Graphic of the Week: Having too much and too little renewables – at the same time

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.

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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.)

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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.

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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.

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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.

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About J. M. Korhonen

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15 Responses to Graphic of the Week: Having too much and too little renewables – at the same time

  1. Note, too, that this problem is particularly acute when the ownership of renewable generators is widely distributed. In centralized systems, there are fewer players, which makes it easier to reach agreements for loss sharing. (Although that may be illegal under current EU competition rules.)

    But if there are thousands of owners each selling electricity at any price above marginal cost, it’s very hard to avoid a race to the bottom. Unintended consequences, perhaps?

  2. Another note (thanks to Mikko Särelä): the above text does not account for price increase during off-peak hours. It’s feasible that the off-peak electricity price will rise so much that, for example, solar PV producers will get so much more money from their 26% share of off-peak production, that installing additional panels will be profitable.

    However, this depends on the assumption that conventional power plants will die out because their economies (investment and maintenance costs) cannot support intermittent operation. If fossil plants are subsidized, as they now begin to be in Germany, this will damp the rise of off-peak prices.

  3. Still more good comments from Facebook discussion: Aki Suokko mentions that several conventional plants – most notably coal plants – have long start-up/shut-down delays. Therefore, they might be producing some electricity even during peak renewable production hours. This will cause additional problems: if renewable electricity has preferential access to grid, it may cause negative electricity prices.

    I assumed that in the future scenario (Fig. 2), few if any of these slow plants are still operational. This may be an optimistic assumption.

  4. Proteos says:

    Don’t look too far, what you point out is very true. And this problem of the price of the electricity from wind or solar is already present in Germany, even when wind is only 8.5% of total production and solar about 5%. Here’s a blog post I have written that backs up what you say with figures.

    http://epi.proteos.info/index.php?post/2014/02/27/Les-subventions-%C3%A0-l-%C3%A9olien-et-au-solaire-sont-parties-pour-durer-%28version-2%29

    It’s in french, but the pics are pretty telling I think (you may try google translate). Already, wind would be accepting a rebate of 15% on the baseload price on the free market.

    What is the likely consequence? Well, someone would have to define a price for wind power and this price would necessarily have to be backed by the state’s authority. Or be forced to buy some proportion of wind as part of forced portfolio composition.
    If you think that the current market organization of the electricity market can not work in a future with lots of renewables, you are not alone:

    http://www.strategie.gouv.fr/en/2014/01/report-crisis-european-electricity-system/

    • Thanks Proteos, your article was very informative. Google Translate was adequate (I think) but if you have time, an English version would be a welcome addition to the discussion :).

      In the Facebook comments to this article, Mikko Särelä pointed out that increased renewable penetration will lead to very high price fluctuations: electricity will be nearly free during the day, but it can be extremely expensive in the early morning and late evening. It’s possible that this could compensate the losses incurred during peak production, particularly for wind power, which usually produces at least some power 24/7. If the price of solar PV goes down enough, I’m willing to entertain a hypothesis that the ≈ 25% non-curtailed production (at very much higher than average price) might be enough to compensate for the effective loss of 75% of possible sales.

      Of course, it’s likely that such schemes will be politically very unpopular. For all intents and purposes, it’s a handout to industry and commerce, paid by regular folks who tend to be at work during hours of cheap electricity.

      Another problem is that the price increase assumes that the investment and other fixed costs of off-peak conventional plants will be transferred to electricity prices: that’s the supposed mechanism through which the price increases, because conventional plant owners need to recoup their investments in the few hours the plants are needed. It’s not certain this will actually occur, because they can also lobby for subsidies. As they have, successfully, in Germany. (After all, they have political power because, as mentioned, wildly fluctuating prices are likely to be very unpopular.)

      On the other hand, if we assume that prices will indeed fluctuate greatly, that would be good news for nuclear power. If solar can recoup its investment costs with 25% of production, it’s all but certain that nuclear can also compete in such an environment. Even if they have to throttle down completely during peak production hours.

  5. Ville says:

    One would think that once the investment is made nuclear power also something you run without without stopping regardless of where the spot price may be during different hours of the day.

