What causes Negative Pricing in Germany?1

Rohit SalastekarMasters of Electrical & Computer Engineering Illinois Institute of Technology,Ch i ca g o , I L , USArsalaste@hawk..iit.edu

Siddharth KulkarniMasters of Power Engineering Illinois Institute of Technology, Ch i ca g o , I L , USA

skulka24@hawk.iit.edu

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Acknowledgement:

I cannot express enough thanks to my professor and teaching assistant for their continued support and encouragement: Prof. Shay Bahramirad and Wenlong Gong. I offer my sincere appreciation for the learning opportunities provided by them during the term work of ECE 580.

Preface:

Negative electricity prices have become an increasingly frequent occurrence on the power exchanges that allow them. However, there are still many power exchanges, both within and outside of the European Union, that do not allow negative prices.  With a booming renewable sector and a weak demand outlook, negative prices are an important tool for the market to correctly price electricity. To date, in the European Union negative power prices have been allowed in the countries covered by the European Power Exchange (EPEX), i.e. France, Germany, Austria, Switzerland, as well as in Belgium and The Netherlands. Other power exchanges, however, do not allow prices to fall below zero. This is probably because, when market rules were designed, there was no particular reason to do otherwise.

Index Terms:

Negative Pricing, Renewable energy

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I. Index:

Number Topics Page NumberSection-I: Background

1 Energy in Germany 052 Government Energy Policy 053 Energiewende 064 German Renewable Energy Act 08

Section-II: Negative PricingSection-III: Causes of Negative Pricing in Germany

1 Industrial and Business Demand Drop 112 Natural Calamities 123 Climatic Factors 134 Record Breaking Negative Pricing in Germany 14

Section-IV: Solution and ConclusionIndex

1 References 202 List of Figures 033 List of Tables 03

II. List of Figures:

Number Figure1 Energy Production in Germany2 Deep water port at Wilhelmshaven3 Nuclear Plants in Germany4 Electricity generated in first six months of 20145 Wind Farm in Bernburg6 Nationwide installed Photovoltaics7 Erlasee Solar Park8 Geothermal Plant in Germany9 Primary energy consumption from Renewables10 Renewable Energy Production11 Energiewende

III. List of Tables:

Number Tables1 Energy in Germany2 Rise in installed renewable electric power generation

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Section – I

Background

1. Energy in Germany:

Energy in Germany is dominated mainly by the sources like fossil fuels, nuclear power, biomass (wood and biofuels), and wind, hydro and solar.

Germany was the largest energy consumer in Europe and the eighth-largest energy consumer in the world in 2012. It was also the fourth-largest economy in the world by nominal gross domestic product (GDP) after the United States, China, and Japan in 2012. This is mainly because, Germany’s size and location give it considerable influence over the European Union's energy sector. However, Germany has to also rely on imports to meet the majority of its energy demand. [1]

Germany's main source of energy continue to be Petroleum and other liquids which make up to 37% of the country's total primary energy consumption in 2012. The petroleum product demand is mainly from the transportation sector, although the government's 2010 "Energy Concept" publication advocates for one million electric vehicles on the road by 2020 and six million by 2030. [1]

Figure 1: Energy Production in Germany [2]

Germany is one of the largest refiners in the world, and the second largest in Europe and Eurasia after Russia. Its production is more than 2.2 million barrels per day of crude refining capacity. Germany imports oil through four crude oil pipelines and one petroleum product pipeline, as well as four main sea ports. The country’s sole deep water port at Wilhelmshaven handles a large portion of Germany’s international oil trade. [1]

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Figure 2: Deep water port at Wilhelmshaven

Germany has no liquefied natural gas (LNG) terminals, so the country must import natural gas exclusively through several major cross-border pipeline networks. Almost all natural gas imports come from Russia via the Nord Stream system (completed in 2011), Norway via Norpipe and Europipe systems, and the Netherlands via four main pipelines. Natural gas consumption in Germany has declined from its peak of nearly 3.6 trillion cubic feet (Tcf) in 2003 to 3.1 Tcf in 2012, largely because of energy efficiency improvements. [1]

Germany was the fifth-largest generator of nuclear energy in the world in 2012 with 94.1 terawatthours, a decrease from 102.3 terawatthours generated the previous year. Following Japan’s Fukushima accident in March 2011, the German government decided to close eight reactors launched before 1980 because of public protests and to close Germany’s nine remaining nuclear reactors before 2022. [1]

Figure 3: Nuclear Plants in Germany

Coal is Germany's most abundant indigenous energy resource, and it accounted for about 24% of Germany's total primary energy consumption in 2012, a slight increase over the previous few years. Coal consumption increased after Japan's Fukushima reactor accident occurred in March

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2011, and Germany used coal as a substitute for nuclear power in electricity generation. Germany was the world's eighth-largest producer of coal in 2012. Nearly all coal production serves the power and industrial sectors. [1]

Table 1: Energy in Germany [2]

