From one extreme to another: Negative and zero electricity prices harm investment

Electricity prices have gradually stabilised following the energy crisis. However, on spot markets they are very often falling into negative territory across Europe. In some European Union member states, electricity is free of charge or even carries a negative price every tenth hour this year. Low prices benefit consumers, but they pose a major problem for investors in new generation sources.

The energy sector has been on a rollercoaster over the past three years. The sharp rise in electricity prices that began in the second half of 2021 was followed by an equally rapid decline. This decline is most apparent in spot electricity prices. This year, they have spent a record amount of time at zero or even in negative territory across Europe.

The reason for zero or negative electricity prices is low consumption and high short-term electricity generation, primarily from renewable energy sources. This can also be seen in charts and data showing when zero or negative electricity prices occur most often. Such hours occur by far most frequently on public holidays and around midday, when electricity generation from solar sources is usually at its highest.

In the European Union, zero or negative electricity prices occur by far most frequently in Spain and Finland. In at least these two countries, electricity has been free of charge every tenth hour this year.

Spain's renewable energy association APPA has issued a strong warning in connection with negative prices. Future investment in renewable energy sources is at risk. The organisation cited zero or even negative electricity prices on spot markets as the reason. According to APPA's president, prices are insufficient to make investments in renewable energy worthwhile, which could jeopardise the financing of such investments.

“We continue to increase installed renewable capacity without a corresponding increase in electricity demand,” APPA president Santiago Gomez told journalists.

Finland is facing very similar prices and, as of the end of October, has the highest number of outright negative electricity prices as well as the highest combined total of negative and zero prices.

However, virtually all European Union countries have seen a substantial increase in negative electricity prices due to market integration. The number of zero or negative prices is also at a record high in the Czech Republic this year. The electricity price was zero or negative for 360 hours, representing a total of 5 % of hours this year.

Negative impacts on investors in new generation sources

Negative prices can have a positive effect, particularly for electricity consumers. For generators, however, such prices are naturally undesirable, for two reasons. The first follows from the very nature of negative prices: generators must pay in order to be able to supply electricity to the grid at all. The second is that some generators do not receive support during hours with negative prices. Alternatively, they receive support, but only on a limited basis.

For investors in generation sources, low prices make it more difficult to achieve a return on their investments. They then prefer to abandon an investment rather than risk it failing to generate a return.

This is already evident in the Czech Republic. Voices are already being raised that, at current prices, it is difficult to secure financing for solar power plants. Yet most projects cannot do without bank financing.

Industry associations have therefore long called for the reintroduction of operating support for solar power plants. However, its reintroduction does not appear likely, given current efforts to reduce support for renewable energy sources in order to save the state budget.