Readers of Power Markets are familiar with the concept that large amounts of wind and solar will drive down market prices – the merit order effect.  And if wind and solar producers are dependent on those market prices for their income, they will also drive down their own revenues.  In other words, the more wind and solar we have, the less value they offer in reducing costs from other sources.
 
In a new paper in Nature Energy, Shayle Kann, the solar guru with Greentech Media, and Varun Sivaram at the Council on Foreign Relations sound the alarm. They point out the gap between today’s optimism about cost reductions and growth versus the long run trouble that solar will have as it becomes a significant part of the power supply.
 
For now, they say, most solar is insulated from wholesale market prices because projects either have long-term contracts with utilities or are valued through net energy metering.
 
"However, in the long term, as solar becomes a mainstream power source, regulators and utilities around the world
 are likely to align solar compensation more closely with wholesale market pricing. As solar is non-dispatchable, project operators cannot strategically sell into the market at higher-priced times — solar is purely a price taker (unless paired with energy storage, as discussed below). If compensation tracks solar’s value as adoption grows, then solar owners will experience declining revenues."
 
In order “to enable solar to outrun value deflation in the long term” they conclude that solar will have to become even cheaper than the $1 per watt target set by DOE’s Sunshot Initiative. 
 
In fact, they propose a new goal of only 25 cents per watt by mid-century, or around 1.5 cents per kWh – too cheap to meter!  This implies a need for new technologies, new applications, and new approaches to deployment, which they describe.
 
But this concern is predicated on electricity demand not changing too much.  While they cite research by Berkeley Lab and others about changes to demand driven by low cost wind and solar power, even that research has its limits.
 
Andrew Mills and Ryan Wiser of Berkeley Lab explored the decline in value of wind and solar in a 2012 paper, and then revisited the topic to look at ways to mitigate the decline in 2015.
 
Most of the decline, they said, comes from impacts on the value of energy and capacity, as shown in the figure.  Wind and solar have value by displacing other sources.  But at a certain point, solar runs out of mid-day capacity and energy to displace.  Demand is sated, and value declines -- drastically.
​

But there are other changes afoot that are likely to create a future power demand that is quite different than today’s.
 
Kann and Sivaram mention electric vehicles and storage as two big options. But there are other dynamics:

• Customers will be attracted to the very low prices created by periods of surplus power, as expressed by zero and negative pricing.  Factories, water pumping operations, and other flexible customers will “make hay while the sun shines,” sucking up mid-day solar power.

• Regulators will change rate designs to reflect changes in wholesale prices, such as by moving more customers to time-sensitive pricing.  Peak hours – and hence peak prices – may shift to reflect “net demand,” that is the leftover demand that is not already met by wind and solar.  This will increase changes in demand, through consumer behavior and technology choices.

• Dynamic pricing and demand response will also increase the use of flexible demand, such as water heating and air conditioning, both of which take advantage of thermal storage.  Jim Lazar’s excellent “Teaching the Duck to Fly” has a list of options.

 
And there are more options emerging, especially through the decarbonization of other sectors, like heating, transportation, and chemicals. 

• Denmark already integrates excess wind production with their numerous district heating systems, turning wind power into heat in the winter. Electric heat pumps (air-source and ground-source) would be a great way to suck up winter wind power on the US High Plains -- since heat demand is coincident with windy winter cold fronts.

• Electric cars, trucks, buses, and trains will have their own daily and seasonal patterns of electricity demand.  They will also constitute a massive amount of storage.  Gov. Brown's goal of 1.5 million electric vehicles in California, for example, adds up to over 135 GW and 450 GWh of batteries on wheels – a massive tool for integrating wind and solar through vehicle-grid integration, since California's peak demand is less than 50 GW.

• German companies are demonstrating “power to gas,” using surplus renewable electricity to make synthetic natural gas.  And Siemens recently announced plans in the UK to demonstrate the concept of using wind power to make synthetic fertilizer, drawing nitrogen from the air and hydrogen from water.

 
More such ideas will no doubt emerge, driven by both market forces and decarbonization policies.  It is likely that the shape of demand in the future will look entirely different than it does today.
 
Clearly Kann and Sivaram's goal of cheaper solar is a laudable one, and should be pursued vigorously.  But it should be accompanied by an R&D and policy agenda to facilitate changes in demand.
​

Rocky Mountain Institute, the clean energy think tank founded by Amory Lovins, has weighed in on the debate about whether wind and solar are incompatible with conventional power markets.

In "3 Ways Renewable Energy Can Grow in a 21st Century Grid," Lovins along with RMI's Mark Dyson and James Mandel, say that some analysis doesn't take into account the potential for a changed power system.

"Assuming a static grid and unchanging market mechanisms can be used to make any innovation look bad," they note. 

They offer three points that minimize the supposed problems.

First, supply is changing, as more flexible gas generation replaces older and less flexible coal and nuclear plants.  

