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Can someone with a microecon background explain how this is possible? (My guess is that consumption is somehow completely independent of unit price and that it

Can someone with a microecon background explain how this is possible? (My guess is that consumption is somehow completely independent of unit price and that its also inelastic?)

MrRadar 8y ago
The key thing to understand is that the electricity market is unusual in that electricity can't be easily "stockpiled" the same way most commodities can be. This means it needs to be produced at almost the same rate it's consumed. Some types of generators have long ramp-up/ramp-down times so it can actually be cheaper to keep them running and pay someone to consume the excess power they're producing compared to how much it would cost to stop them when the energy they're producing is no longer needed and then start back up again when it is. Additionally, some other types of generators (wind and solar) receive tax credits for every kWh they produce so even if you lose money selling the energy you can come out ahead when factoring in the tax credit.
- jabl 8y ago
  Also some producers in some markets receive subsidies in the form of feed in tariffs (fit). With FIT and near zero marginal costs (e.g. wind or solar) you can bid a negative price and still make a profit.
cbdumas 8y ago
No microecon background but I worked in an energy adjacent field for a while. One of the big issues here is that there is a huge price/cost mismatch. Consumers are billed a flat price at all times of the day and year (mostly), but the cost of producing 1 kWh of energy varies enormously throughout the day. This dynamic has always been true to some extent, but a huge increase in distributed solar generation has exacerbated this problem considerably in some places. In most (all?) cases utilities cannot actually set their own price structures without sign off from regulators, so the onus is essentially entirely on utilities themselves to level out their costs (with storage or more flexible generation).
iaw 8y ago
Generators are turned on/off via pricing signals, in advance a generator makes known how much money /MWh it will take for them to turn on and scale to various levels of output. A control dispatch system monitors/estimates demand and sends pricing signals to the generators in an effort to match that demand. So reducing price when there's oversupply and increasing price when there's undersupply in an effort to balance load demand and generation supply. Nuclear and coal plants produce a baseline output when they're on and take a long-time to turn on/off so their baseline bid is nearly zero. As long as they get a penny for a MWh they'll stay on because they make their profit in they high demand hours. In a system without wind (solar is less of an issue because it's easier to predict) this design works fairly well at moderating power generation relative to demand. Adding a renewable that's not properly predicted to this system for a few hours leads it to try to "turn off" some baseline generation if these hours are already low generation. If that baseline is priced close to zero then the pricing has to go negative. Hope that makes sense.
nostrademons 8y ago
Consumption and production are both inelastic and storage costs are high. Traditionally when a producer produces more of a good than consumers want to buy, the price drops, consumers buy more, and producers produce less. If consumption & production are both inelastic, consumers won't buy more and producers can't produce less. The excess goes into inventory, where it's treated as an asset and then sold (often at lower prices) when supply and demand equilibrate. You can't put electricity into inventory, at least not without batteries or similar tech, which cost money and leak charge. Hence, if you produce extra, you have to pay someone to manage the storage or usage of that extra current. There are a few other industries that function like this. Garbage is a big one: you have to pay someone to take your garbage because demand for garbage is much less than supply and storage has non-zero cost.
- petermcneeley 8y ago
  Right but Garbage almost certainly has a negative value so it makes sense.
  - nostrademons 8y ago
    At the instant where there's too much electricity on the grid and too few people using it, that electricity has negative value too. And you can't store it (without paying somebody) till some later instant.
- WalterBright 8y ago
  > Consumption and production are both inelastic and storage costs are high. Consumption is inelastic because the electricity rates are fixed 24/7. Allow variable pricing based on supply, and you'll see very elastic behavior. For example, people will charge their car batteries when the rates are cheapest. Same for running the electric hot water heater, and the A/C, refrigerator, etc.
  - Dylan16807 8y ago
    I'd say it's more "slightly elastic" than "very elastic". A lot of people won't spend the mental energy to optimize anything more than the most major consumptions, and even then most of what they can do is rearranging loads, not reducing them.
floatrock 8y ago
Energy markets are some of the most complex set of competing incentives I've worked with. You're not going to get a simple microecon theory, because it's actually many different related markets interacting with each other and fighting often conflicting policy goals. Here's a good lecture that dives into some structures and why it's complicated: https://youtu.be/tsfBewWIF9c?t=21m47s https://youtu.be/tsfBewWIF9c?t=21m47s (this is the market structure bit, the first chunk is all about renewables in new england) Get your wonk hat on, you're going down the rabbit hole. Your econ-style graphs start around the 26:30 mark. If it was a simple explanation, we wouldn't have these issues. Complex systems produce chaotic results.
- petermcneeley 8y ago
  From the video - "no profits for anyone in the energy market if you take this far enough, which is where we need to take it to meet the legislative requirements" This doesnt sound complex. It sounds like this is intentional.

