Bursts of free power raise red flags for green tech investors

Something strange is going on in Europe’s power markets: Prices keep dropping below zero.

Solar parks on Spanish plains and wind turbines above Norwegian fjords were so productive in May that a record share of clean electricity flooded the grid. At times, supply vastly exceeded demand, and producers needed to do something with all that energy.

For more than a million consumers, that meant getting free electricity to heat their homes or charge their vehicles. While good for them, the phenomenon is happening so frequently that it is raising concerns among investors about how much more renewable power they can build into an US$800 billion market before returns start to suffer.

“Negative pricing is going to slow down the deployment of renewable capacity for most players,” said Axel Thiemann, chief executive officer for solar developer Sonnedix. “That affects your ability to invest at reasonable levels.”

Electricity is traded on wholesale markets in a similar fashion to oil and gas. Negative prices are not new, first occurring in Germany in 2008 as the nation ramped up wind and solar production.

But they were rare – until now.

There was a twelvefold increase in the occurrence of negative wholesale prices last year, according to the European Union market monitor known as ACER. An agency report from March called it “an explosion”, with the highest number of instances in the Nordic region.

Germany, Europe’s biggest power market, had about 300 hours with prices below zero last year. That may double in 2024, indicated energy analytics firm EnAppSys.

In the UK, the number of negative hours will grow fivefold by 2027 to surpass 1,000, said industry consultant Modo Energy.

“It’s a dynamic that we’ll continue to see,” said Anna Borg, chief executive officer at Sweden’s utility company Vattenfall. “We have to live with that.”

So what is the solution for producers and investors? The obvious one is to build more batteries – ranging from freezer-sized installations at someone’s home to rows of freight containers in a field. They would store the excess electricity for distribution at times when the wind is not blowing or the sun is not shining.

“We need to manage the intermittency in the market,” said Birgitte Ringstad Vartda, CEO of Statkraft, Europe’s largest generator of renewable energy. “Negative prices are also an opportunity to create value.”

The phenomenon is spreading quickly outside Europe as well.

In Australia, prices across the National Electricity Market fell below zero a record 14 per cent of the time last year, according to BloombergNEF. That percentage has increased steadily since 2018, and capacity issues are projected to worsen with the continued building of new renewable sources and the uptake of rooftop solar.

In parts of California, prices fell deeper into negative territory amid a burst of new solar projects and low gas prices. In April, there were 592 hours during which electricity cleared below zero – already more than last year’s total.

The irony is that building solar and wind farms fosters conditions that can discourage the building of more – something called power price cannibalisation. Operators may be reluctant to make future investments because they are not getting paid enough for the clean energy they are churning out now.

“The effect is now so strong that interest in investing in solar parks is declining sharply,” said Alexander Hauk, a spokesman for the German Association of Local Public Utilities, or VKU. The group represents more than 700 companies nationwide.

The regular occurrence of subzero prices may become the new normal, BloombergNEF said, as Europe will generate more than two-thirds of its power from renewable sources by 2030.

“We continue to have to look for differentiated plays that are not taking that exposure,” said Scott Mackin, who co-leads Denham Capital’s sustainable infrastructure team.

Producers with coal, gas and nuclear plants – including Electricite de France, RWE and Vattenfall – are at times reducing their output or even turning them off to make room on the grid for renewables.

Meanwhile, consumers are taking advantage. A growing number of suppliers are attracting people who realise there are savings to be had by being more proactive and adjusting their consumption to times when prices are lower.

Tibber’s app tracks the wholesale market – hour by hour. When prices dip below zero, some of its one million clients get paid.

The firm expanded beyond the Nordics last year, and its biggest growth markets are Germany and the Netherlands, said co-founder and CEO Edgeir Vardal Aksnes. More traditional utilities are increasingly offering the same service, too. 

“When you get negative prices, you charge your car to the max, heat the house 1-2 deg C extra as well as ramp up the water heater,” said user Kim Poulsen, who lives north of Gothenburg, Sweden.

The growth in subzero prices will not tail off until the mid-2030s, said Ed Porter, a Modo Energy director. That is when Europe’s energy storage systems should be big enough to absorb the excess and make a meaningful impact on prices.

There may be a sevenfold increase to more than 50 gigawatts in capacity connected to transmission networks by decade’s end, noted Aurora Energy Research. The UK, Italy and Ireland are the top three markets for storage investment.

The UK is forecast to quintuple energy storage capacity by 2030 through auctions and accelerated battery connections to the network.

Germany is the largest market for residential batteries, indicated BloombergNEF research.

Vattenfall is focusing a bigger share of its 40 billion kronor (S$5.1 billion) investment plan on flexible assets to help soak up surplus electricity. They include batteries working in combination with its wind and solar parks, Borg said.

Sonnedix’s Thiemann oversees a solar development pipeline spanning the globe. Despite rapid growth for the storage industry, he is cautious about where to spend next. 

“One thing is to have sites and the ability to deploy, the other question is for people like us to actually have the confidence and long-term stability to put the shovel in the ground and really build,” Thiemann said. Bloomberg