Possibly, but rarely
The majority of financial market participants would agree on the dogma that commodity prices can never be zero or negative. However, it is not always true in the electricity markets. While zero or negative prices aren’t especially common, they do occur. This can create real chaos in many financial calculations. For example, for an asset with a negative price, dividing by the previous price will give an undefined or misleading result if prices are zero or negative.
The electricity market price—just like a price of any other commodity—is driven by the economics of supply and demand, which in turn are determined by several external factors such as climate conditions, seasonal factors or consumption behavior. To better understand the reasons for the negative prices, one needs to look further into the mechanics of the electricity generation process.
The theory
In the electricity markets, power producers generate electricity at a scheduled rate. Power grid operators oversee the transmission lines, also called the transmission grid. Due to the physical properties of electricity, it is almost impossible to store the excess during periods of low consumption for later use during periods of high demand. If consumption is low, the only way to bring the balance into the demand/supply equation and preserve the transmission line’s integrity is to shut down the power plant.
The reality
Changes in the external environment may lead towards oversaturating the market with electricity. For example, in an unusually cold summer, consumers will use less electricity to power A/C units.
Because of the costs associated with restarting power plants, many power plant operators would rather give power away for free than shut down their operations. Unfortunately, too much voltage put on the power lines can destroy the whole power transmission grid. In order to incentivize producers to shut down, power grid operators actually can charge power producers for every megawatt of power they produce. In such odd periods of negative prices, consumers can actually get paid for turning on all the lights—or so we, as consumers, might believe.
Lose-lose…
Eventually, power producers need to allocate the cost of operating at negative prices, and that cost can get passed back to the end consumers in the form of higher electricity prices. End consumers might actually pay for not turning on those lights. It seems like a lose-lose situation then.
As with any other commodity, electricity producers have a wide variety of financial tools available to hedge against price swings. Market price for electricity is a variable that depends on multiple components, and power producers can predict it only so much.
It is necessary for producers to use multiple analytical tools and hedging techniques to make sure that their businesses are profitable at all times, even during periods of low consumption. Creating financially sound hedging strategies by using the latest state-of-the-art tools is of key importance.
Win-win!
Today we are turning on the lights, figuratively speaking, on a new energy exchange, Nasdaq Futures (NFX). With the NFX launch, energy brokers can access a new trading venue to execute their energy hedging strategies, all while saving on the trading, clearing and market data fees according to NFX.
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| An NFX workspace on the next-gen TT platform featuring the new Blocktrader widget. |
As announced in March, TT is a preferred NFX vendor. NFX is available on both the new TT platform and X_TRADER®. We are offering a full suite of trading, analytics and risk management tools with functionality built for NFX products as well as tools to aggregate energy products that trade across multiple exchanges. Check out some of the new tools, like the Blocktrader widget we built specifically to support the needs of energy brokers.
We are excited to add NFX to our portfolio of connected exchanges and bring additional trading opportunities to our customers. Because at the end of the day, power producers and their brokers should be able to operate and hedge efficiently in the electricity and other energy markets so that we, as the end consumers of electricity, do not have to pay for not turning on the lights.