Low and negative prices in wholesale power markets are the subject of intense scrutiny in the power sector today.

Traditional generators warn that “around-market” energy policies like renewable portfolio standards and nuclear subsidies are depressing energy prices, threatening cost recovery for dispatchable coal and gas plants and potentially threatening reliability.

Generators point to cases like last month’s bankruptcy of Panda Temple Power, a modern 758 MW natural gas plant in Texas, as indications of things to come if prices do not rise. The concerns were the subject of a widely-watched technical conference at the Federal Energy Regulatory Commission last month, as well as the subject of a controversial review of baseload power underway at the Department of Energy.

Generators say something must be done to “level the playing field” for their fossil fuel plants, nuclear and renewable sources that receive direct subsidies.

A number of power market experts, however, say the arguments are overblown.

“Some focus on the 50 hours per year when prices are negative and others focus on the 50 hours per year when prices are $10,000/MWh,” said Michael Hogan, senior advisor to the Regulatory Assistance Project who previously worked in gas generation. “But the important focus is the average power price.”

“Traditional generators benefit much more from the average price than renewables generators,“ he added, speaking of the Texas power market. “Renewables tend operate when supply and prices are below average and not when demand and prices are higher than average.”

Brattle Group economist Hannes Pfeifenberger agreed.

“The bigger problem is oversupply and low prices,” he said. In Texas, new wind and solar generation and flexible combined cycle natural gas plants are allowing ERCOT “to dial back the use of natural gas generation, and companies like Calpine are hurting.”

A recent UBS analysis of the price of natural gas assets confirmed Pfeifenberger’s observation. In October 2012, Calpine’s 432 MW Bosque plant sold for $528/kW in the ERCOT market. In November 2015, Energy Future Holdings sold two plants with 637 MW in total generating capacity for $440/kW.

“Nuclear and coal are particularly suffering from low energy prices, which are mostly due to low natural gas prices,” Pfeifenberger said. "But natural gas generators are also suffering because low prices provide smaller margins.”

But far from a problem that needs a policy fix, the analysts say the “suffering” in Texas is a sign that interstate energy markets are working properly — responding to a capacity overbuild by delivering lower returns to individual generators. And, they emphasize, there’s no evidence that the phenomenon is a threat to broad power sector reliability in the Lone Star State or across the nation.

“Negative prices are the result of an efficient market and too much inflexible capacity,” Hogan said.

An efficient marketplace

Texas is the nation’s wind energy leader, with more than 18 GW of capacity installed. Because wind receives a production tax credit of $24/MWh, facilities can bid prices into negative territory and still make money.

Generators blame this and other subsidies for driving down prices, saying it is unfair they do not receive support along with the zero-carbon resources. But Jim Lazar, another RAP senior advisor, says the argument is misguided.

“They complain about wind and solar tax incentives but traditional resources have received similar tax benefits and, for decades, the ability to dispose of waste into the public atmosphere.”

Federal subsidies for nuclear power are “of greater value than the tax incentives to wind and solar,” Lazar added. “It's a roughly fair playing field, with incentives flowing to all sources of electricity.”

Xcel Energy CEO Ben Fowke said his analysis is similar.

“Renewables get blamed [for low power prices] but that’s probably an unfair criticism,” he said. “It’s more about overcapacity due to the lack of demand, energy efficiency, and the continued low price of natural gas.”

Brattle’s Pfeifenberger and Judy Chang agreed the two most important reasons for low average energy prices are low natural gas prices and flattened net load.

“In many of the markets, the marginal price is set by natural gas generators,” Chang said. They bid against the competition in anticipation of a higher-priced resource setting the locational marginal price (LMP). But with natural gas’s current price of below $3/MMBTU, it is gas generation that most often sets the LMP. When there is an oversupply of capacity, this eliminates "the high price opportunities that allow gas generators to make up for selling at cost.”

Pfeifenberger described three groups of market prices.

“For the majority of hours natural gas plants are on the margin and prices are low because natural gas generators are competing with each other and just making their operating costs,” he said. “They are not making enough to cover their fixed costs.”

During a much smaller number of hours, prices are even lower than the bids from natural gas generators, he said. “They could be zero or negative. In those hours, natural gas can’t compete and plants are not running. Generation comes from base load that would cost too much to shut down and from renewables.”

In the third category are hours when very high system demand drives prices to “scarcity” levels and system operators use peaker plants and demand response. This category applies specifically to energy-only markets like ERCOT and SPP, as jurisdictions with capacity markets do not have the same peak pricing.

“Those prices give natural gas generators a margin big enough to cover fixed and investment costs and profits," Pfeifenberger said. "But falling demand and new resources limit the number of hours those prices are available.”

RAP’s Hogan is certain that oversupply is the source of low prices, and said one reason the market has not yet self-corrected is the Prisoner's Dilemma.

“Once enough generation leaves the market, the remaining generators will do much better so everyone not under immediate financial threat is waiting to see who blinks first,” he said. “Others are hanging on in hope of new demand or a bailout from policymakers mistakenly afraid the lights will go out.”

The economic reality for Hogan is stark. “If it is necessary to pay generators to keep them in operation, then the market does not need them.”

But is reliability threatened?