Second, demand is increasingly flexible too, thanks to demand response and time-varying rates. As wind and solar create periods of low-cost power, consumers and their automated devices will switch their consumption in response, changing the daily load shape. This Power Markets paper describes the host of flexibility options.

Third, storage technologies and prices are improving, allowing wind and solar to be shifted to meet higher value time periods.  RMI wisely points out, though, that battery storage is "not necessarily ... competitive with the many other ways to achieve grid flexibility," a point I've made repeatedly and that Amory makes in this video.

Lastly, they give a shout out to Power Markets, linking to our previous blog post:

"But even if renewables do face adoption limits in current markets, there is no reason we have to keep these markets the way they are. Wholesale power markets are largely a product of historical coincidence, formed out of the paradigms of the last century in which thermal power plants competed only with each other."

Of course changing the market, especially in a way that benefits new entrants and increases the threat to incumbents, is not a simple task.  Germany's commitment to competitive markets and to the Energiewende gave them the spine to implement their recent reforms.  
​

After years of intense study and consultation, the German government has proposed final changes to the design of their electricity market.  Rejecting PJM-style capacity markets as expensive and bureaucratic -- you know you're in trouble if the German government is calling you bureaucratic -- they are instead planning to foster greater competition, to increase customer responsiveness to prices, and to create backup features to ensure reliability. 

Like Texas, after their debate about capacity markets in 2013, they are planning to let prices go where they will, to encourage market investment as needed.  They did create a "capacity reserve" of plants equal to 5 percent of peak demand, which will be dispatched only when operating margins are too tight.  (And in a sop to the lignite industry they are putting a number of lignite plants into a four year retirement plan before decommissioning.)

But all in all, Germany has decided to let the free market solve the financial aspects of the Energiewende. 

You can read more in my article in POWER Magazine.

​Energy guru and journalist Chris Nelder, now at Rocky Mountain Institute, has launched the Energy Transition Show, a podcast devoted to the transition to a low-carbon energy future.  

The second and third episodes look at the impacts of renewable power on the grid, first with Mackay Miller of NREL talking about integration and next with me talking about the financial issues of wind and solar.

In the interview I get to expand on my recent essay for Greentech Media, "How Wind and Solar will Blow Up Power Markets." That essay was itself a response to some ideas highlighted in the MIT Future of Solar study and a subsequent essay by Jesse Jenkins of MIT and Alex Trembath of the Breakthrough Institute.

After that article ran in GTM, Jenkins wrote a follow up post on Energy Collective, saying that I confused the ends with the means.

He wrote:  

Renewable energy isn’t an end in itself. Rather, wind and solar are a means to various goals, including supplying affordable, reliable electricity without CO2 emissions or air pollution.

In other words, well-designed electricity markets should reward and remunerate electricity generators for the value they deliver by contributing to these ends. Regardless of how we pay for them, wind and solar simply deliver less value the more they scale up.

​This is a common argument, blessed by economists and conventional wisdom. If you develop an agnostic market place geared toward carbon reduction, like through a price on carbon, you will get the least cost carbon solutions. 
 
But the whole point of my essay, which maybe wasn’t clear enough, is that markets are not necessarily agnostic. They dictate winners according to how they are designed.

And that is abundantly clear in this case of wind and solar generators that are dispatched by nature, not by prices. They don't fit in with an Econ 101, clearing-price, merit-order-dispatch market, since they don't respond to short term price signals.
 
Due to the merit order effect, wind and solar cause spot-market prices to fall at the very time that they are producing. The larger their share, the more often they will see low or zero or negative prices. If they are dependent on these short-term markets for revenues, their revenues will dry up.

As Jenkins and Trembath put it, they will eat their own lunch. This will put a cap on deployment at a level far below what we need them to achieve in order to decarbonize the planet.
 
This is not a technical limit, but a self-imposed financial limit due to market design. 
 
I like something that Rainer Baake once said. He is the founder of Agora Energiewende, the Berlin think tank, and is now the deputy minister of the German commerce department, in charge of the Energiewende. One of his conclusions about the Energiewende is that wind and solar have emerged as the winners. They are clean, they are affordable, they are scalable, and they are domestic.  Bioenergy and hydropower are limited in Germany, nuclear and carbon capture are expensive and unpopular, and uncontrolled gas is not clean enough. So any scenario of victory in the Energiewende involves lots of wind and solar.

The big catch, of course, is that they are dispatched by nature. So what do you do? You have to redesign the system around that, and make sure they succeed. Because that is the least cost and most certain answer to carbon emissions in the power sector.
 
So in Baake's thinking, the means were obvious, and the goal was to make the means successful.  Hence the need for new market designs that accommodate wind and solar, the goal of the Power Markets Project.  