Can someone with a microecon background explain how this is possible? (My guess is that consumption is somehow completely independent of unit price and that its also inelastic?)

MrRadar 8y ago

The key thing to understand is that the electricity market is unusual in that electricity can't be easily "stockpiled" the same way most commodities can be. This means it needs to be produced at almost the same rate it's consumed. Some types of generators have long ramp-up/ramp-down times so it can actually be cheaper to keep them running and pay someone to consume the excess power they're producing compared to how much it would cost to stop them when the energy they're producing is no longer needed and then start back up again when it is. Additionally, some other types of generators (wind and solar) receive tax credits for every kWh they produce so even if you lose money selling the energy you can come out ahead when factoring in the tax credit.

jabl 8y ago
Also some producers in some markets receive subsidies in the form of feed in tariffs (fit). With FIT and near zero marginal costs (e.g. wind or solar) you can bid a negative price and still make a profit.

cbdumas 8y ago

No microecon background but I worked in an energy adjacent field for a while. One of the big issues here is that there is a huge price/cost mismatch. Consumers are billed a flat price at all times of the day and year (mostly), but the cost of producing 1 kWh of energy varies enormously throughout the day. This dynamic has always been true to some extent, but a huge increase in distributed solar generation has exacerbated this problem considerably in some places. In most (all?) cases utilities cannot actually set their own price structures without sign off from regulators, so the onus is essentially entirely on utilities themselves to level out their costs (with storage or more flexible generation).

iaw 8y ago

Generators are turned on/off via pricing signals, in advance a generator makes known how much money /MWh it will take for them to turn on and scale to various levels of output. A control dispatch system monitors/estimates demand and sends pricing signals to the generators in an effort to match that demand. So reducing price when there's oversupply and increasing price when there's undersupply in an effort to balance load demand and generation supply. Nuclear and coal plants produce a baseline output when they're on and take a long-time to turn on/off so their baseline bid is nearly zero. As long as they get a penny for a MWh they'll stay on because they make their profit in they high demand hours. In a system without wind (solar is less of an issue because it's easier to predict) this design works fairly well at moderating power generation relative to demand. Adding a renewable that's not properly predicted to this system for a few hours leads it to try to "turn off" some baseline generation if these hours are already low generation. If that baseline is priced close to zero then the pricing has to go negative. Hope that makes sense.

nostrademons 8y ago

Consumption and production are both inelastic and storage costs are high. Traditionally when a producer produces more of a good than consumers want to buy, the price drops, consumers buy more, and producers produce less. If consumption & production are both inelastic, consumers won't buy more and producers can't produce less. The excess goes into inventory, where it's treated as an asset and then sold (often at lower prices) when supply and demand equilibrate. You can't put electricity into inventory, at least not without batteries or similar tech, which cost money and leak charge. Hence, if you produce extra, you have to pay someone to manage the storage or usage of that extra current. There are a few other industries that function like this. Garbage is a big one: you have to pay someone to take your garbage because demand for garbage is much less than supply and storage has non-zero cost.

petermcneeley 8y ago
Right but Garbage almost certainly has a negative value so it makes sense.
- nostrademons 8y ago
  At the instant where there's too much electricity on the grid and too few people using it, that electricity has negative value too. And you can't store it (without paying somebody) till some later instant.
WalterBright 8y ago
> Consumption and production are both inelastic and storage costs are high. Consumption is inelastic because the electricity rates are fixed 24/7. Allow variable pricing based on supply, and you'll see very elastic behavior. For example, people will charge their car batteries when the rates are cheapest. Same for running the electric hot water heater, and the A/C, refrigerator, etc.
- Dylan16807 8y ago
  I'd say it's more "slightly elastic" than "very elastic". A lot of people won't spend the mental energy to optimize anything more than the most major consumptions, and even then most of what they can do is rearranging loads, not reducing them.

floatrock 8y ago

Energy markets are some of the most complex set of competing incentives I've worked with. You're not going to get a simple microecon theory, because it's actually many different related markets interacting with each other and fighting often conflicting policy goals. Here's a good lecture that dives into some structures and why it's complicated: https://youtu.be/tsfBewWIF9c?t=21m47s https://youtu.be/tsfBewWIF9c?t=21m47s (this is the market structure bit, the first chunk is all about renewables in new england) Get your wonk hat on, you're going down the rabbit hole. Your econ-style graphs start around the 26:30 mark. If it was a simple explanation, we wouldn't have these issues. Complex systems produce chaotic results.

petermcneeley 8y ago
From the video - "no profits for anyone in the energy market if you take this far enough, which is where we need to take it to meet the legislative requirements" This doesnt sound complex. It sounds like this is intentional.