Rob Gramlich, a federal policy specialist and founder of consultancy Grid Strategies, said the argument that renewables are to blame for low and negative prices is “way overblown.” Natural gas sets the LMP “almost all the time in almost all these markets. The data is very clear.”

“Traditional generators play the reliability card to advance their policies and financial interests,” Gramlich said. While oversupply can magnify existing market price competition, “congestion, curtailment, and negative prices do not affect reliability because the grid operator can curtail suppliers anytime there’s an expected overload,” he said. “Traditional generators play the reliability card to advance their policies and financial interests.”

RAP’s Hogan agreed. Markets could “over-correct” and drive too much coal, nuclear, or natural gas generation capacity offline, he said, but the lights will stay on.Reserve margins across the U.S. today are “well in excess” of the established standards from the North American Electric Reliability Corporation.

The threat to reliability is "a Chicken Little argument traditional generators use over and over,” Hogan said. “If market conditions threaten their plant, they immediately start talking about blackouts. There is no evidence that will happen.”

Hogan spoke from his experience as a natural gas plant developer for multiple companies. Reversals of Clinton administration policy under President George W. Bush led to “something close to 200 GW of brand new gas-fired generation going either literally or effectively bankrupt between 2001 and about 2005,” he said. “Nobody bailed them out. And the lights didn't go out.”

Jeff Bladen, executive director of market services at MISO, said competitive bids would bring resources needed for reliability back into the market. “They would not be forced to retire if they are still needed for reliability because that belies the laws of economics.”

Hogan said generators’ newest concerns about negative prices come from New York and Illinois policies enacted to keep financially non-viable but emissions-free nuclear facilities in operation.

With Zero Emission Credits, nuclear generation can be price-competitive with emissions-causing natural gas generators like Calpine, Hogan said. “They thought they would push the nuclear generators out of the market.”

Email and phone efforts to obtain a response from Calpine went unanswered, but company officials and other gas generators slammed the nuclear subsidies at the FERC technical conference and are challenging them in court.

Brattle’s Chang agreed there is no threat to reliability. “Grid operators are prepared to deal with the operational challenges by redefining services and properly compensating ancillary services products and flexibility products.”

“It is less a reliability problem than a financial problem for the traditional generators,” Brattle's Pfeifenberger added. "New revenue streams will become available. But that may not happen until some generators go out of business.”

Hogan sees the financial problem for traditional generators as part of a bigger policy question. The objective is to transition an energy market already oversupplied with relatively new emissions-causing generation infrastructure to an energy market with mostly emission-free resources.

Emissions-free resources will have to replace existing carbon-based capacity and the only way to do that is through better policy, he said.

Today's tax credits and mandates allowed renewables to reach their current penetration levels but the policymakers who designed them “overlooked the reality that they were going to create surplus capacity," Hogan said. "Now we have it. If the surplus capacity goes away, the lights will not go out. But the owners of that surplus capacity will not be happy.”

Easing the transition

Average power prices are low for the same reason prices drop in the oil and car markets, Hogan said. “If generators say they will go out of business because of low prices, the market’s response is ‘Good. How fast?’”

It may be possible to ease the transition for regulated owners of transitional generation. That was pivotal to Oregon’s landmark 2016 move away from coal and to a 50% renewables mandate. Renewables advocates agreed to allow Pacific Power and Portland General Electric, the state’s dominant investor-owned utilities, time to depreciate their fossil generation assets.

“Investments in traditional generation may be stranded because policy has supported the emergence of new generation that is pushing them out the market,” Hogan said. “If the owners can make that case, some kind of stranded costs settlement is appropriate.”

Another fix advocated by both Hogan and RAP’s Lazar is to allow negative prices to flow through to retail markets. To go with that, the retail market should offer both critical peak pricing and critical off-peak pricing, Hogan said.

With peak pricing, utilities and system operators who anticipate a demand spike offer exceptionally high prices to generators. At those times, generators who could not sell at low prices may access returns high enough to cover losses if they can deliver.

Demand-side resources, perhaps as much as 20% of load from things like water heating and refrigeration, "will move if it gets the right price signals,” Hogan said. “It is not just batteries. If mid-afternoon solar over-generation drives prices to negative $20/MWh and prices spike to $60/MWh when the sun sets, a lot of people will move their demand to capture that $80/MWh differential.”

California regulators have a proposal to implement critical off-peak pricing but have not acted on it, he said. There has been opposition from traditional generators, but it would actually help them because shifting the load would smooth market price volatility. The most inefficient excess supply would, however, have to go out of business, Hogan added.

MISO’s Bladen described a third and now emerging fix. “What’s really important is grid operations getting the necessary support,” he said. “We are seeing a migration away from energy as the primary service toward ancillary services. Generators who can provide flexibility might access revenue recovery for what tomorrow might be the grid’s primary services.”

Xcel CEO Fowke seems to see a similar future. He recognizes the emerging heated competitiveness between flexibility providers. But, he stressed, in the rise of renewables, there is also a need for regulators who require that the planning process include both cost and reliability considerations.

Inadequately planned generation works fine “when you have a surplus of capacity,” Fowke said. “But it’ll be quite different when you don’t have a surplus of capacity.