    Have you calculated max cost for storage to make the function work out? My understanding is that Lithium ion batteries are coming down in price. Not sure when they would hit the break-even.

    Also where do you get the 3.3X current solar, and what do you use as ‘current solar’ level?

    Further, if you assume a person has bought PV panels on her roof their cost to zero at that hour in any case if peak Solar will suffice the daytime usage. The problem only occurs for the system and for the companies producing whole sale Solar. Distributed personal solar production does not need to adhere to this logic, no?

    • Nuclear has slightly higher marginal cost than wind or solar, so it might be throttled down during peak production hours. But as I mentioned in my comment to Proteos, if we assume that renewables can recoup their investment costs despite having to sell much of their product at zero price, then baseload nuclear can very probably compete as well.

      I haven’t bothered to calculate storage costs, because there are so many assumptions and variables to consider. But using the tried and true Harrison-Stetson method of estimation, let’s assume that the price spread might be somewhere around 100 €/MWh; the most recent “breakthrough” Li-Ion battery development is making promises to drop the battery price to 130 000 €/MWh by 2020, from current 360 000 – 720 000 €/MWh. So there’s still some way to go before Li-Ion is cheap enough for large-scale storage.

      http://green.autoblog.com/2013/11/08/li-ion-battery-prices-headed–down-180-kwh/

      The cheapest currently available battery is still the lead acid battery of 1859 vintage, at around 200 000-300 000€/MWh.

      Synthetic methane conversion MIGHT be profitable with a price spread of, say, 60-120 €/MWh; that’s the technology I’m counting on the most.

      3.3x solar is just an example of a possible development where lowering peak production prices (remember, the prices go down before they fall off a cliff) curb renewable installations. No modeling involved. “Current” refers to German and Austrian renewable production as of 26.3.2014.

      For individuals, the problem is again in the storage. An average homeowner will not be at home when the solar panels produce electricity. Given cheap enough storage, that would not be a problem, but given wings, cows could fly.

      I’m actually of the opinion that solar water heating is the best method for utilizing solar energy in the higher latitudes. Equipment is much cheaper than with solar PV, and short-term energy storage (as hot water) is very feasible. Furthermore, it can actually retire fossil fuel plants, at least in Finland, where fossil fuels are burned during summer simply to warm water for showers etc.

      • Note that there’s a significant piece of information missing from my above reply: the levelized cost of stored energy. The costs quoted above are just battery investment costs.

        This study

        http://www.esc.ethz.ch/events/frontiers/120926_FiER_Battke.pdf

        suggest that levelized cost of storing electricity, i. e. the required price spread for profitability, is around 670 €/MWh. Nevertheless, it’s not competitive at its own even for time-shifting daily production.

  6. This is an excellent piece as usual. As long as the storage issue is not solved in grand enough scale this will be the biggest hurdle for all intermittent renewables. The LOC isn’t that big issue anymore, it is the fact that without subsidies no one could justify investments to plants that are almost always producing at exactly the same time and thus would push down the market price at exactly the wrong moment… This realization is dawning on some. Others refuse to accept it. Also one has to remember that storage will increase energy use due to conversion losses.

    I think Scenarios 3 and 6 are rather likely. Both will be enforced by the state of course.

    Also few comments below.

    “One of the benefits of renewable energy is that it pushes down the price of electricity when the wind blows or the sun shines.”

    This is a good point but I think it is fair to say that any form of electricity production that is cheaper than the marginal plant pushes down the price.

    “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.”

    I heard this from a German colleague and I am not sure if it is true but apparently they have been using the primary circulation pumps of a mothballed nuclear plant to run water through the reactor during a time of negative price in order to make money with wasting excess electricity. Talk about negawatts…

    • Thanks Lauri! You are of course absolutely correct that any production with marginal cost less than average cost will drive down electricity prices. But this is an argument that has been used particularly often in renewables advocacy.

      The increase in energy demand due to storage losses is indeed a problem, because losses may rather easily run up to 20-30% or more. If we need to match that with increased primary energy production, those energy scenarios that rely heavily on reducing primary energy consumption are in even greater trouble than they are now.

