7 ms·

> All energy costs a positive amount of dollars to produce. Thus, in the long run, the price of electricity must be such that generators recoup their fixed cost

> All energy costs a positive amount of dollars to produce. Thus, in the long run, the price of electricity must be such that generators recoup their fixed costs, recoup their variable costs, and make some profit that makes the whole endeavor worthwhile. The only type of cost that strictly determines a price floor is the variable cost. Recuperating fixed costs and profits are based on a revenue prediction which may or may not come true, but once the investment is made it rationally operates until prices descend past the variable cost barrier, regardless of whether long term ROI is positive or not. What I don’t understand is why prices must go negative. A price of zero should be enough to turn off capacity, modulo switching costs (the cost to start or stop a turbine?)

rayiner 9y ago
> The only type of cost that strictly determines a price floor is the variable cost. Recuperating fixed costs and profits are based on a revenue prediction which may or may not come true, but once the investment is made it rationally operates until prices descend past the variable cost barrier, regardless of whether long term ROI is positive or not. Only variable costs will drive the short-term decision of whether to stay on or not. But the price of electricity in relation to fixed costs and profit will factor into the long-term decisions regarding building new plants and decommissioning ones that need refurbishment/upgrades. In the long run, the price of electricity has to be high enough to ensure sufficient capacity to meet demand. (That's something of a simplification, as I said. In reality, the incentive for building new capacity comes from both the electricity market, and so-called capacity markets: https://business.directenergy.com/understanding-energy/managing-energy-costs/deregulation-and-energy-pricing/capacity-markets. https://business.directenergy.com/understanding-energy/manag...) > What I don’t understand is why prices must go negative. A price of zero should be enough to turn off capacity, modulo switching costs (the cost to start or stop a turbine?) It can take a coal plant ~4-8 hours to reach maximum output after even a warm restart.
apendleton 9y ago
Many kinds of power generation can't be easily started and stopped (nuclear, say). It might be cheaper to create an incentive for someone to use your excess power for a short period than it is to absorb the cost of a long shutdown and restart.
NickNameNick 9y ago
It can take a long time to turn some capacity on or off, and not all generators throttle cleanly to zero. Hydro plants can have rough running ranges that cause excessive wear. or might have run-of river flow requirements. Coal plants have huge parasitic loads in the crushers and pulverisers and blowers, and/or poor ability to throttle below a minimum limit. For any of those reasons, it may make sense for a generator to pay someone else to temporarily take their excess capacity, rather than shut the generator down.
ngould 9y ago
In the U.S., the main reason prices go negative is because of the production tax credit. Wind producers get a subsidy per MWh produced. Since the unsubsidized marginal cost of production is zero, the result is a negative effective production cost. So if wind is the marginal energy producer, the clearing price goes negative. I don't know how things work in Germany, but I'd be surprised if the negative prices there had much to do with the costs of starting/stopping conventional units. In most electricity markets, participants have to bid in their marginal cost. Even if you're an inflexible nuke, your marginal cost is positive. You usually need genuinely negative marginal cost units to drive the clearing price negative. That only really happens when subsidies are part of the picture.
emiliobumachar 9y ago
After investors get burned a couple times, the revenue predictions get updated to account for the measured risk. So, thinking longer term, fixed costs do have to be taken into account.

rayiner 9y ago

> The only type of cost that strictly determines a price floor is the variable cost. Recuperating fixed costs and profits are based on a revenue prediction which may or may not come true, but once the investment is made it rationally operates until prices descend past the variable cost barrier, regardless of whether long term ROI is positive or not. Only variable costs will drive the short-term decision of whether to stay on or not. But the price of electricity in relation to fixed costs and profit will factor into the long-term decisions regarding building new plants and decommissioning ones that need refurbishment/upgrades. In the long run, the price of electricity has to be high enough to ensure sufficient capacity to meet demand. (That's something of a simplification, as I said. In reality, the incentive for building new capacity comes from both the electricity market, and so-called capacity markets: https://business.directenergy.com/understanding-energy/managing-energy-costs/deregulation-and-energy-pricing/capacity-markets. https://business.directenergy.com/understanding-energy/manag...) > What I don’t understand is why prices must go negative. A price of zero should be enough to turn off capacity, modulo switching costs (the cost to start or stop a turbine?) It can take a coal plant ~4-8 hours to reach maximum output after even a warm restart.

apendleton 9y ago

Many kinds of power generation can't be easily started and stopped (nuclear, say). It might be cheaper to create an incentive for someone to use your excess power for a short period than it is to absorb the cost of a long shutdown and restart.

NickNameNick 9y ago

It can take a long time to turn some capacity on or off, and not all generators throttle cleanly to zero. Hydro plants can have rough running ranges that cause excessive wear. or might have run-of river flow requirements. Coal plants have huge parasitic loads in the crushers and pulverisers and blowers, and/or poor ability to throttle below a minimum limit. For any of those reasons, it may make sense for a generator to pay someone else to temporarily take their excess capacity, rather than shut the generator down.

ngould 9y ago

In the U.S., the main reason prices go negative is because of the production tax credit. Wind producers get a subsidy per MWh produced. Since the unsubsidized marginal cost of production is zero, the result is a negative effective production cost. So if wind is the marginal energy producer, the clearing price goes negative. I don't know how things work in Germany, but I'd be surprised if the negative prices there had much to do with the costs of starting/stopping conventional units. In most electricity markets, participants have to bid in their marginal cost. Even if you're an inflexible nuke, your marginal cost is positive. You usually need genuinely negative marginal cost units to drive the clearing price negative. That only really happens when subsidies are part of the picture.

emiliobumachar 9y ago

After investors get burned a couple times, the revenue predictions get updated to account for the measured risk. So, thinking longer term, fixed costs do have to be taken into account.