Negative pricing
In economics, negative pricing can occur when demand for a product drops or supply increases to an extent that owners or suppliers are prepared to pay others to accept it, in effect setting the price to a negative number. This can happen because it costs money to transport, store, and dispose of a product even when there is little demand to buy it, or because halting production would be more expensive than selling at a negative price.[2]
Negative prices are usual for
Examples
Natural gas in West Texas
Natural gas prices in the Permian Basin, West Texas, went below zero more than once in 2019. Natural gas is produced there as a byproduct of oil production, but production has increased faster than the construction of pipelines to transport natural gas. Oil production in the Permian Basin is profitable, so the natural gas continues to be produced, but disposing of it is costly: producers must burn the gas (which is subject to regulations) or pay for space on existing pipelines. As a result, the price of natural gas becomes negative; in effect, producers of natural gas pay others to take it away.[5]
Oil in 2020
In March and April 2020,
Electricity
When demand for
Negative electricity prices happen as a result of uneven and unpredictable patterns of supply and demand: demand is lower at certain times of day and on holidays and weekends, while wind and solar production are highly dependent on weather.
This phenomenon occurs in
In certain markets, financial incentives for the production of renewable energy can more than offset the cost of selling power at a negative price.[18] In the United States, these incentives are found in the federal renewable electricity production tax credit (PTC) program and through the trading of renewable energy credits (RECs). Eligible generators that opt into the PTC program receive a tax credit for each kilowatt-hour (kWh) of electricity produced, over a period of 10 years for most types of generation. In 2020, this payment ranged from $0.013/kWh to $0.025/kWh, varying based on the type of generation.[20] The avoided tax from the receipt of a production tax credit can more than offset the cost of dispatching electricity at a negative price.[18][20][21] Separate from tax credits are RECs (in the United States) or green certificates (in Europe), tradeable instruments that represent the environmental benefits of renewable generation.[22][23][24] These instruments can be sold and traded, allowing generators to offset negative power prices.[25]
In
Onions in 1956
In the United States in 1956,
Installment receipts
It is possible for
In 1998, investors in Canada bought installment receipts for shares of
Effects
Typically, negative prices are a signal that supply is too high relative to demand. They can lead suppliers to cut production, bringing supply more in line with demand.[36][37]
Challenges
Electronic trading systems may not be set up to handle negative prices. If negative prices are a possibility, market participants must verify that their systems can process them correctly. This includes
See also
- Bad (economics)
- Negative interest rate
References
- ^ Sheppard, David; McCormick, Myles; Brower, Derek; Lockett, Hudson (20 April 2020). "US oil price below zero for first time in history". Financial Times. Retrieved 20 April 2020.
- ^ Resilience (2020-05-28). "Shutting Down Oil Wells, a Risky and Expensive Option". resilience. Retrieved 2023-04-30.
- ^ ISBN 978-0-691-17595-9. Retrieved 3 April 2021.
- ^ "Power Worth Less Than Zero Spreads as Green Energy Floods the Grid". Bloomberg. 2018-08-06.
- ^ a b "U.S. natural gas prices turn negative in Texas Permian shale again". Reuters. 2019-05-22.
- ^ a b c "One Corner of U.S. Oil Market Has Already Seen Negative Prices". Bloomberg. 2020-03-27.
- ^ a b c "Hundreds of US oil companies could go bankrupt". CNN. 2020-04-29.
- ^ a b Matt Egan. "Oil crashes below $19, falling to an 18-year low". CNN. Retrieved 2 April 2021.
- ^ a b c Watts, William. "Why oil prices just crashed into negative territory — 4 things investors need to know". MarketWatch. Retrieved 2 April 2021.
- ^ "CME Group, as oil contract plunges negative, says markets working fine". Reuters. Retrieved 3 April 2021.
- ^ a b "US oil prices turn negative as demand dries up". BBC News. 20 April 2020. Retrieved 2 April 2021.
- ^ Saefong, Myra P. "Oil prices went negative a year ago: Here's what traders have learned since". MarketWatch. Retrieved 2022-10-07.
