Renewable energy production has become a significant contributor to many nations’ power grids. But the viability without state subsidies faces an ironic challenge: wind and solar power are proving to be victims of their own success.
Over the past few years, nearly half of the world’s newly added electricity generation capacity has been based on renewable energy, such as wind and solar power. In 10 countries, wind and solar deliver more than 10 percent of total consumed electricity. Countries such as Denmark, Spain and Portugal have become international leaders in mainstreaming renewable energy production. However, this expansion has been built on governmental support schemes; over the long term, wind and solar energy will need to become economically viable without subsidies. So will they?
The economics of renewables are impressive. The cost of generating electricity from wind and sun have declined dramatically: five years ago, one megawatt-hour (MWh) of solar energy cost US $300-500. Today, it sells for less than $50. In places as diverse as the United Arab Emirates, India, Chile, Mexico, and South Africa, recent solar photovoltaics procurement auctions continue to break record after record. Even Germany, which receives less solar radiation than southern Canada, now generates solar power at $60 a MWh.
In some countries, wind and solar power are now cost-competitive with coal-fired and natural gas-fired power plants – even when carbon emissions are not priced. However, cost structures are country-specific, and cost-competitiveness is not universal. Renewables tend to be cheaper where it is windy or sunny, where investors have access to low-cost financing, where fossil fuels are expensive, and where emissions are priced. In many places, however, coal-fired power plants remain the cheapest option for producing electricity. Still, for renewables to have caught up with fossil plants in cost terms represents a huge success for wind and solar power.
Costs are, however, only one side of the competitiveness equation. The other is value.
Merely comparing electricity generation costs between different plant types is misleading, as it ignores the fact that the economic value of electricity from different power stations is not the same. This is because on wholesale markets the price of electricity fluctuates from hour to hour or even minute to minute. As a result, some power plants produce electricity disproportionally at times of high prices (so called “peaking” plants), while others produce constantly at low prices (“base load” plants). This little detail has striking consequences for the economics of wind and solar power.
On the value side, the outlook for renewables is less rosy. For the first wind turbine built in a country, the market value of wind power – i.e. its per-MWh revenue – is about the same as that of a “base load” fossil fuel power stations. Hence it is fair to compare generation costs of a wind turbine with that of a coal plant, as both produce electricity of the same economic value. Wind power, however, becomes less valuable as it becomes more widespread. For example, recent studies shows that German wind-powered electricity has already become 10 percent less valuable than that from other sources. The reason for the value drop is simple economics: during windy hours, the excess supply of electricity depresses the power price. This is precisely when renewables generate the most electricity, disproportionally earning low prices – or a “self-cannibalization effect.” In a sense, wind power becomes a victim of its own success.
Solar power is at a further cost disadvantage, losing more than 20 percent of its value because its output is concentrated in fewer hours of the year, mostly summer mid-days.
When Cyclone Axel passed over Europe during Christmas 2016, it generated record wind power – and zero or even negative electricity prices across Europe’s power exchanges. During that period, wholesale electricity was worthless. When strong winds coincide with a clear sky and solar power generation is strong, prices tend to drop to zero even during the middle of the day, when electricity demand is high.
In Germany, solar power currently has 7 percent of the energy market share, and wind power 14 percent. Computer modeling shows that the value drop will continue as renewables keep growing. If wind power supplies a third of all electricity, each MWh produced by wind turbines will be worth around 40 percent less than that of the first wind turbine. This value drop is a persistent phenomenon, rather than a transitory event.
Competitive large-scale renewables not only depend on lowering of generation costs, but also on transforming the entire power system. A flexible power system can help to mitigate the value drop. Long-distance power lines and electricity storage can help, as well. Other options are likely to be more important in the coming decades: harvesting hydro power flexibility; making existing power plants more flexible; and constructing wind turbines that produce more electricity more constantly. More work lies ahead of us.
The journey toward mainstream renewable energy is not over – it has just begun, and it requires continued effort and ingenuity.