One of the benefits of renewable energy is that it pushes down the price of electricity when the wind blows or the sun shines. Besides lowering energy bills, that kills the profitability of traditional “baseload” power plants – i.e. those burning coal or splitting atoms – and forces them to close, to the rejoicing of all.
Or so we’ve been told. But can there be too much of a good thing?
This is a problem where I would value your input, my dear reader. Please share your thoughts on whether I’ve made any mistake or overly simplified the situation, and what could be done to correct this problem. But first, let me explain.
In order to understand the possible problem, look first at the Fig. 1 below. The graph shows a rather typical weekday load in the combined German/Austrian electricity grid (26.3.2014, to be precise: source). From nighttime low, the load increases during the day, and falls back late in the evening. You may also note the contributions of wind (blue) and solar (yellow) power.
Figure 1: Total electricity production in the combined German/Austrian electricity network, 26.3.2014.
In Fig. 2, the demand is unchanged (black), but renewable production has been increased, by a factor of eight for wind power and by a factor of four for solar power. Such a scheme could, theoretically, deliver some 75% (or more – see below) of electricity from low-carbon sources. This would be a great accomplishment, even though France and Sweden did better already in the 1980s. (Note that in reality, increased penetration would slightly flatten the shape of production peaks, due to increased geographical diversity. But that’s not large enough impact to be relevant for the purposes of this experiment.)
Figure 2: Production when solar PV generation is increased 4 and wind production 8 times from current levels. Black curve denotes demand.
As you may note, there are times when power production greatly exceeds the demand. In terms of production “lost,” this in itself is not a great problem: some 13% of total solar production and about 10% of wind production go above the demand, and are either wasted or need to be stored for future use. Many renewable energy advocates – particularly those advocating for renewables only energy scenarios – would stop here and point out that overproduction is not a terribly big problem: a loss of 10-15% of daily production may be acceptable, if the prices of renewable energy sources continue to fall.
But it may get worse. Much worse.
In a deregulated electricity market, the price of electricity is effectively determined by the lowest cost marginal production connected to the grid. The marginal cost of producing electricity with solar PV and wind turbines is close to zero.
Therefore, what will happen once renewable production exceeds total demand?
Every renewable generator wants to make money from selling electricity. In other words, every producer wants to be in the group of producers that gets a chance to sell their electricity. Furthermore, every generator has an incentive to, basically, sell at any cost, as long as they at least cover very low marginal cost. Once production exceeds demand, every producer must lower their asking price to the lowest cost they can bear, because otherwise they would be left out of the market: the next door neighbor can always undercut any asking price higher than marginal cost. This creates a bidding war – a race to the bottom, where the bottom is some cents per megawatt hour, or even less. In other words, the moment the production exceeds demand, the price of electricity will collapse.
Unfortunately, if there is excess production, it’s not just the excess production that’s worthless. Unless I’m mistaken, practically all production during hours when a) there is excess production and b) the marginal costs of that production are close to zero is nearly worthless. Figure 3 shows what will happen.
Figure 3: Electricity that can be sold at higher than near-zero marginal cost of solar/wind generation. Black curve denotes demand.
During daylight hours and (in this case) in the evening, electricity is basically given away for free. In fact, under some circumstances, the price can be negative: you may get paid for using electricity. This is because electric grid will fail just as easily under excessive load, as it will fail if the load does not meet the demand. Therefore, the grid operator may sometimes have to offload excess electricity to anyone who can waste it.
What’s the impact? About 20% of wind power production is worthless, which is bad in itself. But it’s the day-only solar that really takes a hit: massive 74% of total solar output must be handed out for pennies. In the worst case, someone has to pay to get rid of the production.
You may imagine what this does for the profitability.
The renewable boosters are right on one thing, though: this does wreak havoc on the profitability of existing plants as well. The sad thing is that they’re still needed: note the still-black areas on the Figure 3. This means that conventional plants, too, almost certainly need subsidies simply to keep them in reserve. Furthermore, they still account for some 25% of the total daily production. If that is met by fossil fuels, there is practically no chance that climate targets can be achieved.
What happens then?
That was the theory, but how will it play out in practice? Here are some potential scenarios; feel free to add yours in the comments section below.
