So, Texas constructed a market that allows it to take advantage of Federal dollars being credited to other market participants (energy providers) in the most efficient way possible.
The author didn't clarify the "complicated" market, but my assumption of the highest-price-to-everyone mechanism is that ERCOT only selects a limited subgroup of all bidders each auction period, according to whatever is most economical for ERCOT. So there is some incentive to keeping your bid low.
What I don't understand is how anyone who isn't benefiting from the tax credits could bid at or below zero. The author seems to indicate that wind did not meet 100% of the need during the negative price period and did not indicate anyone else was receiving tax credits beyond wind producers. So how was the highest price in the negatives? Someone had to have costs associated with the electricity they were producing within the 70% that wasn't wind-powered.
>What I don't understand is how anyone who isn't benefiting from the tax credits could bid at or below zero.
It's also a pretty cheap way of advertising a market opportunity and driving investors' expectations: your money would be better spent on a new aluminum smelting plant being our customers rather than a new coal or natural gas plant being our competitors.
Believe it or not, in the early days, the oil industry also had this problem of "excess supply". In the UK in the 1900s they dealt with this by lobbying Winston Churchill (before he was prime minister) to shift the navy from running largely on coal to running on oil.
It's not the highest price bid. It's the highest price bid among the cheapest set of bids which could fill demand. Say we need 100 units of electricity in the next hour, and the bids are 50 units @ $2/unit, 30 units at $5, 30 units at $10, and 30 units at $20. Then, to get 100 units, you only need to buy from the first three suppliers, who are offering 110 units between them. The highest price among those is $10/unit. The 4th supplier's price is higher, but he's not among the winning bidders.
That's what I'm saying. Let me rephrase within your example: How was the highest price bid among the winning bidders negative?
According to the article, not all of the electricity could be provided by wind. So roughly 70% of the capacity offered by the "winning bidders" came from non-wind sources which, presumably, require positive prices to sustain themselves. How was the highest bid among those selected negative?
As noted in the article, wind power is highly variable, but other sources have the opposite problem: Slow ramp up and ramp down times.
If you're running a massive coal plant (and nuclear is ten times worse), you can't just turn it off for 5 minutes if the last 5 minute auction didn't go your way. Even if you think the next 10-20 auctions won't be economical for you to win and you start the shut down process, you'll still need to get rid of that power you're generating in the meantime.
What (probably) happened is that the a combination of high wind production and low demand meant the system temporarily had a surplus of power, and some (non-wind) producers actually were selling power at a loss just to get rid of it because they couldn't wind their systems down fast enough. Which is a much more interesting story than "federal government subsidies wind". Shame Slate didn't talk about it.
Your point is an interesting one and leads me to an odd conclusion: the presence of wind producers in this market is not a requirement for negative prices.
Assuming the author is accurately describing the market, by definition, the bids of wind producers will always account for a minority of the capacity. Which means the other 70+ percent of the supply is coming from other producers. If your explanation holds, then coal producers and the like were bidding themselves at a loss, which seems like that is a state that could happen even in the absence of wind producers.
I can see how the wind producers are affecting this, but they're not a requirement. If there was a transition to considerably lower-usage electrical devices within Texas, the relative gap between demand and capacity of the existing producers would result in the same effect on the market: everyone scrambling to deal with ramp downs even at a loss. It's just that the wind farms produced that gap on the supply side instead.
no wind is not a requirement, but the variability wind adds is so strong this may never happen in practice without wind power.
if there was a general move to lower power use, the market would adjust to the lower level. it is the unpredictable variability that causes the negative prices.
Others have pointed out that other plants (nuclear especially) can't shift output quickly, so they'd rather pay to dump energy for a few hours than ramp down and ramp up again.
I wonder if some producers were counting on the "winner's curse". The auction pays out at the highest price that was needed, so if you want to sell at any price you might put in a negative price just to ensure you're picked.
The author didn't clarify the "complicated" market, but my assumption of the highest-price-to-everyone mechanism is that ERCOT only selects a limited subgroup of all bidders each auction period, according to whatever is most economical for ERCOT. So there is some incentive to keeping your bid low.
What I don't understand is how anyone who isn't benefiting from the tax credits could bid at or below zero. The author seems to indicate that wind did not meet 100% of the need during the negative price period and did not indicate anyone else was receiving tax credits beyond wind producers. So how was the highest price in the negatives? Someone had to have costs associated with the electricity they were producing within the 70% that wasn't wind-powered.