2. Government Energy Policy:

Germany was the fifth-largest producer of nuclear power in the world, but in 2000, the government and the German nuclear power industry agreed to phase out all nuclear power plants by 2021, as a result of an initiative with a vote result of 513 Yes, 79 No and 8 Empty. The seven oldest reactors were permanently closed after the Fukushima accident. However, being an integral part of the EU's internal electricity market, Germany will continue to consume foreign nuclear electricity even after 2022. In September 2010, Merkel's government reached a late-night deal which would see the country's 17 nuclear plants run, on average, 12 years longer than planned, with some remaining in production until well into the 2030s. Then, following Fukushima Daiichi nuclear disaster, the government changed its mind again, deciding to proceed with the plan to close all nuclear plants in the country by 2022. [2]

Government policy mainly concentrates on conservation and the development of renewable sources, such as solar, wind, biomass, water, and geothermal power. As a result of energy saving measures, energy efficiency (the amount of energy required to produce a unit of gross domestic product) has been improving since the beginning of the 1970s. The government has set the goal of meeting 80% of the country's energy demands from alternative energy by 2050. [2]

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Towards Sustainable Energy:In September 2010, the German government announced a new aggressive energy policy with the following targets:

Reducing CO2 emissions 40% below 1990 levels by 2020 and 80% below 1990 levels by 2050 Increasing the relative share of renewable energy in gross energy consumption to 18% by 2020,

30% by 2030 and 60% by 2050 Increasing the relative share of renewable energy in gross electrical consumption to 35% by 2020

and 80% by 2050 Increasing the national energy efficiency by cutting electrical consumption 50% below 2008

levels by 2050Forbes ranked German Aloys Wobben ($3B), founder of Enercon, as the richest person in the energy business (wind power) in Germany in 2013. [2]

A. Renewable Energy:

Germany is a regional and world leader on several categories of renewable energy use. In 2012, Germany was the largest European producer of non-hydro renewable electricity, with the largest sources being solar and wind. The German government stated that it will continue to shift from nuclear power to renewable energy sources. [3]

Germany's renewable energy sector is among the most innovative and successful worldwide. The share of electricity produced from renewable energy in Germany has increased from 6.3% of the national total in 2000 to about 30% in the first half of 2014. In 2011, 20.5% (123.5 TWh) of Germany's electricity supply (603 TWh) was produced from renewable energy sources, more than the 2010 contribution of gas-fired power plants. During the first six months of 2014, almost 31% of German electric power came from renewable sources, mainly wind, biogas, and solar; this was more than came from brown coal. In 2010, investments totaling 26 billion euros were made in Germany’s renewable energies sector. Germany has been called "the world's first major renewable energy economy". [4]

Figure 4: Electricity generated during first 6 months of 2014 [4]

Siemens chief executive Peter Löscher believes that Germany’s target of generating 35% of its electricity from renewables by 2020 is achievable – and, most probably, profitable for Europe’s

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largest engineering company. Nordex, Repower, Fuhrländer, and Enercon are wind power companies based in Germany. More than 21,607 wind turbines are located in the German federal area, and the country has plans to build more wind turbines. As of 2011, Germany's federal government is working on a new plan for increasing renewable energy commercialization, with a particular focus on offshore wind farms. A major challenge is the development of sufficient network capacities for transmitting the power generated in the North Sea to the large industrial consumers in southern Germany. [4]

According to official figures, some 370,000 people in Germany were employed in the renewable energy sector in 2010, especially in small and medium-sized companies. This is an increase of around 8% compared to 2009 (around 339,500 jobs), and well over twice the number of jobs in 2004 (160,500). About two-thirds of these jobs are attributed to the Renewable Energy Sources Act. [4]

B. Target:

Since the passage of the Directive on Electricity Production from Renewable Energy Sources in 1997, Germany and the other states of the European Union have been working towards a target of 12% renewable electricity by 2010. Germany passed this target early in 2007, when the renewable energy share in electricity consumption in Germany reached 14%.  In September 2010, the German government announced the following new ambitious energy targets: After the 2013 elections, the new CDU/CSU and SPD coalition government continued the energy transition, with only minor modifications of its targets in the coalition agreement. [4]

Renewable electricity - 40 to 45% by 2025, 55 to 60% by 2035, and 80% by 2050 Renewable energy - 18% by 2020, 30% by 2030, and 60% by 2050 Energy efficiency - Cutting the total energy consumption by 20% from 2008 by 2020 and 50%

less by 2050 Total electricity consumption - 10% below 2008 level by 2020 and 25% less by 2050

The German Government reported, in 2011, renewable energy (mainly wind turbines and biomass plants) generated more than 123 TWh (billion kilowatt-hours) of electricity, providing nearly 20% of the 603 TWh of electricity supplied. [4]

In 2012, all renewable energy accounted for 21.9% of electricity, with wind turbines and photovoltaic providing 11.9% of the total.

