Or “spill” water without running the generators? During these negative price hours, hydro owners are paying money to produce electricity – why? Why, for example, on April 9th of this year was so much hydro operating in the middle of the day, even while wholesale prices were negative?
Source: CAISO Daily Renewables Watch. This figure shows hourly generation in California on April 9, 2017.
Part of the answer is that many hydro facilities are “run of the river”. Don’t think Shasta Dam. Think small-scale facilities in which the natural flow of the river is used to generate electricity. Negative prices weren’t even envisioned when these facilities were first built, so many lack the ability to “spill” water when necessary and presumably it is very expensive to retrofit these facilities.
But large facilities like Shasta Dam are more puzzling. While it is true that these facilities are limited in how much water they can store, it is not clear this should matter. Nor should it matter if there are minimum and maximum flow constraints. When prices are negative, large hydro facilities should always be able to “spill” water and this would seem to be preferable.
Source: California’s Shasta Dam, public domain image.
This leaves me wondering whether there is something else: operational, legal, or contractual keeping these facilities running even when prices are negative. In the Northwest, dam operators have limits on how much they can “spill” because it churns air into the water which is bad for fish. Perhaps there is some similar regulation for California dams.
So my colleague Catherine Wolfram was right when she wrote back in March about the sinking duck. Water does have a lot to do with negative prices. Solar alone would not have driven such levels of negative prices this year if it hadn’t happened on top of near-record levels of hydro generation. In some sense, hydro can be even harder to turn off than wind and solar.
Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is Faculty Director of the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Faculty Research Fellow at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. Prior to joining Haas in 2009, he was an assistant professor of Economics at the University of Michigan. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.