- ^ a b c d e f g Reed, Stanley (25 December 2017). "Power Prices Go Negative in Germany, a Positive for Energy Users". The New York Times. Retrieved 2 April 2021.
- The Ottawa Citizen. Retrieved 2 April 2021.
- ^ "Iodine Pit - Xenon Peak - Xenon Pit".
- ^ "Xenon-135 Reactor Poisoning".
- ^ a b c "Negative prices: how they occur, what they mean". Stanwell. Retrieved 2 April 2021.
- ^ a b c d Deng, Lin; Hobbs, Benjamin F.; Renson, Piet. "Negative Bidding by Wind: A Unit Commitment Analysis of Cost and Emission Impacts" (PDF). IAEE Energy Forum. 2014 (3): 45–47. Retrieved 4 April 2021.
- The Ottawa Citizen. Retrieved 3 April 2021.
- ^ a b Lips, Brian; Inskeep, Ben. "Renewable Electricity Production Tax Credit (PTC)". DSIRE. N.C. Clean Energy Technology Center. Retrieved 3 April 2021.
- ^ "Negative Electricity Prices and the Production Tax Credit" (PDF). The NorthBridge Group. Archived from the original (PDF) on 2017-04-04. Retrieved 4 April 2021.
- ^ "Renewable Energy Certificates (RECs)". EPA.gov. United States Environmental Protection Agency. Retrieved 3 April 2021.
- ^ Shields, Laura. "State Renewable Portfolio Standards and Goals". NCSL. National Conference of State Legislatures. Retrieved 3 April 2021.
- ^ "What is a green certificate?". KYOS. Retrieved 4 April 2021.
- IRENA. p. 87. Retrieved 4 April 2021.
- ^ a b Gross, Daniel (18 September 2015). "A Bizarre Thing Happened in Texas: Wind Power Made the Price of Electricity Go Negative". Slate Magazine. Retrieved 4 April 2021.
- ^ a b Boettiger, Corey. "ERCOT Wind Energy Leading To Lower, More Volatile Pricing?". BTU Analytics. Retrieved 3 April 2021.
- ^ Unwin, Jack (15 April 2019). "Top ten US states by wind energy capacity". Power Technology. GlobalData. Retrieved 3 April 2021.
- ^ Price, Asher. "'An electrical island': Texas has dodged federal regulation for years by having its own power grid". Austin American-Statements. USA Today. USA Today. Retrieved 3 April 2021.
- ^ ISBN 978-0-471-53057-2
- ^ Breitinger, Walt and Alex (3 May 2020). "More commodities below zero? It's happened before". The Des Moines Register. Retrieved 3 April 2021.
- ^ "Negative Commodity Prices – Causes and Effects". Yahoo! News. Retrieved 4 April 2021.
- ^ "Introduction to Instalments" (PDF). p. 9. Retrieved 3 April 2021.
- ^ "Installment Receipts". www.sedi.ca. Retrieved 3 April 2021.
- National Post. Retrieved 3 April 2021.
- ^ "Power Prices Below Zero Point to the 'End of the Energy Mainframe'". The Energy Mix. 29 August 2018. Retrieved 2 April 2021.
- JP Morgan. Retrieved 2 April 2021.
- ^ Evans, Rich. "Negative-Priced Assets - Some Practical Considerations". Global Investor Group. Retrieved 3 April 2021.
- ^ Duncan, Felicity (22 July 2020). "The Great Switch – Negative Prices Are Forcing Traders To Change Their Derivatives Pricing Models". Intuition. Retrieved 2 April 2021.
- ^ a b "Traders Rewriting Risk Models After Oil's Plunge Below Zero". Bloomberg.com. 21 April 2020. Retrieved 3 April 2021.
- ^ "Switch to Bachelier Options Pricing Model - Effective April 22, 2020 - CME Group". CME Group. Retrieved 3 April 2021.
Further reading
- "MCX negative oil futures pricing mess: Jury out on contract law". The Economic Times. Retrieved 3 April 2021.