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The Renewable Energy Paradox

  • March 8, 2017

Renewable energy technologies have improved rapidly over the past decade; technology advances, prices drop, capacity increases, and more and more are deployed both behind the meter and at utility scale.  Many technologies are now at or near grid parity with fossil fuel generation (without subsidies in many areas).

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However, attempting to build a new energy market on an out of date grid has uncovered numerous problems that have to be addressed. “The problem is that government-supported renewable energy has been imposed on a market designed in a different era.” There are three main reasons that renewable energy is shocking the energy system:

  1. Public subsidies since 2008 have cut utility revenues from wholesale power markets and hindered investment.
  2. Renewable energy is intermittent, meaning it is not dispatchable and is not a reliable form of energy generation. This simply means that renewable energy cannot provide 100% of our energy generation (at least for the time being), which leads to an even larger problem – financing fossil fuel plants in a profitable manner. As of now, we still need fossil fuel generation to kick in when renewables cannot do the job (i.e. when the sun isn’t shining and the wind isn’t blowing).
  3. Renewable energy has roughly zero marginal running costs because the sun and wind are free. “In a market that prefers energy produced at the lowest short-term cost, wind and solar take business from providers that are more expensive to run, such as coal plants, depressing power prices, and hence revenues for all.”

“Electricity markets, especially those that were deregulated in the late 20th century, typically work on a ‘merit order’: at any given time they meet demand by taking electricity first from the cheapest supplier, then the next-cheapest, until they have all they need; the price paid to all concerned is set by the most expensive source in use at the time. Because wind and solar do not need to buy any fuel, their marginal costs are low. They thus push more expensive producers off the grid, lowering wholesale prices.”

If wholesale prices fall too low, fossil fuel generators will no longer be profitable, but we need these generators in order to meet spikes in demand and keep the lights on. These plants would be sitting idle for most of the time and would only get dispatched at peak hours of the year. This is difficult to sell to investors; therefore we look towards public funds, capacity payments and subsidies, and risk distorting the economic market.  We have seen this recently in New York (though with nuclear, not fossil fuels).  The upstate nuclear generation plants were going to shut down due to poor economics from low wholesale power pricing, but the State bailed them out with the Clean Energy Standard and socialized the cost of the nuclear power, thus providing subsidies to continue operating.

Related Article: Indian Point Nuclear Closing: What’s the Impact On New York Electricity Rates?

Last year, NRG Energy, the largest integrated power company in the U.S., lost approximately $900 million and cut 20% of its work force. NRG’s President and CEO, Mauricio Gutierrez, said the independent power producer (IPP) model is “now obsolete and unable to create value over the long term.” Engie, formerly known as GDF Suez, sold all of its US fossil fuel generation last year to exit the IPP business and focus on renewables and services in the US.  As the commodity markets continue to weaken, technological innovation, changes in fuel mix, consumer preference and distributed generation (on-site generation) has put considerable pressure on the traditional IPP model making it no longer economical.

Rolando Fuentes from KAPSARC, King Abdullah Petroleum Studies and Research Center, introduces us to the ‘clean-energy paradox.’ “Subsidies foster deployment of renewables; renewables depress power prices, increasing the need for financial support. If renewables were to make up 100% of the market, the wholesale price of electricity would fall to zero, deterring all new investment that was not completely subsidized.”

So, How Do We Fix This Problem?

 

The energy sector needs to evaluate how electricity is bought, sold, valued, and regulated in order to account for new generation. We need new technology. We need efficient renewable energy storage if we ever want to effectively leave fossil fuels in the past.  We need a price on carbon to accelerate adoption of renewables and storage.  A new grid needs to account for large storage capacity, big enough to reach out to far away renewable generation plants, and smart enough to help customers adapt demand to supply. “Digitalization, smart meters and batteries are enabling companies and households to smooth out their demand- by doing some energy-intensive work at night. This helps to cope with intermittent supply. Small, modular power plants, which are easy to flex up and down, are becoming more popular, as are high-voltage grids that can move excess power around the network  more efficiently.”

The hardest task will be to redesign the power market to meet the need for flexible supply and demand.  New York is attempting this with REV, but progress has been slow.  And with PSC Chairwoman Audrey Zibelman, a leading voice in REV, leaving this past March to run Australia’s energy grid, who knows how quickly progress will be made.

Despite a potentially anti-renewable, pro-fossil fuel administration in the White House, there should be hope that we’ll figure this out.  The States have taken the lead on many energy related regulations related to renewables and carbon pricing, and will continue to take the lead on designing the electricity grid of the future.  Market forces, and not just regulations and subsidies, have accelerated adoption of renewables, and will continue to do so as technology inevitably improves, prices for renewable generation and storage continue to drop, and distributed generation is effectively integrated into the grid.

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Sources:

The Economist. A world turned upside down. http://www.economist.com/news/briefing/21717365-wind-and-solar-energy-are-disrupting-century-old-model-providing-electricity-what-will. Accessed 3 March 2017.

The Economist. Clean energy’s dirty secret. http://www.economist.com/news/briefing/21717365-wind-and-solar-energy-are-disrupting-century-old-model-providing-electricity-what-will. Accessed 3 March 2017.

Walton, Robert. UtilityDive. NRG CEO: Independent power producer model ‘obsolete.’ http://www.utilitydive.com/news/nrg-ceo-independent-power-producer-model-obsolete/437150/. Accessed 3 March 2017.