Chancellor Angela Merkel, along with a vast majority of her compatriots, believes, "As the first big industrialized nation, we can achieve such a transformation toward efficient and renewable energies, with all the opportunities that brings for exports, developing new technologies and jobs". [4]

As of 2014, renewable sources account for 30.8% of the overall electricity production (first half-year). Compared to the same period of 2013, energy production from wind, solar and biomass increased by 9.9 TWh, while it decreased from fossil fuels by 14.8 TWh, and remained almost unchanged for nuclear and hydro power. [4]

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C. Wind Energy:

In 2013, wind power generated a total of 53.4 TWh of electricity and more than 3.2 GW of new capacity was added to the grid. In 2011, the country's installed capacity of wind power reached 29,075 megawatts (MW), about 8% of the overall capacity. According to EWEA, in a normal wind year, installed wind capacity in Germany will meet 10.6% at end 2011 and 9.3% at end 2010 of the German electricity needs. [4]

More than 21,607 wind turbines are located in the German federal area and the country has plans to build more. As of 2011, Germany's federal government is working on a new plan for increasing renewable energy commercialization, with a particular focus on offshore wind farms. A major challenge is the development of sufficient network capacities for transmitting the power generated in the North Sea to the large industrial consumers in southern Germany. [4]

Figure 5: Wind farm in Bernburg [10]

D. Photovoltaic Solar Energy:

In July 2012, a cumulative installed total solar PV power of 29.7 GW was in place.  Solar PV provided 18 TW·h in 2011, 3% of the total electricity demand. As solar power installations rise quickly, in first half of 2012, about 5.3% of the total electricity demand was covered by solar power. On Saturday May 25, 2012, solar power broke a new record high, feeding 22 GW into the power grid, or as much as 20 nuclear power stations. This jump above the 20 GW level was due to increased capacity and excellent weather conditions countrywide, and made up for half of the nation's electricity demand at midday. [4]

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Figure 6: Nationwide installed photovoltaics [4]

Germany was also the biggest expanding market for solar PV 2012, with 7.6 GW of newly connected systems. Some market analysts expect the solar electricity share could reach 25% by 2050. Price of PV systems has decreased more than 50% in 5 years since 2006. [4]

Figure 7: Erlasee Solar Park [4]

E. Geothermal Power:

Geothermal power in Germany is expected to grow, mainly because of a law that benefits the production of geothermal electricity and guarantees a feed-in tariff. But after a renewable energy law that introduced a tariff scheme of €0.15 [US$0.23] per kilowatt-hour (kWh) for electricity produced from geothermal sources came into effect that year, a construction boom was sparked and the new power plants are now starting to come online. [4]

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Figure 8: Geothermal plant in Germany [4]

F. Hydroelectricity:

The total installed capacity in Germany at the end of 2006 was 4.7 GW. Hydropower meets 3.5% of the electricity demand. Latest estimates show, in Germany in 2007, about 9,400 people were employed in the hydropower sector which generated a total turnover of €1.23 billion. [4]

G. Biofuels:

Biofuel and biomass are some of Germany's most important sources of renewable energy. In 2010, biomass accounted for 30% of renewable electricity generation and for 70% of all renewable energy (mostly wood). Germany has committed to blending 6.25% biofuels in petroleum by 2014 with the Biofuels Quota Act. [4]

H. Industry:

Germany's renewable energy sector is among the most innovative and successful worldwide. Nordex, REpower Systems, Fuhrländer and Enercon are wind-power companies based in Germany. SolarWorld, Q-Cells, and Conergy are solar-power companies based in Germany. These companies dominate the world market. Every third solar panel and every second wind rotor is made in Germany, and German turbines and generators used in hydro energy generation are among the most popular worldwide. [4]

Nearly 800,000 people work in the German environment technology sector; an estimated 214,000 people work with renewables in Germany, up from 157,000 in 2004, an increase of 36%.

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Siemens’ “environmental solutions” portfolio, which is firmly focused on renewables, is “already generating more than €27 billion a year, 35 per cent of Siemens’ total revenue, and the plan is to grow this to €40 billion by 2015”. Ending its involvement in nuclear industry will boost the credibility of Siemens as a purveyor of “green technology”. [4]

Germany's main competitors in solar electricity are Japan, the US, and China. In the wind industry, it is Denmark, Spain, and the US.

Figure 9: Primary energy consumption from Renewables [4]

I. Highlights of Government Policy:

The Alliance '90/The Greens party joined the federal government between 1998 and 2005 and it highly benefited the renewable energy sector. Support for renewable energy continued under all following governments, regardless of composition, including the current CDU/CSU and SPD coalition government which started in 2013. The Renewable Energy Sources Act aided the renewable energy sector which basically promotes renewable energy mainly by stipulating feed-in tariffs and recently also market premiums that grid operators must pay for renewable energy fed into the power grid. People who produce renewable energy can sell their 'product' at fixed prices for a period of 20 or 15 years which has created a surge in the production of renewable energy. In 2012, Siemens estimated the total cost of renewable energy would come to at least €1.4 trillion (US$1.8 trillion) by 2030. [4]

For the 2011–2014 period, the federal government set aside 3.5 billion euros for scientific research in the country. Additionally, in 2001 a law was passed requiring the closing of all nuclear power plants within a period of 32 years. The shutdown time was extended to 2040 by a new government in 2010. After the Fukushima incident, the law was abrogated and the end of nuclear energy was set to 2022. After the 2013 federal elections, the new CDU/CSU and SPD coalition in important areas continued the Energiewende of the previous government, but also agreed on a major revision of the EEG. [4]

