The Increasing Trend of Negative Energy Pricing and Renewable Energy Curtailments in California – Is This a Problem or an Expected Outcome of a Rationally Functioning Market?
There has been a lot of discussion regarding renewable energy curtailments, and some believe it’s a big problem. I dug deeper and, as you’ll read, curtailments and negative pricing are not as big of an issue as some may think but somehow it gets a lot of attention.
California has experienced a significant increase in the number of hours when energy prices turn negative, a trend most prominently observed during the first six months of the year when demand is low. It is exacerbated when hydroelectric generation must release water as the snow melts during spring just as days are getting longer and solar starts producing more.
The electricity market isn’t unique in yielding negative prices that result in energy suppliers paying to produce electricity. Take for instance the Christmas tree market. If I want to buy a Christmas tree before December 25, it will cost over $100 (unless I buy a Charlie Brown Christmas tree). But what if I wait until December 26 to buy a Christmas tree? I can have my pick of any tree on the lot for free. Sometimes the lot owner might even pay me to haul away a truckload of trees. The quality of the tree hasn’t changed between December 24 and December 26. But timing has changed the market conditions and thus the value of the product.
Similarly, in the wholesale energy business, timing affects the market value of energy products. Suppliers respond to the market and elect, rather than be forced to pay to generate during certain hours of the year. In fact, as you see below and in the summary report below the electricity market is behaving rationally and the overall volume and value of renewable energy curtailment is a small fraction of the wholesale electricity sold and consumed.
In 2023, the total CAISO estimated wholesale cost of serving load in 2023 was about $14.5 billion or about $65/MWh for 223 TWh of customer load served by the CAISO. This represents a 32 percent decrease from about $95/MWh or $21.6 billion for 230 TWh in 2022 (2023-CAISO annual-report, Page 86). Since 2024 similar numbers are not publicly available, we assume that in 2024 the amount of load served and the wholesale cost are similar to 2023.
What are curtailments?
When the system is experiencing oversupply, CAISO turns to the market to provide an economic signal to reduce generation. Suppliers will bid a price $/MWh and an MW quantity into the CAISO market. If supplier 1 (S1) bids 50 MW at negative $26/MWh and supplier 2 (S2) bids 50 MW at positive$20/MWh and the CAISO is buying 50 MW for a given hour, then S1 is marginal because the CAISO, as a rational buyer, would elect to buy the lowest cost product. S1 sets the energy clearing price for the entire system. In this case, it is negative $26/MWh,
When the system is experiencing oversupply, CAISO turns to the market to provide an economic signal to reduce generation. Suppliers will bid a price $/MWh and an MW quantity into the CAISO market. If supplier 1 (S1) bids 50 MW at negative $26/MWh and supplier 2 (S2) bids 50 MW at positive$20/MWh and the CAISO is buying 50 MW for a given hour, then S1 is marginal because the CAISO, as a rational buyer, would elect to buy the lowest cost product. S1 sets the energy clearing price for the entire system. In this case, it is negative $26/MWh,
- S1’s bid at negative $26/MWh sets the energy clearing price. S1 will continue to operate but must pay to produce energy because the energy clearing price is negative.
- S2 will not get awarded, its offer or bid to operate and generate renewable energy is too expensive compared to S1, which is willing to pay to generate. S2 is not permitted to operate and will have to shut down.
The question is whether S2 was forced to curtail its output or chose not to generate energy because the market clearing price was not high enough to satisfy its $20/MWh offer. The CAISO will buy the least expensive energy, in this case purchasing 50 MWh from S1 not only for free but S1 will have to pay 50MWh x $26/MWh =$1,300 to generate. This is a well-functioning market with an outcome based on the supplier’s own bid for the CAISO market.
What is the volume of energy suppliers are paying to generate as with S1?
| Year | Day Ahead Supplier MWh | Suppliers’ Payment to CAISO | Hours Per Year Priced Between $0 to Negative$26/MW h | Hours Per Year Priced Less Than Negative $26/MWh |
| 2023 | 3,700,265 | $23,277,923 | 188 | 0 |
| 2024 | 13,347,076 | $159,883,667 | 575 | 62 |
| QTR1 | 3,799,606 | $42,651,353 | 161 | 22 |
| 2025 | ||||
| Total | 21,560,547 | $226,606,744 | 963 | 84 |
In 2024, suppliers paid the CAISO $160 million to supply 13.3 TWh of energy.
What is the volume of energy suppliers’ bids that are not “in the money” and are paying to generate as with S2?
- S2’s renewable generation bid was higher than the energy clearing price of negative $26/MWh and was not able to generate. We label these intentional economic out-of-the-money bids as curtailments.
- In 2024, generation curtailments were 3,423,377 MWh, which was a 29% increase from 2,659,526 MWh of renewable generation curtailed in 2023.
- In 2024, the 3.4 TWh generation curtailments, although voluntary, represent 1.4 % of the CAISO’s annual load.
- The potential CAISO market revenue of suppliers such as S2 at $15/MWh (the average energy price during solar hours which I used as a proxy for market value) results in approximately $50 million, which is 0.35% of the wholesale energy cost. The $50 million number is conservative and may be a lot lower.
What’s the big picture? In my mind, these numbers are small compared to the benefits of renewables.
Who Benefits?
S1 produces energy but must pay to produce. Load Serving Entities (LSE) collect, through the CAISO, all the payments from generators that pay to generate although S1 is not totally in the red as there are other bilateral revenue streams outside of the CAISO markets. For instance, there may be power purchase agreements between LSE and S1 for Renewable Energy Credits (RECS) and other payments such as Resource Adequacy (RA) that S1 may collect.
Some may say that S2 is stuck with a curtailment and others may call it “not in the money”. Whatever the case may be, suppliers such as S2 do not receive or pay the CAISO. However, depending on their bilateral contract with the LSE, they may collect a payment from the LSE to be curtailed.
In 2022, CAISO collected $23 million or 0.15% of CAISO’s wholesale energy cost and is 1.6% of the CAISO load.
In 2023, CAISO collected $159 million or 1% of CAISO’s wholesale energy cost and is 5.8% of the CAISO load. This is quite an increase and is much more interesting than curtailment.
In QTR1 2025, we already surpassed all of 2023 when suppliers paid CAISO $42 million to generate 3.7 TWh.
To provide some context, the 2023 bid recovery payment from CAISO to gas-fired generation was $289 million. So, these negative price payments by renewable energy suppliers or curtailment are not as big as many may think!
What does all this mean? Markets work! Suppliers such S1 are bidding into the CAISO market and CAISO has the tools to balance the system. CAISO receives these payments and allocates them to LSEs. Negative prices are an effective way to manage the grid, and revenue goes to the LSEs. Whether the LSE passes these savings to the retail customers is another chapter and is much more complicated.
Suppliers such as S2 are not “in the money” or curtailed by choice and are a small fraction of the entire market.