Increasingly frequent negative electricity prices pose a problem for investors

As renewable energy sources expand, negative electricity prices are occurring more and more frequently on the markets.  This phenomenon was virtually unheard of 20 years ago, but is now becoming increasingly common, especially in the warmer months of the year, when solar PV generation rises. Negative electricity prices can therefore be expected to become even more frequent in the future.

In 2023, the EU saw a record number of hours with negative electricity prices. Negative electricity prices occur more frequently in some countries than others, depending on the amount of installed renewable capacity and the electricity grid. Scandinavia had the highest number of hours with negative electricity prices in 2023.

For consumers, this is generally a positive phenomenon that makes electricity cheaper, if we set aside the costs of upgrading the electricity grid to accommodate renewables. For investors, however, it is an unwelcome complication that makes investments less profitable.

Leaving aside other factors, it can be said, in simple terms, that the higher the price of electricity, the faster a generating asset will pay for itself. Households that have installed rooftop solar PV systems know this well, for example. When electricity prices were high, payback periods fell to just a few years. Large investors face the same issue, only on a much greater scale. Paradoxically, then, negative electricity prices can ultimately prove harmful.

Investment needed for decarbonization vs. negative prices

Decarbonizing the energy sector requires huge investment, most of which comes from the private sector. In most cases, this investment is made by publicly traded companies, which are primarily concerned with the profitability of individual projects. They often rely on bank financing, but banks are reluctant to lend to projects with uncertain returns or, for example, without contracts for future offtake (PPAs) from the power plants being built. Rising interest rates do nothing to improve these conditions, as companies have to borrow at higher cost. A slowdown in the development of renewables in Europe is already evident, with many private companies scaling back their construction plans.

This could create a vicious circle: more renewable capacity will be needed, but building it will not be profitable because of the low-cost electricity it supplies to the grid. In the UK, for example, the number of hours with negative prices is expected to increase more than tenfold by 2027 compared with 2023. This is one reason interest in building large-scale solar parks has declined.

Renewable energy development will continue despite the growing number of days with negative electricity prices, but it will often be combined with other elements that increase flexibility. The system will need to be optimized more effectively, and projects will be subject to greater scrutiny, with many halted as early as the planning stage.

Birgitte Ringstad Vartal, CEO of Norwegian company Statkraft, believes that negative electricity prices also present an opportunity for companies that can use them to store electricity or convert it into other forms of energy. She also mentioned other options, such as rotating stabilizers, which Statkraft is now installing in the UK to help stabilize the electricity grid.