      Anecdotes are of course anecdotes, but sadly, I’ve heard similar stories. What puzzles me is that very same people may condemn nuclear power “because it produces energy too cheaply, thus encouraging waste” and remain completely oblivious about negative energy prices.

  7. Rami Niemi says:

    How about conversion to thermal energy, e-to-h? In stead of storage options. 1 000 000 heatpumps times 1m^3 water times 36° is 42 GWh of heat and 10 GWh of electricity drawn out of grid without exergy loss.

    • Sure, that would be simple – assuming that there is sufficient demand for heat.

      Personally, I believe that both heat pumps and simpler heating elements will be used to absorb excess electricity. I only hope that they will use the heat for something useful :).

  8. I did not read comments, but Janne, you have a fundamental problem with your premises and therefore most of your pondering is false or easily addressable.

    First: there is no such thing as “free markets” on electricity markets, nor there should be. Grid is functioning the best as highly regulated and centrally planned system. We only need single grid, not competition among grids.

    Second: spot pricing of electricity, is only applicable in grids where there is high share of generation capacity from sources that have high marginal cost of production. E.g. you cannot use spot pricing of electricity in France where there is high share of nuclear power that has close to zero marginal cost.

    Partial solution for your problem starts from adding simple carbon tax that increases the marginal cost of fossil power. And hence fossil power will be more suitable for filling the gaps of intermittent renewables, because this makes fossil baseload generation in combined cycle power plants nonprofitable. With this method it is very straight forward to go over 60 % with solar+wind generation. To go beyond that we need storage, such as synthetic kerosene and Diesel production for transportation, and also more innovations how to utilize cheap but intermittent power. Synthetic Diesel is very close to parity with fossil Diesel and when the share of renewables increases it is more than profitable to use that surplus renewable electricity for synthetic Diesel generation. This is a storage technology that has almost 100 % efficiency if the big picture is considered.

    How to prevent the cannibalism of renewables? Simplest way to address this problem is that renewable energy subsidies are inversely proportional to renewable electricity generation. E.g. if the spot price of electricity falls below 40 euros per MWh, then all subsidies for renewables are discontinued. This would encourage e.g. wind energy producers to optimize their windmills for common low wind speeds rather than rarer strong winds and for solar producers it makes most sense to install solar panels as such that they are facing either East or West rather than on South. Also solar producers should have as high as possible self-consumption ratio.

    • Perhaps you should try to read the discussion and a bit more about the electricity pricing before you go about declaring others entirely mistaken.

      For example, it’s perfectly possible to use spot pricing even when there are a lot of low marginal cost producers, and in fact it is the most optimum way of allocating price to generation at any given moment of time. Here’s the French spot market: http://www.epexspot.com/en/

      Of course, whether spot pricing is the optimum for _low-emission energy system_ is another topic, and I tend to agree that the current deregulated solution isn’t probably going to produce desired results. Nevertheless, spot price is a good indication of the _value_ of electricity. Regulation can change the _price_ that generators receive for electricity, but it cannot change the _value_ of that electricity. Which is zero (or actually negative) in cases where production exceeds demand.

      Optimizing production of wind turbines (windmills are those in the Dutch postcards) and solar panels certainly helps and is beneficial, but all it can do is to flatten somewhat the shape of the daily production curves. It cannot make the wind blow or the sun shine. Therefore, it can reduce the problem but not eliminate it.

      Your suggestion as to how to solve the problem unfortunately does nothing of the sort. Because it cannot command wind to blow when it’s not blowing, nor calm the winds when they are, it would cause the wind power generation growth to stall exactly in the same manner as shown in the text. When the value of electricity falls close to zero, the profitability problem remains. This doesn’t mean that renewables are a bad idea, it just means one inherent limitation to their use with current technology.

      Excellent storage options would of course help, just as I’ve been saying for years. However, they will help baseload generators exactly as much. Furthermore, you seem to have fairly optimistic assumptions regarding the state of technology. But if you can back your assertions with actual proof, e.g. test reports other than manufacturer’s claims, I would be listening more.

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