Large amounts of wind and solar drive down market prices -- a phenomenon known as 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.
But a big unknown is 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.
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 of Greentech Media and Varun Sivaram of the Council on Foreign Relations sound the alarm, arguing that solar will face economic troubles 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). If compensation tracks solar’s value as adoption grows, then solar owners will experience declining revenues," they write.
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 kilowatt-hour -- 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 below. Wind and solar have value by displacing other sources. But at a certain point, solar runs out of midday capacity and energy to displace. Demand is sated, and value declines -- drastically.
In a new paper in Nature Energy, Shayle Kann of Greentech Media and Varun Sivaram of the Council on Foreign Relations sound the alarm, arguing that solar will face economic troubles 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). If compensation tracks solar’s value as adoption grows, then solar owners will experience declining revenues," they write.
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 kilowatt-hour -- 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 below. Wind and solar have value by displacing other sources. But at a certain point, solar runs out of midday capacity and energy to displace. Demand is sated, and value declines -- drastically.
But a big unknown is 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 future power demand that is quite different than today.
Kann and Sivaram mention electric vehicles and storage as two big options. But there are other dynamics:
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 midday 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 not already met by wind and solar. This will induce 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 report has a list of options.
- Denmark already integrates excess wind production with numerous district heating systems, turning wind power into heat in the winter. Electric heat pumps (air-source and ground-source) would be a great way to suck up winter wind power on the U.S. High Plains region, since heat demand is coincident with windy winter cold fronts.
- Electric cars, trucks, buses and trains will have their own daily and seasonal patterns of electricity demand. They will also constitute a massive amount of storage. Gov. Brown's goal of 1.5 million electric vehicles in California, for example, adds up to over 135 gigawatts and 450 gigawatt-hours of batteries on wheels -- a massive tool for integrating wind and solar through vehicle-grid integration, since California's peak demand is less than 50 gigawatts.
- German companies are demonstrating “power-to-gas,” using surplus renewable electricity to make synthetic natural gas. And Siemens recently announced plans in the U.K. to demonstrate the concept of using wind power to make synthetic fertilizer, drawing nitrogen from the air and hydrogen from water.
More such ideas will no doubt emerge, driven by both market forces and decarbonization policies. It is likely that the shape of demand in the future will look entirely different than it does today.
Clearly Kann and Sivaram's goal of cheaper solar is a laudable one, and should be pursued vigorously. But it should be accompanied by an R&D and policy agenda to facilitate changes in demand.