BSC Insights: Negative System Prices during COVID-19
While much of the UK economy was shut down between mid-March and Mid-June, due to measures to manage COVID-19, the UK electricity market has seen an increase in negative System Prices. In this Elexon Insight, Emma Tribe explains why this was the case and shows the trends for negative System Prices in April and May 2020.
What are negative System Prices?
Elexon calculates System Prices to represent the cost to National Grid ESO of balancing the GB electricity System in any given half-hour Settlement Period.
National Grid ESO makes sure that the level of generation meets total demand from customers, by balancing the system second by second. The data on what balancing actions have been taken and for what price is sent to Elexon to use in calculating System Prices and Energy Imbalance Volumes.
System Prices are used to settle Energy Imbalance Volumes. Energy Imbalance Volumes occur when there is a difference between how much electricity was bought or sold before the Settlement period and how much was used or generated during the Period.
When System Prices are positive, market participants are paid for a surplus of electricity and pay for a deficit of electricity.
As an example if you were a generator you might agree to sell 30MWh to a supplier in advance. If you ended up generating 29MWh, you would have a deficit Imbalance Volume of 1MWh and be charged the System Price for that 1MWh.
On the Supplier side, if the Supplier bought 30MWh to cover the forecasted electricity demand of its customers and they actually ended up using 25MWh, then you would have a surplus Energy Imbalance of 5MWh. In this example the Supplier would then be paid for the surplus energy at the System Price.
When System Prices turn negative, the direction of cashflow is flipped and market participants instead pay for a surplus of electricity and are paid for a deficit of electricity.
Negative System Prices result when balancing data from National Grid ESO shows that there was an excess of electricity on the system and National Grid ESO has paid to reduce the excess. National Grid ESO can pay balancing services providers to either reduce electricity generation or increase electricity use.
Negative System Prices by Month in 2020
Out of the 7,294 Settlement Periods from January to May 2020 there have been 175 Settlement Periods where the System Price was negative, this represents 2.4% of the January to May period. The majority (83%) of these negative System Prices have occurred in April and May. This has led to 4.86% of all Settlement Periods in April and 5.04% of all Settlement Periods in May having negative System Prices. As explained below this is the highest percentage of negative system prices seen in recent years.
Number of Settlement Periods with a negative Price in each month in 2020
On 22 May 2020 there were 28 Settlement Periods within the day, which had negative System Prices, representing 58% of half hours of the day. This is the first time that System Prices have been negative for such a significant proportion of the day since April 2001, which was the first year of System Prices being calculated.
Negative System Prices by year since 2014
At 2.4% January to May 2020 have the highest percentage of negative system prices in recent years by a substantial amount. Between 2014 and 2019 negative System Prices occurred in just 0.49% of Settlement Periods.
Before 2020, 2019 had the highest percentage of negative System Prices, with 0.76% of Settlement Periods having negative prices. December 2019 had the longest continuous run of negative System Prices ever, when the System Price was negative for 11 hours.
Percentage of Settlement Periods with a negative System Price since 2014
It should be noted that the bar for 2020 only covers the period from January to May, but clearly demonstrates the prevalence of negative prices in 2020 so far, when compared to the last 6 years.
When there has been negative Prices in April and May 2020
The graph below shows when the negative prices have occurred in April and May 2020 by time of day, overlaid with the average electricity demand for that time. During the afternoon, between 14:30 and 15:00, System Prices were negative for eight out of 61 days. This time period coincides with a lull in average demand. We tend to see a dip in electricity demand in the early afternoon, as this is when embedded solar generation nets off demand.
Number of negative System Prices by time of day in May and April 2020
One of the key factors leading a higher number of negative System Prices in April and May 2020 has been the lower demand for electricity, driven by the COVID-19 lockdown measures. A recent Elexon insight has shown that electricity demand was 19% lower in April and May in 2020 compared to the same period last year. This lower demand for electricity has made it more critical for National Grid ESO to turn down generation to keep the system in balance.