Making solar too cheap to meter
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 a big unknown is whether and how demand will change in response to large amounts of low cost wind and solar. In their mitigation research, Mills and Wiser test a few options, including changes in demand due to changes in price (price elasticity of demand). These options mitigate the decline in value somewhat, as shown in the figure below, with the biggest help for wind coming from increased geographic diversity and solar being boosted by more storage.
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.