Sunday, November 23, 2008

A Negative Marginal Cost?

Subsidies can distort markets. In this case, wholesale electric power producers are paying customers to take their output.

In the first half of 2008, prices were below zero nearly 20 percent of the time. During March, when negative prices were most frequent, prices were below zero about 33 percent of the time. After mostly taking the summer off, negative power prices were back to near 10 percent in October.

This seems a little crazy. During these negative price periods, suppliers are paying ERCOT to take their power. Consumers (at least at the wholesale level) are getting paid for using power, and the more power consumers use the more they get paid.

Thanks to Michael Giberson at Knowledge Problem.

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