The German energy policy is framed within the European Union, and the March 2007 European Council in Brussels approved a mandatory energy plan that requires a 20% reduction of carbon

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dioxide emissions before the year 2020 and the consumption of renewable energies to be 20% of total EU consumption (compared to 7% in 2006). The accord indirectly acknowledged the role of nuclear energy — which is not commonly regarded as renewable, but emissions-free — in the reduction of the emission of greenhouse gases, allowing each member state to decide whether or not to use nuclear-generated electricity. [4]

Also, a compromise was reached to achieve a minimum quota of 10% biofuels in the total consumption of gasoline and diesel in transport in 2020. [4]

Figure 10: Renewable energy production [4]

3. Energiewende:

Germany's Energiewende, or energy transition, designates a significant change in energy policy from 2011. The term encompasses a reorientation of policy from demand to supply and a shift from centralized to distributed generation (for example, producing heat and power in very small cogeneration units), which should replace overproduction and avoidable energy consumption with energy-saving measures and increased efficiency. [5]

Energiewende (German for Energy transition) is the transition by Germany to an energy portfolio dominated by renewable energy, energy efficiency and sustainable development. The final goal is the abolition of coal and other non-renewable energy sources. [5]

Renewable energy encompasses wind, biomass (such as landfill gas and sewage gas), hydropower, solar power (thermal and photovoltaic), geothermal, and ocean power. These renewable sources are to serve as an alternative to fossil fuels (oil, coal, natural gas) and nuclear fuel (uranium). [5]

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This term was the title of a 1980 publication by the German Öko-Institut, calling for the complete abandonment of nuclear and petroleum energy. On the February 16 of that year the German Federal Ministry of the Environment also hosted a symposium in Berlin, called Energiewende – Atomausstieg und Klimaschutz (Energy Transition: Nuclear Phase-Out and Climate Protection). The views of the Öko-Institut, initially strongly opposed, have gradually become common knowledge in energy policy. In the following decades the term expanded in scope; in its present form it dates back to at least 2002. [5]

Energiewende designates a significant change in energy policy: The term encompasses a reorientation of policy from demand to supply and a shift from centralized to distributed generation (for example, producing heat and power in very small cogeneration units), which should replace overproduction and avoidable energy consumption with energy-saving measures and increased efficiency. [5]

In a broader sense this transition also entails a democratization of energy: In the traditional energy industry, a few large companies with large centralized power stations dominate the market as an oligopoly and consequently amass a worrisome level of both economic and political power. Renewable energies, in contrast, can as a rule be established in a decentralized manner. Public wind farms and solar parks can involve many citizens directly in energy production. Photovoltaic systems can even be set up by individuals. Municipal utilities can also benefit citizens financially, while the conventional energy industry profits a relatively small number of shareholders. Also significant, the decentralized structure of renewable energies enables creation of value locally and minimizes capital outflows from a region. Renewable energy sources therefore play an increasingly important role in municipal energy policy, and local governments often promote them. [5]

Figure 11: Energiewende [9]

The key policy document outlining the Energiewende was published by the German government in September 2010, some six months before the Fukushima nuclear accident. Legislative support was passed in 2011.

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Important aspects include:

greenhouse gas reductions: 80–95% reduction by 2050 renewable energy targets: 60% share by 2050 (renewables broadly defined as hydro, solar and

wind power) energy efficiency: electricity efficiency up by 50% by 2050 an associated research and development drive [5]

The policy has been taken over by the German federal government and has resulted in a huge expansion of renewables, particularly wind power. Germany's share of renewables has increased from around 5% in 1999 to 22.9% in 2012, surpassing the OECD average of 18% usage of renewables. Producers have been guaranteed a fixed feed-in tariff for 20 years, guaranteeing a fixed income. Energy co-operatives have been created, and efforts were made to decentralize control and profits. The large energy companies have a disproportionately small share of the renewables market. Nuclear power plants were closed, and the existing 9 plants will close earlier than planned, in 2022. [5]

One factor that has inhibited efficient employment of new renewable energy has been the lack of an accompanying investment in power infrastructure to bring the power to market. It is believed 8,300 km of power lines must be built or upgraded. The different German States have varying attitudes to the construction of new power lines. A second factor is the storage capacity needed to create a stable electricity supply from wind and solar energy is far beyond what can be realized in Germany. A third factor is the amount of windmills needed to meet the German electricity consumption can by far not be realized on German territory. Industry has had their rates frozen and so the increased costs of the Energiewende have been passed on to consumers, who have had rising electricity bills. Germans in 2013 had some of the highest electricity costs in Europe. In comparison, their nuclear-reliant neighbor France has some of the cheapest in the EU (#7 out of 27). [5]

