How can power/electricity prices be negative? Bloomberg shows this chart:



I understand the above chart to mean that consumers were actually paid to use electricity. (Please correct me if I'm mistaken.) 

I was wondering how this is possible? How is the power/electricity market special and different from other markets? (Or perhaps the German electricity market is special.)
Yes, customers who were exposed to day-ahead wholesale market prices were paid to use electricity.

It is a combination of several different factors that make the day-ahead wholesale electricity market special.

Firstly, very few electricity consumers participate in it directly. So the demand side is very illiquid, with very low short-run elasticity - and it quickly becomes perfectly inelastic.

Secondly, there's very little time-arbitrage. The market for electricity at 0500 and the market at 1500 are two separate markets: there are very few arbitrageurs who can buy at 0500 and sell at 1500. That's because until recently, there's been very low rewards for doing so (more on this, below).

Thirdly, there are several suppliers for whom reducing supply would incur expense: so, for market-clearing purposes, they have negative short-run marginal costs. There are two ways that can happen.


very inflexible conventional generators (usually nuclear) just can't turn their output up and down every hour or two, without incurring maintenance costs.
generators with contracts that enable them to sell all their output at a pre-specified positive price: they would need wholesale prices to go negative by the more than that amount, to make it worthwhile for them to reduce their output.


Germany now has such a high combination of those two kinds of generators, that there are times when their combined output is greater than domestic consumption, and that's when prices go negative.

Fourthly, although Germany shares a grid with many other continental European countries, the opportunities for spatial arbitrage are very limited, because total German generation is much much larger than the interconnection power capacity to the rest of the grid: so that interconnection capacity strictly limits the amount of energy that can be arbitraged with other countries within a given trading hour.

Finally, though it seems strange, these negative prices are a good thing. They're a temporary condition that will only last for a transition period, as electricity markets decarbonise. At the moment, we've got transmission networks and market structures that were designed for, and built around, excessively-polluting suppliers such as coal and gas. We have to stop that pollution - the cost of it way exceeds the benefits. So, the industry has to change structurally, and markets and networks will have to change too.

Coal- and gas-fuelled generators have been very helpful for in-day markets, because they can rapidly change the amount they supply. So the near-absence of participation from the consumption side hasn't been a problem at all, until recently - and why the rewards for arbitrageurs were low. But now, there is an increasing number of hours when those very flexible generators no longer dominate the market.

As we move to a grid that no longer has that supply-side responsiveness, we need responsiveness from new arbitrageurs, and from the demand-side. Period of negative pricing provide strong incentives for those new market participants to come forwards. And, as more and more of those new participants enter the market, the negative prices will become rarer and rarer.

So this isn't just Germany. It has happened, and will happen, elsewhere too.