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Mar 27, 2012

Why power generators are terrified of solar

In Germany, solar PV is not just licking the cream off the profits of the fossil fuel generators -- as happens in Australia with a more modest rollout of PV -- it is in fact eating their entire cake, writes Giles Parkinson, of RenewEconomy.

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Here is a pair of graphs that demonstrate most vividly the merit order effect and the impact that solar is having on electricity prices in Germany; and why utilities there and elsewhere are desperate to try to rein in the growth of solar PV in Europe. It may also explain why Australian generators are fighting so hard against the extension of feed-in tariffs in this country.

The first graph illustrates what a typical day on the electricity market in Germany looked like in March four years ago; the second illustrates what is happening now, with 25GW of solar PV installed across the country. Essentially, it means that solar PV is not just licking the cream off the profits of the fossil fuel generators — as happens in Australia with a more modest rollout of PV — it is in fact eating their entire cake.


Both graphs were published last week on the website Renewables International, and were sourced from EPEX, the European power price exchange. The first graph, from 2008, shows peaking power prices rising to about €60/MWh and staying there for most of the day, with some visible peaks around noon and the early evening — the size of which would depend on the temperature and the usage.

The second graph shows a brief leap to €65/MWh around 9am, before the impact of solar PV takes hold — erasing the midday peak entirely and leaving only a smaller one in the evening. The huge bite out of day-prices is also a bite out of fossil fuel generators’ earnings and profits. Note that the average peak price in the second graph is barely higher than the baseload price.

Deutsche Bank solar analyst Vishal Shah noted in a report last month that EPEX data was showing solar PV was cutting peak electricity prices by up to 40%, a situation that utilities in Germany and elsewhere in Europe were finding intolerable. “With Germany adopting a drastic cut, we expect major utilities in other European countries to push for similar cuts as well,” Shah noted.

Analysts elsewhere said one quarter of Germany’s gas-fired capacity may be closed, because of the impact of surging solar and wind capacity. Enel, the biggest utility in Italy, which had the most solar PV installed in 2011, highlighted its exposure to reduced peaking prices when it said that a €5/MWh fall in average wholesale prices would translate into a one-third slump in earnings from the generation division.

Imagine how that graph might look in Australia with a similar deployment of solar in a country that actually has some sun. Wind has already helped reduce wholesale prices in South Australia, although it has left daytime peaks more or less untouched. Solar would have an altogether different impact.

The NSW government — which owns the state’s generators, if not their output — doesn’t want to find out, and has abolished the feed-in tariff, on the basis that it costs too much. But here’s another interesting graph.


Components of average retail bill 2011-2012

It comes from the Australian Energy Market Commission’s report on its “Power of Choice Review”, looking at range of demand management and energy-efficiency opportunities, that was released on Friday. It suggests pretty clearly that the cost of green energy incentives — the renewable energy target, feed-in tariffs, and demand management and energy efficiency schemes — in Australia is minimal. They total just 6% of the cost.

The average power bill is dominated by transmission, distribution, wholesale and retail costs. This is what the AEMC report is trying to address — what measures can be introduced that can help consumers protect themselves against rising electricity costs? — and it canvasses a whole range smart grid and smart appliance opportunities that could be introduced.

It’s not quite clear how easily that can be introduced. Most utility, generation and retail businesses are geared towards simply selling more electrons, or building more poles and wires. The AEMC report says some $11 billion of current $45 billion spend on network upgrades could possibly be avoided, but it is not yet ready to offer solutions. Notably, it says it has to try and unravel how to apportion costs and benefits among consumers, generators, retailers and network providers. IPART tried to do the same thing in its review of solar feed in tariffs and declared it to be too hard.

And just letting the forces of the market work is not necessarily an answer either. Competition in the retail market hasn’t achieved much because, as the AEMC pointed out in a previous report, “the increase in retail competition has served to increase costs” and increased retail margins are expected to contribute more to rising energy costs than green energy schemes.

While the AEMC report is at least a step in the right direction, there is a big question remaining over whether the energy industry is moving fast enough. It’s not simply a matter of changing the rules and the incentives, it is also a question of culture.Having spent decades simply delivering their product to the door using a “take it or leave it” approach (did the consumer have any choice?) the energy utilities now realise that they have to learn how to bring their business inside the household — in ways that the AEMC envisages; with smart meters, in-house displays, load controllers, storage and the like.