4. German Renewable Energy Act:The German Renewable Energy Act (German: Erneuerbare-Energien-Gesetz, EEG) was designed to encourage cost reductions based on improved energy efficiency from economies of scale over time. The Act came into force in the year 2000 and was the initial spark of a tremendous boost of renewable energies in Germany. In the first half of 2014, 28.5% of Germany's electricity was produced from renewable sources (up from 23.4% in 2013). In 2012, 10.2% of heat and 5.7% of fuel used in Germany was generated from renewable sources. Due to the use of renewable energies, 145 million metric tons of CO2 emissions were avoided during 2012. The renewable energy industry employed 377,000 people in 2012, up from 30,000 people in 1998. Of these jobs, 268,000 exist as a direct result of the German Renewable Energy Act. Germany is third after China and the U.S., the world’s top renewable energy economies, as measured by investment in the renewable energy sector. Due to its success, the German Renewable Energy Act can serve as an archetype of similar legislation in other countries. [6]

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A. Purpose of the EEG:

According to Section 1 para. 1 EEG 2014, the purpose of the law is to facilitate  the sustainable development of energy supply, particularly for the sake of protecting the climate and the environment, to reduce the costs of energy supply to the national economy (also by incorporating external long-term effects), to conserve fossil fuels and to promote the further development of technologies for the generation of electricity from renewable energy sources. [7]The EEG only regulates the renewable electricity sector. The Renewable Energies Heat Act (Gesetz zur Förderung Erneuerbarer Energien im Wärmebereich – EEWärmeG) promotes the increase of heat generated from renewable energy to 14% by 2020. [7]

B. EEG Surcharge:

Costs of the EEG system are distributed to electricity consumers via the so-called EEG Surcharge (EEG-Umlage). Details of this reallocation can be found in the 2010 Equalization Scheme Ordinance (Verordnung zur Weiterentwicklung des bundesweiten Ausgleichsmechanismus - AusglMechV) and the Equalization Scheme Execution Ordinance (Verordnung zur Ausführung der Verordnung zur Weiterentwicklung des bundesweiten Ausgleichsmechanismus (Ausgleichsmechanismus - Ausführungsverordnung - AusglMechAV). [7]

The equalization scheme goes through five steps:1. Renewable energy generator (wind farm, solar park, etc.)2. Distribution system operator3. Transmission system operator4. Electricity supply undertaking5. Consumer [7]

The AusglMechV was an important step to create more transparency for the sale of renewable energy. Under the AusglMechV, transmission system operators have to take the power from the distribution system operators and have to sell it at the spot market (financial equalization). [7]

Revenues from the spot market sale of renewable energy do not cover the feed-in tariffs and market premiums payable pursuant to the EEG, profile service costs (Profilservicekosten) and other costs of running the EEG surcharge system. In fact, prices at the spot market have been negative at times. To ultimately pass on the costs of the transmission network operator to the consumer, deficits are first allocated to the electricity supply companies as the so-called “EEG surcharge” (EEG-Umlage), who then pass the surcharge on to their customers. In 2013, the total EEG surcharge amounted to EUR 20.4 billion. In 2014, the EEG surcharge was set at 6.24 ct/kWh. [7]

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C. EEG Targets towards Renewables:

The EEG 2014 aims to constantly and cost effectively increase the share of renewable energy sources in the German electricity supply. According to Section 1 para. 2 EEG 2014, renewable energy shall account for

40% to 45% of the share in the gross electricity consumption by 2025 55% to 60% by 2035 and For 80% by 2050. [7]

D. Main Principles of the Act:

The three main principles of the EEG are:

a) Investment protection through guaranteed feed-in tariffs and connection requirement: Originally, every kilowatt-hour generated from renewable energy facilities received a fixed feed-in tariff. The system has recently been modified to now also include a market premium system. Network operators are required to preferentially feed-in this electricity into the grid over electricity from conventional sources (nuclear power, coal and gas). Renewable energy plant operators in principle receive a 20-year, technology-specific, guaranteed payment for their electricity generation. Small and medium enterprises have been given new access to the electricity market, along with private land owners. The Federal Ministry for Environment, Nature Conservation and Nuclear Safety argued that anyone producing renewable energy could sell his ‘product’ for a 20-year fixed price. [6]

b) No charge to Germany’s public purse: The promotion of renewable electricity continues to be necessary up until now. The EEG rates of remuneration show what electricity from wind, hydro, solar, bio- and geothermal energy actually cost. Compared to fossil fuels, there are lower or no external costs, such as damage to the environment, the climate or human health. The remuneration rates have until recently been considered not to be subsidies as such, since they are not paid for by taxes and are paid for by every consumer as an EEG surcharge (EEG-Umlage) that is included in the electricity bill. The polluter pays principle which is also known as "whoever consumes more, pays more" is in effect passed on to consumers. In 2013, the total EEG surcharge amounted to EUR 20.4 billion. In 2014, the EEG surcharge was set at 6.24 ct/kWh. Certain reductions of the EEG surcharge apply for energy intensive industries (so-called special equalization scheme). [6]

c) Innovation by decreasing feed-in-tariffs: Feed-in tariffs in Germany decrease in regular intervals to exert cost pressure on energy generators and technology manufacturers. The decrease (called "digression") applies to new plants. Thus, it is hoped, technologies are becoming more efficient and less costly. [6]

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E. Statistics:Increases in installed renewable electric power capacity and generation in recent years is shown in the table below:

