Bursts of Free Power Raise Red Flags for Green Tech Investors

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(Bloomberg) — Something strange is happening in Europe's energy markets: Prices keep falling below zero.

Solar parks on the Spanish plains and wind turbines above the Norwegian fjords were so productive in May that a record share of clean electricity flooded the grid. Sometimes, supply greatly exceeded demand, and producers had to do something with all the energy.

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For more than a million consumers, that meant free electricity to heat their homes or charge their cars. While this phenomenon is good for them, it is happening more frequently, raising concerns among investors about how much renewable energy they can build in the $800 billion market before returns start to decline.

“Negative pricing will slow down the deployment of renewable capacity for most players,” said Axel Thiemann, CEO of solar developer Sonnedix. “This affects your ability to invest at reasonable levels.”

Electricity is traded on wholesale markets in a similar way to oil and gas. Negative prices are not new, they first occurred in Germany in 2008, as the country increased wind and solar energy production.

But it has been rare until now.

There has been a twelve-fold increase in the incidence of negative wholesale prices in the past year, according to the European Union market monitor known as ACER. An agency report issued last March described it as an “explosion,” with the largest number of cases in the northern region.

Germany, Europe's largest energy market, had about 300 hours at prices below zero last year. That could double in 2024, according to energy analytics firm EnAppSys Ltd.

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In the UK, the number of passive hours will grow five-fold by 2027 to exceed 1,000, industry consultant Modo Energy said.

“It's a dynamic that we'll continue to see,” Anna Borg, CEO of Vattenfall AB in Sweden, said in an interview. “We have to live with that.”

So what is the solution for producers and investors? The obvious thing is to build more batteries, from refrigerator-sized installations in someone's home to rows of shipping containers in a field. They store excess electricity for distribution during times when the wind is not blowing or the sun is not shining.

“We need to manage the intermittency in the market,” Birgitte Ringstad-Vardal, CEO of Statkraft AS, said in an interview with Bloomberg TV. “Negative prices are also an opportunity to create value.”

This phenomenon is spreading rapidly outside Europe as well.

In Australia, prices in the national electricity market fell below zero by a record 14% compared to last year, according to BloombergNEF. This proportion has increased steadily since 2018, and capacity issues are expected to worsen as new renewables and rooftop solar continue to be built.

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Parts of California saw prices fall deeper into negative territory amid a wave of new solar projects and lower gas prices. During April, there were 592 hours during which electricity was filtered below zero – already more than last year's total.

The irony is that building solar and wind farms fosters conditions that can discourage building more — something called energy price cannibalization. Operators may be reluctant to make future investments because they are not getting enough money for the clean energy they produce now.

The impact is now so strong that interest in investing in solar parks is declining sharply, said Alexander Hock, spokesman for the German Association of Local Public Utilities. The group represents more than 700 companies nationwide.

Regular recurrence of sub-zero prices could become the new normal, with Europe generating more than two-thirds of its energy from renewable sources by 2030, BNEF says.

“We still need to look at different games that don't get that exposure,” said Scott McKean, who co-leads the sustainable infrastructure team at Denham Capital.

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Producers with coal, gas and nuclear plants – including Electricite de France SA, RWE AG and Vattenfall – sometimes reduce or even shut down their production to make room for renewables on the grid.

At the same time, consumers benefit. An increasing number of suppliers are attracting people who realize that there are savings to be made by being more proactive and adjusting their consumption to times when prices are lower.

The Tibber app tracks the wholesale market – hour by hour. When prices fall below zero, some of its 1 million customers get their money back.

Co-founder and CEO Edger Vardal Aknes said the company expanded beyond the Nordic countries in the past year, and its biggest growth markets are Germany and the Netherlands. More traditional facilities are increasingly offering the same service as well.

“When you get negative rates, you charge your car to the max, heat the house an extra degree or two on top of turning up the water heater,” said user Kim Paulsen, who lives north of Gothenburg, Sweden.

Ed Porter, director of Modo Energy, said subzero price growth will not abate until the mid-2030s. Europe's energy storage systems would then have to be large enough to absorb the surplus and have a significant impact on prices.

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There could be a seven-fold increase to more than 50 gigawatts in capacity connected to transmission grids by the end of the decade, according to Aurora Energy Research Ltd. The UK, Italy and Ireland are the three largest markets for investment in storage.

The UK is expected to quintuple its energy storage capacity by 2030 through auctions and accelerating the connection of batteries to the grid.

Germany is the largest market for residential batteries, according to BNEF research.

Vattenfall is focusing a larger share of its 40 billion kroner ($3.8 billion) investment plan on flexible assets to help absorb surplus electricity. This includes batteries that work in conjunction with wind and solar collectors, Borg said.

Sonnedix's Thiemann oversees a solar development pipeline that extends around the world. Despite the rapid growth of the storage industry, he is cautious about where he will spend next.

“One thing is that we have the sites and the ability to spread out, and the other question is that people like us have the confidence and long-term stability to put the shovel in the ground and really build,” Thiemann said.

-With assistance from François de Bauby, Petra Sorge, Thomas Gualtieri, Francine Lacqua, David Mohammadi, and Sahaj Sood.

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