A study in 2010 from Ernst & Young showed how difficult a task that would be. Electricity retailers were not skilled at customer service. There was little interchange with the customers, and if there was, it was sparked by complaints around blackouts and connections.

The report noted that, with the deployment of new technologies, power and utilities companies will come under competitive attack all along the value chain, as new interactive customer relationships and new competitive models allow third parties to enter the market. The incumbents can choose either to evolve, or face a revolution where “market rationalities and business strategies change completely”.

The recent experience with feed-in tariffs suggests that the utilities will be slow to evolve. The first graphs from Germany illustrate their fears, but as David Crane from NRG pointed out last week, trying to stand in the way of this evolution could be pointless.

The arrival of solar PV, and the achievement of parity against retail prices, means that consumers do now have a choice. As Jeff Bye, the head of solar at CBD Energy told RenewEconomy last week, he is fielding dozen of calls each week from consumers asking how they can install solar and be taken off the grid.

“People are annoyed by their growing bills — even if they reduce their usage, the bills are still going up,” he says.

Bye is advising his customers to stay connected to the grid, but to use it simply as a back-up, a sort of battery of last resort. This can be done, he says, by using a 3-5kW system on the roof, battery storage and a power router — which can set excess PV power to go into the battery instead of the grid, and can source energy from the grid to top up the batteries when they get low.

“Customers are making decisions on what they are spending — 20-30c/kWh — not on what they export,” he says. On a larger scale, the City of Sydney is planning on achieving its own independence for the 300MW of capacity used within its boundaries through a network of cogeneration and tri-generation installations, backed up with distributed energy such as solar PV and battery storage.

*This article was first published at RenewEconomy

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26 thoughts on “Why power generators are terrified of solar

  1. John64

    … and in other news:

    Collapse of German Solar Companies Threaten California’s Big Solar Projects

    “Solar Trust’s parent company, German developer Solar Millennium, filed for bankruptcy in Germany in December and moved to sell its U.S pipeline of projects to a German photovoltaic power plant developer called Solarhybrid. Then late last month Solarhybrid itself sought bankruptcy protection, citing a cutback in German subsidies for solar energy.”

    That’s the problem with subsidising industries to this extreme. You distort the market too much, everything falls over and needs to be bailed out. Rather than selling their power at a good price and becoming profitable – they relied on subsidies, kept prices artificially low – and fell over the minute the Government ran out of money.

  2. Bob Wallace

    Here’s something interesting. Take a look at spot contract price at 2pm on April 1. The price goes to zero, even -0.1. Looks like “always on” generators are having to pay the grid to take their power in the middle of the day.

    http://www.eex.com/en/Market%20Data

    Look back across the week and see how prices are higher around 7am than later in the day.

    Then set the calendar for the same week in 2009 (click on the small calendar and back arrow to 4/2009) and see how midday prices rise.

  3. Frank Campbell

    Since 2004 when I first began to investigate the claims of wind and its victims it’s never ceased to amaze me how patronising and cruel wind’s proponents were…

    Wallace here is typical- dismissive: “the vapours” etc. And the usual insult from Monkeywrench.

    No one can be sure about health impacts- infrasound etc -because the fraudulent “industry” has been in denial for decades. Research is needed. But it makes no difference to my critique: people’s lives are ruined without compensation or redress. Worse, they are told by wind ratbags that they’re malingering. I’ve interviewed many wind turbine victims- most initially supported turbines nearby (Waubra) but learned the hard way. The distress is appalling.

    This is really about basic human rights. It’s about elementary planning laws being waived in the interests of big capital.

    The callousness says much about the Greens, who I’ve voted for since 1992. They have become a nasty, millenarian sect- prepared to sacrifice anyone who gets in their way. The real environment is being neglected in favour of the moronic obsession with premature/failed/expensive renewable energy technologies. Check out geothermal- a billion dollars of public and private money wasted already. Realisation of this is now widespread, with predictable electoral consequences. The Right spreads like a fungus across the land- it will probably be ignored by Crikey, but eleven DSE bioiversity scientists will be sacked shortly in western Victoria.
    The Greens and Gillard are responsible for this national collapse of progressive politics- and the proximate cause is climate millenarianism.