Table 2: Rise in installed renewable electric power generation [4]

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Section – IINegative Pricing

Basic Concept

Negative prices are a price signal on the power wholesale market that occurs when a high inflexible power generation meets low demand. Inflexible power sources can’t be shut down and restarted in a quick and cost-efficient manner. Renewables do count in, as they are dependent from external factors (wind, sun). [8]

On wholesale markets, electricity prices are driven by supply and demand which in turn are determined by several factors such as climate conditions, seasonal factors or consumption behavior. This helps to maintain the required balance. Prices fall with low demand, signaling generators to reduce output to avoid overloading the grid. On the French and German/Austrian Day-Ahead market and all Intraday markets of EPEX SPOT, they can thus fall below zero. [8]

In some circumstances, one may rely on these negative prices to deal with a sudden oversupply of energy and to send appropriate market signals to reduce production. In this case, producers have to compare their costs of stopping and restarting their plants with the costs of selling their energy at a negative price (which means paying instead of receiving money). If their production means are flexible enough, they will stop producing for this period of time which will prevent or buffer the negative price on the wholesale market and ease the tension on the grid. [8]

Negative prices are not a theoretical concept. Buyers are actually getting money and electricity from sellers. However, you need to keep in mind that if a producer is willing to accept negative prices, this means it is less expensive for him to keep their power plants online than to shut them down and restart them later. [8]

Negative prices are a comparably rare phenomenon, as several factors have to happen at the same time. However, they are nothing unusual. In Germany, where inflexible power generation from renewables is increasing, 56 hours on 15 days with negative prices were observed on the Day-Ahead market in 2012. On the Intraday market there were 41 hours on 10 days. They were first introduced in 2008 on the German/Austrian Day-Ahead and 2007 in the German Intraday market. In 2010, they were introduced on the French Day-Ahead and Intraday markets. The Austrian and the Swiss Intraday markets, launched in 2012 and 2013 respectively, also provide the possibility of negative prices. [8]

The limits on negative pricing are the price caps that are reached extremely rarely. They are an economically logical barrier for power trading. Negative prices are a signal, an indicator for market participants. If producers decide to keep their production up, they have calculated that this is the best, most cost-efficient way for them considering the costs of shutting down and restarting their plants. In addition, negative prices are an incentive for producers to invest in the development of more flexible means of production that can react more efficiently to fluctuating energy supply in order to increase security of supply and prevent negative prices. Negative prices are a signal of tense situations in the power system. [8]

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Causes and Occurrences:

The causes of negative pricing is explained with the help of the concept of Supply and Demand shock

Fig 12. Supply Demand Shock[11]

A sudden increase or decrease in the supply of the commodity or service affects its equilibrium price. A negative supply shock (sudden supply decrease) will raise prices and shift the aggregate supply curve to the left. A negative supply shock can cause stagflation due to a combination of raising prices and falling output.[11]

A positive supply shock (an increase in supply) will lower the price of said good and shift the aggregate supply curve to the right.[11]

A positive demand shock increases demand and a negative demand shock decreases demand. Prices of goods and services are affected in both cases. When demand for a good or service increases, its price typically increases because of a shift in the demand curve to the right. When demand decreases, its price typically decreases because of a shift in the demand curve to the left.[12]

The main causes of negative pricing are

Industrial and Business Demand Drop Natural Calamities Climatic Factors

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1. Industrial and Business Demand DropOn December 24, 2013, when industrial and business power demand dropped sharply, the price of German power for intra-day delivery fell to an average of -35.45 euros per megawatt-hour (MWh) between 0000 and 0600 in the morning, touching lows of -62.03 Euros/MWh halfway through that period. [13]Over the Christmas holiday, which typically causes a drop in energy demand, wholesale electricity prices in Germany, the Nordic region, the Czech Republic and Slovakia turned negative on excessive renewable energy production and mild weather. [13]

2. Natural CalamitiesIn December 2013, devastating storms sent wind turbines spinning causing the wind farms to produce to their full capacity and as we know that when renewable energy output is more than necessary producers face negative market prices because electricity cannot be stored in high volumes, negative pricing was observed over Northern Europe e.g. Denmark, Sweden, etc. [13]

There are some occurrences of negative pricing in U.S of America too. For example, in March 2014, pacific north western region, Washington to be specific, experienced large amounts of precipitation which kicked up river flows in the region and boosted hydro generation in Bonneville plant to around 13000 MW on March 11 and March 12. The negative prices are largely a result of surplus generation caused by uptick in river flows during the spring melt along with growing wind capacity. [15]

3. Climatic FactorsVarious climatic factors such as sunny days, high winds, precipitation etc. boost renewable energy generation and the production suddenly increases.For Example on July 21, 2013, Germany generated 24.9GW of its energy from PV at around 01:30 pm. This creates sudden increase in supply. This causes a positive supply shock and possibilities of negative pricing come into picture. [16]

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Fig 13. Photo Voltaic Power Generation in Germany [16]

Some other occurrences of negative pricing are as follows:

First occurrences of negative pricing were in 2007 in the German intraday market. In 2008 they were in German/ Austrian day- ahead markets. France was introduced to negative pricing in 2010. Austrian and Swiss intraday markets first experienced negative pricing in 2012. [8]