1. The most obvious solution might be to store the excess electricity for use later, perhaps by converting it to synthetic methane. If all the electricity produced in Fig. 2 could be losslessly stored and recovered, some 86% of daily electricity might be covered from renewable sources. (Real figure would, of course, be much lower.) The problem here is that storage technologies are still very much under development. Much depends on the progress of energy storage technologies: for the reasons outlined above, they are far more important components for a sustainable energy system than advances in low-cost renewable generation. Given sufficient amounts of sufficiently advanced (and cheap) storage, we would have no problem managing large low-carbon penetrations – both renewable and nuclear. However, in reality, there probably will not be storage options that are scalable enough at a low enough price.
2. The costliest option probably would be to continue paying subsidies for renewable energy generators irrespective of whether their electricity is needed or not. The cost-benefit ratio for this option seems to be remarkably low, given that increased penetrations will swiftly increase the ratio of zero-price electricity to paid-for electricity.
3. Under free market, the renewable energy revolution will for all intents and purposes stop dead on its tracks once peak production regularly begins to catch up with total demand. No amount of foreseeable cost reductions will make solar PVs a competitive energy source when 75% (or more) of their production must be given away for free. Figure 4 below shows one potential scenario, where solar production increases 3.3 times, and wind power 5 times from current levels. In this case, conventional energy sources must cover for 60% of the electricity demand. This is totally incompatible with any scientifically credible electricity decarbonization plans – not to mention the decarbonization of the energy system as a whole. Furthermore, the profitability of conventional plants will be poor or nonexistent, necessitating heavy subsidies, while high share of low marginal cost production will nevertheless drive down electricity prices during peak production hours, necessitating still more subsidies for renewable generators. This is the worst case scenario: punishing subsidies all round, no worthwhile climate progress. Sadly, it is also the most likely one, in my opinion.
Figure 4: “Sustainable” increase in renewable generation. In financial terms, that is.
4. Demand management, i.e. smoothing of the load curve, will not help much. In particular, solar PV installations will hit a wall no matter how much demand management there is.
5. Supergrids may help some, if excess electricity can be exported to geographically faraway locations and, conversely, excess production from those locales can be used to firm up the grid. However, Germany + Austria are already rather large locales, and it’s an open issue whether adding more Central European countries to the grid would do much good. To time-shift the solar production peak by three hours to both directions (when it could really make an impact) would require building of equivalent amount of solar panels in Russia and in the Canary Islands, and anywhere in between. The chances of the former occurring in the current geopolitical climate are remote to say the least.
6. One possible solution would be for the producers to gang up and share the loss, i.e. curtail a percentage of everyone’s production if it threatens to exceed demand and crash prices. Alternatively, the Government could force the producers to do so. This could alleviate the problem somewhat, although prices would still suffer during peak production hours. Unfortunately, such cartels are probably illegal, run counter to the ethos of distributed generation, and furthermore, would produce an irresistible incentive to undercut the agreed upon price target – because any one producer would gain more by selling 100% of her electricity at half the price than selling 25% of the electricity at full price. This would, over time, still drive the prices towards marginal cost.
7. In the longer term, the availability of free electricity will stimulate innovation in electricity use. Insofar as it goes towards energy storage technologies, or to technologies that could effectively adjust their production to absorb peak renewables production and therefore reduce demand for dirty energy, that’s a good thing. But there are no guarantees that the cheap energy will only be used in ways that offset dirty energy production elsewhere: just as likely is that it’s simply used to increase economic activity during hours when electricity can be wasted to just about anything.
For example, one conceivable end result might be a sharp decrease in the price of aluminium: aluminium smelters can conceivably be operated relatively profitably as peak production absorbers, and once the major energy cost is effectively taken away, price of aluminium will drop. As a result, it will be used for more and more applications, thus stimulating demand for more aluminium. This has obvious benefits, but from the viewpoint of environmental protection, increased (virgin) production may be a step backwards.
In conclusion, we may very well have too much of a good thing. And this is something that bears remembering the next time someone tells you that renewable overproduction is not a problem, or that renewables are reducing electricity prices and making existing plants uncompetitive. Or applauds, when 50% (or some other figure) of daily electricity production is met from renewable sources.