Enjoy the podcast, and feel free to comment on this blog or on the Energy Transition site.​

I recently visited Boston as a board member of the Clean Energy States Alliance (CESA), which is the collection of state agencies and funds promoting clean energy.  We heard an intriguing discussion on solar power from Robert Armstrong, the head of the MIT Energy Initiative (the previous head was Ernie Moniz, now US Energy Secretary).

This inspired me to finally read MIT's "Future of Solar" study, a substantial report on solar technology, economics, and trends.  

As it happened, around that time the Breakthrough Institute ran an essay on one aspect of the MIT study. In the essay, Alex Trembath and Jesse Jenkins highlight the MIT theory that even though solar has boundless technical potential and very significant economic potential, it may be limited by its impacts on electricity markets.

Hence my new essay in Greentech Media, "Boom!: How Wind and Solar Will Blow Up Power Markets."

When you finish reading the essay, I recommend perusing the comments (currently over 200).  Many GTM readers are experts themselves, and worth tracking.

As the use of renewable energy grows we hear occasional reports of curtailment -- when wind turbines and solar generators are shut off because they are putting too much power into the grid.  

This can happen because transmission development lags behind; it is far faster to build wind and solar than to build transmission to serve them. The Competitive Renewable Energy Zone (CREZ) policy in Texas was a response to high levels of congestion in the wind fields, and the potential for huge growth.

We also hear about curtailment due to the famous Duck Curve.  The California ISO put out a graph showing that as solar grows it will cause periods of "over generation" during sunny days, especially in the spring when demand for air conditioning has not yet picked up. In a report commissioned by California utilities, E3 analyzed a solar-heavy system heavily reliant on curtailment.

My colleague Rachel Golden, working on a graduate degree at UC-Berkeley's Energy Resources Group (ERG), spent last summer working with the California Public Utilities Commission.  At the request of Commissioner Peterman, she investigated the issue of curtailment of renewable energy.  How big a problem was it in California or elsewhere?  What would happen in the future?  What were the impacts on generators and investors?  

And most importantly, what should be done about it?

With a bit of polishing, the memo is now an article in Electricity Journal. You can read it here on the Power Markets website.

Bottom line:  Curtailment is an easy response to renewables integration, but there are usually smarter ways to solve the problem.  Curtailment is wasteful and undermines the investor confidence needed to transition the California power system.  In moderate amounts it can be a useful tool; but only if policy changes are made to make it compatible with the long term growth of renewables.

Ouch ouch ouch! 

It pains me when people write about the German Energiewende without doing their homework. Even people who want to be supportive cause me pain, let alone the many ill-informed attacks out there.

Especially when they have already found their way to the excellent EnergyTransition.de web site, which has all the facts, but then not sufficiently studied the site to learn what has happened and is happening.

The latest entry in this category is the blog at the Energy Institute at the UC-Berkeley Haas Business School.  Professor Maximilian Auffhammer wonders about Germany's plans to exit both nuclear and coal.  

But he doesn't do his homework on many basic facts about the energy transition, both historical and technical.

First, he says that the “Energiewende law” was “proposed months before Fukushima.”  In reality, the Feed-In Act was adopted in 1991, with significant reforms by the Renewable Energy Act (EEG) in 2000, followed by more revisions in 2004, 2009, 2012 and 2014.

The decision to phase out nuclear was made in 2000. The Merkel Administration planned to repeal the phase out in 2010, and reversed course after the Fukushima disaster.

Ouch number two:  He says Germany can “always buy cheap nuclear baseload from France if things go terribly wrong.”  But isn't this power is already spoken for in France? Does he think the plants are sitting there idle?

Ouch three: Like many casual observers of electricity systems, Auffhammer assumes that wind and solar will require storage.  But there are many solutions to variability in Germany that are more cost affective and efficient than storage. The Berlin think tank Agora Energiewende has said “The energy transition must not wait for storage. For the next 15 to 20 years – that is, up to 60 percent of renewable energies – we will have plenty of other, cheaper flexibility options available.”

The biggest solution will be greater EU integration of grid operations. In the same way California is solving variability first by integrating with the Western US grid through the Energy Imbalance Market (EIM) and adding new members to the California ISO. Storage is part of the long term answer, but mostly for reasons other than wind and solar variability.

Last, and most painful: He says the vision of a system with little or no nuclear and coal is “slowly emerging.”  But it was established years ago in the decision to go to 80 percent renewables. It is, in fact, the whole point of the Energiewende!

Ouch!

He is right that there are major problems with phasing out coal. Because Germany is part of the EU-wide emission trading scheme (ETS), they are at the mercy of the overall European market for carbon reduction prices. Because credit prices have been so low, German coal plants are not sufficiently hindered by the ETS. The Merkel administration is proposing new fees on coal plants to accelerate retirement of the oldest coal plants.  But labor unions and power plant owners are fighting to save them, setting up a major political battle.

There are many lessons to be learned from the Energiewende, for America and other regions.  But a professor would know that lessons must rely on sound scholarship.  Otherwise, painful raps on the knuckles result.