Why solar parity scares big utilities

The Climate Spectator has another article on how renewable energy can bring power prices down - Why solar parity scares big utilities.

Thursday January 29, 2009, was a big money day for Victoria’s brown coal generators.

After a night of uncomfortably warm temperatures, and a dawn reading of 32°C, Victoria’s residents turned to their air-con and pedestal fans in near record numbers. By 9am, demand had spiked so high that electricity prices had soared to $10,000 a megawatt hour as utilities switched on every last generator they could find to meet demand. These wholesale prices are normally between $35-$50/MWh.

During that day, which reached a peak of 44.3°C in Melbourne in mid afternoon, the wholesale electricity price never fell below $1,000/MWh. For nearly four hours, it hovered around the $10,000/MWh price. The way the National Electricity Market works means that every generator switched on at that time receives that price, even though it still only cost the brown coal generators around $4/MWh to shovel the coal into their power plants. Over an eight-hour period, the state’s generators would have pocketed an estimated $550 million in revenue, near one fifth of their total revenue for the year.

It was, needless to say, an absolute jackpot for the generators. But while this was an extreme case, it was not an atypical event in the NEM. It is estimated that, on average, around one quarter of the revenue from electricity sales each year is generated from the prices gleaned from around 24-36 hours of peak production. The business models of the energy utilities depend on it. But now those models are under threat.

What, for instance, would have happened that day to electricity prices had there been large amounts of solar deployed along the eastern seaboard available to meet demand? According to modeling conducted by the Melbourne Energy Institute at the University of Melbourne, 5 gigawatts of solar PV would have been very effective in curbing peak demand. Prices would still have spiked, but not over $300/MWh, and for shorter periods. The total revenue for the day would have been just over $340 million – half of what it would otherwise have been.

This is what is known as the merit order effect: the effect technologies with a short-run marginal cost – i.e. with fuel that costs next to nothing, such as solar, wind – have on the market when they deliver electrons en masse to the grid. The overwhelming evidence from Australia and overseas is that they bring the wholesale cost of energy down, sometimes so much that the reduction in prices is greater than the cost of the subsidies that got them built in the first place. And established utilities with higher-cost fuel, such as coal and gas, don’t like it one bit, and are suddenly realising the extent of the threat to their business.

Normally, the overnight load in Victoria stands at around 5.5GW, not enough to even meet the output of all of the state’s coal-fired generators. Wholesale prices barely meet the cost of production. At 8.5GW of demand, an average high-load weekday, peaking gas generators are required and the wholesale price jumps to around $70/MWh. The coal-fired generators make money. But would this still be the case if 1.5GW of solar was available? The Melbourne Energy Institute says not; it would mean that gas-fired utilities normally brought into the grid would not be required and the wholesale price would remain at modest levels.

This might explain why state governments, in Victoria and NSW in particular, are happy to delay the rollout of renewable energy at a large scale. As noted here before, Victoria’s decision to defer an increase in its state-based renewable energy target was motivated by the potential impact of the merit order effect on the state’s coal-fired generators. Right now, the deployment in both wind and rooftop solar is at a virtual standstill because of policy uncertainty. That suits the established generators just fine.

Mike Sandiford, the director of the Energy Research Institute at the University of Melbourne, says that in the case of solar, this is simply delaying the inevitable. Grid parity – and the deployment of solar at a scale that the modeling contemplates – is coming whether the governments and the utilities like it or not, and it’s time policy makers faced up to the issues that it presents.

“We can either hide from grid parity or we can embrace the challenges,” Professor Sandiford said. “All we ever hear is that it is expensive, can’t deliver, or is not worth investing. We rarely hear of the opportunities.” The modeling of the 5GW solar scenario was extended to cover the entire 2009 and 2010 years. It found merit order savings of $1 billion in the first year and $600 million in the second, and avoided transmission and distributed investment.

As those figures show, it’s not just the generators that are impacted by this, it is the network operators as well. NEM data shows that while peak demand is growing, mean demand has plateaued and is now falling, possibly as a result of rising electricity prices, more solar PV, the merit order effect, or even the benefit of the pink batt program.

This divergence has meant that more infrastructure is being built to meet peak demand and is being used less during the day. And despite spending billions on network upgrades, and contributing well over half of the increased retail prices, the industry is losing productivity at a rate of 1 per cent a year. In most industries, this would be untenable. A dramatic increase in distributed energy such as solar would force the network operators to revisit the means to make money.

Professor Sandiford says most of the pubic discussion around feed-in tariffs and other green incentives is to pitch them as a form of regressive tax. That, he says, is way too simplistic. “There are other values here. It can shave peak demand, and it mitigates against extreme prices,” he says. “We are using less electricity at medium prices and more at the peak. It is important to know the answers to these problems before we go off spending. Whether we like it or not, it is going to hit us. We should try and understand what these issues are.”