Renewable Energy and Lower Prices; How Low Can They Go? (Part 1 of 4)

By June 6, 2019 News

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.

It is well known that renewable energy sources, such as wind and solar, are providing more electricity to the U.S. power grids than ever before.  Back in April, the U.S. Energy Information Administration reported that renewable generation sources like solar, wind and hydro facilities produced more electricity than coal fired generation for the first time ever (see chart below.)  It is also no secret that this trend is expected to continue, and renewable sources will serve higher and higher percentages of electricity demand in the coming years.

Don’t Coal It a Comeback…

The benefits of a grid increasingly served by cheap renewable energy is significant.  The carbon footprint reduction of a historically carbon intensive industry alone is a major benefit.  End consumers now have options to purchase low cost energy for ten, twenty and even thirty years.  This grid transformation is something that many people have been hoping would occur for a long time.

However, as with any major industry transformation, unexpected things can occur along the way.  Markets such as Texas and California, both of which have had large buildouts of renewable generation, are seeing significant changes to wholesale power prices.

California, due to its large supply of solar energy, is seeing daytime power prices during certain times of the year become very depressed, while early morning and evening power prices are becoming the highest priced hours.  This is in stark contrast to historical pricing patterns where day-time prices have always been the highest.  This shift presents both opportunities and challenges for energy consumers which we will discuss later in this four-part series.

In Texas, when there are strong winds and an abundance of wind generation, power prices not only reach very low levels but can even go below $0.  Negative power prices are also being seen in California during hours of high renewable generation and low demand on the grid.  During these hours, generators who continue to produce electricity actually have to pay the grid to inject their power.

Wait… You mean I get PAID to use power in California???

Prior to the solar and wind build-out, natural gas fueled power plants dominated the landscape.  The price at which they sold their power was largely driven by the price of natural gas.  The cost to convert the fuel into electricity (fuel price + conversion cost) determined their marginal production cost.  This established the minimum price at which a natural gas generator offered to sell their power, and due to their dominance in the market, typically set the prices for all other generators as well.

However, renewable generation sources such as wind, solar and hydro do not have a fuel cost, and thus no marginal cost.  This raises some interesting questions:

  • So how do they decide at what price they are willing to generate, or more importantly, not generate?
  • As more and more renewable generation is added, and older fossil generation retires, how will prices continue to change?
  • Will these changes help or hurt end use consumers?

While this market transformation is exciting and welcome, there are some very real challenges to both end use consumers and generators alike that must be navigated.

The next three articles in this series will explore 1) why wind and solar generators are actually incentivized to generate at negative prices, 2) the impact that increasingly lower prices are having on fossil-based generation sources and 3) what these changes mean for the end consumer.