In South Australia (SA) there's a few market-specific reasons why floor prices (here -$1000/MWh) occur:

1. Older wind farms have PPAs (essentially a swap) that have no floor. They make the strike price regardless of the market price, so they bid at floor to ensure dispatch.

2. System strength constraints [0] usually limit the amount of wind and solar in SA when there is a lot of intermittent generation (SA is never 100% wind and solar because of this). Because of the way constraints are implemented, these generators are incentivised to bid at floor to ensure maximum dispatch. If everyone bids their capacity to floor, everyone gets turned down 'equally'. If you bid above floor (say at your marginal running cost), you get turned down more (and probably off completely).

3. The market operator (AEMO) also routinely intervenes in the market, directing gas generation to remain on for system strength. AEMO strangely implements this with two separate prices [1]. One for dispatch (accounting for the intervention) and one for payment (an estimated price without intervention). It's often the case that the dispatch price is at floor, again incentivising everyone to bid at floor to ensure dispatch, while the payment price is at or above $0/MWh.

This usually results in a very delicate market where a large amount of capacity is bid at floor (-$1000/MWh) and the next bid is usually at or above $0/MWh. A reduction in demand (hello rooftop PV) causes the price to fall off a cliff. The other thing to remember here is the settlement price (the actual price that is paid to generators) is an average of the six 5-minute dispatch prices over a half hour which can distort 5-minute price signals (there is a rule change fixing this coming into effect in 2021).

Negative prices are definitely useful, but in this case I think these issues distort the signals. I'm not sure what the solution is, there is some talk of a market redesign [2] (but I'm not sure that's a great solution either).

[0]: https://www.aemo.com.au/Media-Centre/South-Australia-System-...

[1]: https://aemo.com.au/-/media/Files/Stakeholder_Consultation/C...

[2]: http://www.coagenergycouncil.gov.au/publications/post-2025-m...

user:	bmada
created:	May 13, 2017
karma:	4