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Comment by keule | Hacker News Reader

I understand put options and short selling, but how on earth can the price of a commodity sink below zero? How can you make a „sell“ order that is negative? Can someone explain please?

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Happens frequently in CAISO midday during shoulder months (https://www.caiso.com/PriceMap/Pages/default.aspx). Renewable generation produces a lot (sunny, decent wind) and electricity usage is so low, that supply exceeds demand. Electricity has to go somewhere to keep the grid balanced, so the utilities will wholesale electricity at negative rates.

Isn't it very easy to "dump" electricity? Why even sell it?

How would you dump it at this large scale? The point of “selling” it at negative price is to encourage consumers to connect loads on the grid in order to burn this extra energy to maintain grid balance.

Is it so easy? Suppose someone told you to 'dump' 100MW right now, for 3 hours. How would you do it?

As a Finn, probably just send out a message on some social media platform that people need to start turning on their saunas for the stability of the network. (Alternatively, like fingrid did, send a notification to my phone saying to "consume energy normally, as the pricing issue does not reflect energy availability")

Even a fairly small electric sauna is ~10 kW, so that's be just 10000 homes solving that problem.

Those saunas wouldn't get turned on if they weren't getting paid for the trouble.

Very few people get paid during this market anomaly. Most people have fixed rate contracts, and the few that do have variable rates, even fewer have ones where the negative price would be passed on to you.

Transmission cost and taxes will still be present, so this is more of a "hey it's going to be a societally good thing to go to the sauna today instead of tomorrow, consider it!" (Also, the saunas are definitely in use, don't worry, nobody's going to pass up the opportunity to say they went to the sauna for a good cause.)

Or, via lower price - negative if necessary - you let someone else go to the trouble, via facilities that they themselves invested in. Also in systems like this, there is not necessarily anything special about "zero" or "negative". It's just "less than the previous number" or "more incentive this way than the previous number".

The idea that negative prices are something weird is pretty silly.

A negative price indicates that the person sellers disposal technique is worse than the buyers disposal technique. In other words, the market is working as intended.

Nobody is complaining about the cost of garbage disposal where people are paying for having less (!) stuff.

There get to be points in some commodities where providers temporarily do want to pay for people to take their product. Electric power is one where supply is not particularly elastic and does need to be disposed of when there is too much for grid stability.

This has happened a couple of times with oil pipelines as well.

Markets tend to figure these things out quickly though.

Commodities contracts that settle in the actual commodity and not in cash are actual obligations on both sides to deliver and take delivery. At some point in order to get rid of the obligation to take delivery at some point people are willing to pay to get rid of their contracts. Sometimes this happens when speculators make crazy bets during instability.

Happened with crude oil in 2020. If you’re still going to produce it but have no where to store it you need to pay people to receive a shipment of 10,000 barrels.

So why don't they put that towards their own capital in terms of expanding retention capacity?

The traders have no place to store it. No method to retain, unless you pay rent, which puts pressure on your trade.

So why are they bitching about this or is it simply like a niche interest piece? Like why should anybody care about this?

It's fun to quote. Much less fun to explain that it's the normal process.

Im exhausted already

how it was explained to me:

its like if you booked a prostitute to come over on Friday, on Friday you found out your partner was coming over and you need the full service sex worker to go somewhere else but have nowhere to send them, so you attempt to pay anyone to take the booking and everyone else is in the same predicament and eventually someone’s going to take the loss of having the prostitute around their partner and mess up their social situation but will be paid handsomely for it

relatable commodities problem

This sounds like something a toxic middle management bro might say to be edgy.

If this is easier for you to understand, you might have a problem.

you’re right, sex workers take deposits for this specific reasons and have autonomy and agency, it’s weird and outdated to deny [probably] women that

thanks for pointing that out it’s a big plot hole and very much unlike the energy market. although maybe deposits would be an improvement to the energy market

a deposit has nothing to do with it, you need to dump the electricity or the entire grid will have a bad time.

reiterating the analogy

no, because it's not your typical cost of carry problem. Oil barrels will not spontaneously combust if you leave them at the plant, and you can control the rate at which you produce them. And the problem is contained at the point at which a seller is left holding the goods.

The electric grid will always distribute the load _somehow_, but the way that happens if there's not enough buyers will have far reaching consequences that are uniuqe to this utility. AND you do not have full control of the production of electricity, which means you don't have the means to react ro a surge unless you have enough sinks distributed _across_ the network.

"I will pay you to take this"

Nowadays it is mostly renewable subsidies without a clause for negative price, marginal cost is 0, if they are paid at a fixed price they will produce and dump it on the market, in Nederlands they big glasshouse turn on the light when the sun is at its peak and earn money. And there is also inflexible baseload, that can't cycle up and down at the rate of changing demand or renewable ramp.

You need to dump product you can't store.

Happened to oil during early covid: https://www.nytimes.com/2020/04/20/business/oil-prices.html

Ah thank you. I remember now. Still weird that this can also happen (and is allowed to happen) in an energy market.

This is in fact a very good feature. When power is cheap or negative it's because there is more generation than load in some segment of the grid. To fix this you can tell people to stop generating, you can tell people to start loading, or you can just drop the price and let both happen on their own.

There are targetted ways this is done when the difference is so big it threatens grid stability, but its often better to let the market handle the gross imbalance on longer timescales when grid stability is not threatened.

There are some things markets are very good at. This is one of them.

> There are some things markets are very good at. This is one of them.

Ironic in a thread about the market making up a totally imaginary generation surplus.

10-20% of Finnish retail customers are on spot market based contract, and stand to save up to something on the order of 0.40€/kWh consumed (net after taxes and fees) off their electrical bill for the reminder of the day. I suppose every market-rational consumer would have a 10kW electric space heater outside melting snow on the ground, maxing out their supply.

No need to waste power melting snow, instead we can all turn on our (electric) saunas!

It's actually particularly important that prices be able to go negative in an electricity market, because it's physically impossible to store electricity: it must be generated and consumed at the same moment. "Electricity storage" is shorthand for "conversion to and from a different kind of energy", which from the perspective of the grid is just a kind of consumption or generation. And if there is too much unused power on the grid, it will damage it.

No the opposite is the case. How would you expect a zero minimum price to be enforced? All waste products would have to be disposed by the government for free and the thing is that this costs money. Negative prices signal a desire to get rid of something.

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