During the month of June, Energy Edge is publishing a four-part series exploring how the growth in renewable energy on the grid is changing power prices. Check out our blog each week for the next article.
Part II of this four-part series explored how wind and solar generators still receive positive economic value even when power prices are negative due to federal tax incentives and REC prices. It also discussed how, as the percentage of demand being served by renewable energy increases, so does the frequency of negative prices.
Part III of this series will discuss:
- The impact negative prices are having on fossil generation and
- How fossil generation is responding to being displaced by renewable generation
We will focus on the California market for this article since it is meaningfully ahead of most other markets with respect to amount of renewable energy that is serving demand.
At the end of 2018, the California Energy Commission estimated 34% of 2018’s electricity demand would be served by renewable generation. However, in certain hours of the year, as much as 60% of grid demand was served by renewable generation.
The time periods when renewable generation is serving the highest percentage of grid demand are occurring during the daytime hours due to the large amount of solar generation that has been built. It is during these hours where California is seeing very low to negative prices occur, particularly at certain times during the year.
The emergence of low and negative prices during the day is a significant change to how prices have historically formed. Most people associate high power prices with daytime hours when demand on the grid is usually the highest. And while this is still true in California during the summer months, it is not the case during the spring and fall when there is an abundance of solar generation but relatively low demand on the grid.
So, low and negative prices are good for consumers, right? Yes and no. If the only price changes brought about by the growth in renewable energy is the reduction in daytime prices, then the answer is yes. However, low and negative daytime prices are not the only things that have changed on the California grid due to the large renewable buildout.
During the times of the year when low and negative prices are occurring during the day, California is also experiencing higher prices during the early morning hours and evening hours. Fossil-based (primarily natural gas) generators who have historically i) generated significant energy during the day and ii) received higher prices for the energy generated during the day are now being displaced by solar generation. However, during the hours when solar power is either coming online (6-8 am) or going offline (5-9pm), natural gas generation is being heavily relied on to meet demand.
These early morning and late afternoon/evening hour prices have significantly increased. This is due to the fact that natural gas generators are not operating as much as they used to historically, so when they generate, they are needing to charge more to recover a similar return as they used to prior to the renewable energy buildout. Said another way, the non-variable costs associated with operating a natural gas generator (O&M, debt service, return on capital, etc) must now be recovered over a smaller number of operating hours, which translates to a need for higher prices. This combination of lower prices in the daytime hours and higher prices in the early morning and evening hours is known as the “duck curve” effect for the picture this price evolution paints on a graph.
Displacing fossil generation with renewable energy is the ultimate goal for decarbonizing our electricity grids. But as we mentioned in Part I of this series, major industry transformation does not come without some challenges along the way.
Part IV of this series, coming the week of July 24, will explore:
- How will prices continue to change as even more renewables are added to U.S. grids?
- What is the near term and long-term outlook for fossil generation?
- What does this mean to end use consumers?