Fig 14 Average hourly wind infeed and load in Germany 2009 [18]

In 2012 the European Energy Exchange observed the price of electricity turn negative during certain hours of the day Sunday through Thursday of last week of December. This is largely due to a strong supply of wind power combined with relatively low electricity demand, which is partly triggered by warmer than average temperatures. Wind, solar, and low demand aren’t the only causes of this phenomenon, however. Nuclear and hydro are also often implicated. Nuclear and hydro power plants can’t easily shut down or start up, so it may be more worth it to them to pay a little to put electricity on the grid for a short time than lose revenue from being shut down when it could be selling electricity for a profit. [19]

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Fig 15. Negative Prices in Dec. 2012 [19]

Over the Christmas holiday in 2013, which typically causes a drop in energy demand, wholesale electricity prices in Germany, the Nordic region, the Czech Republic and Slovakia turned negative on excessive renewable energy production and mild weather.Wind and rain bring out the best in renewable energy from turbines and hydro power, a major source of Nordic electricity. Calm weather hampers green energy output. [13]

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Fig 16. PV and wind turbines Schneebergerhof wind farm in Rheinland-Pfalz, Germany [17]

Germany set a new record on Sunday, May 11, by getting nearly three quarters of its electricity from renewable sources during a midday peak. The prices went down to -65.03 euros per megawatt hour on that day (refer Fig 15) as Wind power peaked at around 21.3 GW at 1 PM on Sunday, with solar simultaneously coming in at 15.2 GW. Add in the roughly 3.1 GW of hydropower and 3.7 GW of electricity from biomass that Germany usually has, and the output of conventional power plants was pushed down to 26 GW at 1 PM on Sunday. Power demand, however, was only at 59.2 GW, meaning that only 15.9 GW of conventional power was needed to serve domestic demand. [13].The weekly distribution of energy generated and the demand during that week is as shown in Fig. 16. The week is a bit unusual in terms of the high level of combined wind and solar output. At 1 PM on Sunday, wind and solar alone made up around 62% of German power demand (domestic, excluding exports). Add on power from biomass and hydro, and renewables covered 73% of demand during the midday peak – albeit on a Sunday, when demand is low.

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Fig 17. German Energy Prices on May 11, 2014 [13]

But the same chart shows us a quite small share of renewables at 5 AM on the first day of the week. Hydro is at 2.0 GW, biomass at 3.7 GW – and wind and solar collectively only at around 0.7 GW. Yet, domestic demand was 53.1 GW. Renewable power only covered 12% of demand that hour, when the residual load came in at 46.7 GW. Germany has a must-run capacity of around 20 GW, meaning that 16 GW (the residual load from domestic demand on Sunday at 1 PM) is simply too little for the German power sector to serve. As the residual load approaches the mid-20s (gigawatts), power firms therefore begin paying customers to take electricity off their hands. And the prices went negative. [13]

Fig 18. Energy Generation and Consumption [13]

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Solutions:

After these occurrences the main question that clicks is Are there any means to soften or prevent negative prices?Liquidity based on wide offer and demand is the key for lowering the occurrence of negative prices. This is where cross-border trading solutions come in. On the Day-Ahead market, Market Coupling provides a solution for the optimal use of cross-border capacities between two or more markets. Thanks to the Market Coupling in North-Western Europe (including France, Germany, Benelux, Great Britain, the Nordic and Baltic countries), negative prices are buffered or prevented. For instance, in case of low or negative prices in Germany, France and Benelux, Denmark and Sweden will import electricity until the cross-border capacity is fully used or prices converge.On the Intraday market, the trading system ComXerv can use cross-border capacities in an optimal way and hence buffer volatility, which also helps to decrease the number of negative prices. As a result, the “quality” of negative prices both on the Intraday and the Day-Ahead markets today is different to the extent that they did not reach -1500 € as in 2009 before the integration process took off. [8]

Fig 19. Market Coupling [24]

This technique is widely accepted technique in North- Western Europe and the detailed explanation for the same is as follows: By definition, market coupling is the use of so-called implicit auctioning involving two or more power exchanges (PX). Market coupling can in practice be implemented in several ways; the scheme developed by EMCC is called tight volume coupling. [20]The general approach to implementation of the target model across Europe relies on the following principles:

Focus on North-West Europe (NWE) price coupling implementation by the end of 2012; Adjacent borders may adopt the Price Coupling of Regions (PCR) algorithm in parallel and/or join

NWE price coupling from the beginning if this does not delay overall progress towards EPC; Common information level and flexible governance arrangements are necessary to ensure smooth

integration of additional borders. [21]

There is another reason why zero-price countries should allow negative pricing: because other countries have already done so.

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As counter-intuitive as it may seem, the fact that a small group of large countries, accounting for a significant share of European electricity demand, has already started the negative-price revolution does have consequences.

Until a few years ago, European electricity markets tended to be pretty much balkanized. Then, three packages of EU directives came, leading to considerable market convergence, based upon the regulatory convergence. And although there are still many differences among national electricity markets in Europe, as well as in the relative degree of market openness, they are now much more similar to each other than before. As a result, there has been an increase in cross-border trade, which in turn has strengthened the case for regulatory harmonization and market convergence.Now market coupling in the day-ahead markets is already a reality in North-Western Europe and, with the looming adoption of fully inter-operable ICT systems in European power exchanges, it will soon be an EU-wide reality. In time, this full market coupling – with full physical as well as financial integration – will result in a proper internal market with a single price for electricity in Europe.For now, short of an EU-wide single price, price convergence is already a reality. Further integration will strengthen the convergence process. And this is where negative pricing becomes relevant: if you have two price-convergent markets, and one has negative prices, while the other does not, then what you can expect to happen is an increase of export from the negative-price country to the zero-price one (during the negative-price hours). This, in turn, further displaces conventional generating capacity in the zero-price country, making the lack of flexibility in that market even more costly.

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Conclution:

Negative prices are not just the result of some abstruse algorithm underlying the power exchange and the functioning of the power system. They are also, and more fundamentally, the way in which the market conveys the decentralized information that is distributed among all market participants, and that cannot be centralized in one single brain, as Nobel-prize winner Friederich Hayek would say. That information is translated into two major market signals, which are embodied in negative prices.In the short run, negative prices show that there is a local condition of oversupply under which electricity is not an economic good which society is willing to pay for, but an economic bad for which consumers should be compensated. Therefore, negative prices create an economic incentive for consumers to shift their consumption patterns so as to capture the opportunity of being paid, instead of paying, to receive energy….However, in the long run, negative prices talk to energy producers, not to energy consumers. The emergence of negative prices, although strongly conditioned by demand-side constraints, shows that the generating fleet encompasses too much “rigid” capacity (i.e. too much nuclear and coal-fuelled plants) and too little “flexible” capacity (for example CCGTs or turbo-gas power plants); or that grid interconnections are insufficient to properly exploit the spare, flexible capacity available within a market area.[22]

Negative prices are a reality in Europe. Several countries in the Central-Western region have allowed negative prices on their power exchanges. Many others have not: by virtue of this, they implicitly subsidize both renewable and inflexible conventional generators at the expense of consumers. They also prevent a clear market signal to reach actors on the demand and supply side to make them adjust their behaviour and investments. Moreover, they prevent the priority dispatch for renewable energy from being correctly priced and make it more difficult to integrate the booming renewable energy capacity in their countries.As the EU Commission’s DG Energy states in its most recent Quarterly Report on European Electricity Markets, “Frequent occurrences of negative prices in many European markets signal the need for better integration of renewables into the power grid”: a problem that is going to become only more pressing as EU-wide market coupling gains momentum.“When my information changes, I alter my conclusions”, said John Maynard Keynes. It is high time for EU member states that do not allow negative prices to change their rules in order to fully capture the missing information these prices provide.   [23]

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What causes Negative Pricing in Germany?

Referred Research Papers:

Referred Websites:

[1] http://www.eia.gov/countries/country-data.cfm?fips=gm[2] http://en.wikipedia.org/wiki/Energy_in_Germany[3] http://www.eia.gov/countries/country-data.cfm?fips=gm[4] http://en.wikipedia.org/wiki/Renewable_energy_in_Germany[5] http://en.wikipedia.org/wiki/Energy_transition_in_Germany[6] http://en.wikipedia.org/wiki/German_Renewable_Energy_Act[7] http://www.germanenergyblog.de/?page_id=283[8] http://www.epexspot.com/en/company-info/basics_of_the_power_market/negative_prices[9]http://reneweconomy.com.au/2013/energiewende-the-german-energy-transformation-explained-57160[10]http://www.addictinginfo.org/2014/07/14/one-third-of-german-power-comes-from-renewable-sources-in-first-half-of-2014/[11]http://en.wikipedia.org/wiki/Supply_shock[12]http://en.wikipedia.org/wiki/Demand_shock[13]http://www.reuters.com/article/2014/01/09/us-europe-power-prices-idUSBREA080S120140109[14]http://energytransition.de/2014/05/german-power-prices-negative-over-weekend/[15]http://www.platts.com/latest-news/electric-power/washington/strong-hydro-generation-causes-negative-northwest-21331628[16] http://www.sma.de/en/company/pv-electricity-produced-in-germany.html[17] http://en.wikipedia.org/wiki/Renewable_energy_debate[18] http://www.usaee.org/usaee2011/submissions/OnlineProceedings/Online%20Proceeding%20Paper%20-%20Maria%20Woodman.pdf[19] http://cleantechnica.com/2012/12/29/negative-european-power-prices-seen-sunday-through-thursday-due-to-strong-wind-power-supply/[20] http://www.marketcoupling.com/market-coupling[21]http://www.acer.europa.eu/Electricity/Regional_initiatives/Cross_Regional_Roadmaps/Pages/1.-Market-Coupling.aspx[22] http://knowledgeproblem.com/tag/negative-prices/[23] http://www.energypost.eu/case-allowing-negative-electricity-prices/[24] http://www.marketcoupling.com/document/688/european-market-fig1.png

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