  4. Frank Campbell

    Yet more wishful thinking from Giles…but at least solar doesn’t ruin people’s lives- this from the Mt Gambier “Border Watch”:

    “Senators blow in to South East
    29 Mar, 2012 1

    SENATOR Nick Xenophon yesterday offered free legal support for a South East man, who will face living in a home surrounded by 16 wind turbines.

    “Their issue reminds me a bit of the film The Castle,” Senator Xenophon said about the retired Millicent farmers, John Clarke and his wife Sue, unaware it was Mr Clarke’s 79th birthday.

    Standing in front of the Clarke’s home, Senator Xenophon admired the view with Victorian Democratic Labor Party Senator John Madigan where eight turbines will soon tower within 1km, and another eight will be within 1.5 to two kilometres.

    By their side, the two senators met more than 20 other people, all with a story to tell about how Infigen Energy’s proposed 153-turbine wind farm was going to impact on them.

    Together the senators are seeking changes to federal laws so that windfarm developers cannot get renewable energy certificates unless they comply with a range of specific guidelines, overriding current state laws.

    They held a public meeting in Mount Gambier last night as part of their visit.

    Senator Xenophon slammed the State Government for “changing the rules”, enabling the Clarke’s to be in hemmed in by turbines.

    “I think it is disgusting the way the State Government changed the rules and shifted the goal posts – someone said it was a bit like being a kid and your mum telling you that you can’t do something so you go off to dad and get permission,” he said.

    “They shifted the goal posts to side swipe communities and it marginalises them.”

    Senator Xenophon also spoke about concerns investment in windfarms would be at the expense of other renewable energy options.

    “Once you put all your eggs in the windfarm basket, you actually choke off investment in all sorts of other renewables – you have tidal power, solar thermal and geothermal, but if you put billions of dollars into wind power, you are not going to have those other renewables,” he said.

    “The other thing, I’m working with Senator John Madigan to actually change the laws so you can’t actually get a renewable energy certificate unless you comply with minimum benchmark guidelines.”

    He said failings in state laws could be bypassed by having best practice standards in terms of community consultation and development, environmental and health guidelines.

    “The potential impact on human health can be quite significant,” he said.

    “I worry windfarms will turn into one of the 21st Century’s big white elephants that will cost all of us dearly – we already have 54pc of the windfarms in the country here in South Australia and enough is enough.”

    He said the likes of Mr and Mrs Clarke deserved to be treated with respect, “not the contempt this State Government’s current planning guidelines allow”.

    “That is why I will be doing my bit to get a legal team to give him some assistance,” Mr Xenophon said.

    “If it can happen to John, it can happen to anybody.”

  5. Wallace Bob

    “Bye is advising his customers to stay connected to the grid, but to use it simply as a back-up, a sort of battery of last resort. This can be done, he says, by using a 3-5kW system on the roof, battery storage and a power router — which can set excess PV power to go into the battery instead of the grid, and can source energy from the grid to top up the batteries when they get low.”

    This part is most interesting to me. Here, in the US, we have some states in which utilities are regulated. The free market does not operate to bring lowest cost power to customers. Some of those regulated (income guaranteed) utility companies are beginning to build new nuclear reactors. History suggests that these reactors will be finished past deadline and over schedule. They will cause increases in the retail price of electricity.

    Having no opt out by purchasing from a cheaper source, one might expect captive customers to install solar along with batteries and a power router enabling them to purchase much less/little electricity from the utility. And, perhaps, purchase at an off-peak or low price tier rate for the electricity they do buy.

    That, if done in any appreciable volume, will drop demand to the point at which these new reactors become surplus generation, but since they (and their mortgages) can’t be turned off, utilities will have to further raise rates which in turn will drive more customers away.

    Looks like a potential route to bankruptcy to me.

    The future is going to be so interesting….

  6. Adam Trethowan

    @john64

    You’re sort of right but I don’t think Giles was looking to mislead.

    I don’t know the exact setup of the european market but generally the price is reduced because:
    – the electricity market requires generators to bid an export price, the cheapest generator exports.
    – some generators can’t shut down their plants (as restart is prohibitive) so they bid really low, even below cost (even negative in some instances) to keep plant running
    – renewable producers get a special treatment and usually don’t have to bid on the market which drives the spot market price down…

    …as you see in the graph.

    It won’t hurt the solar producers because they’ve probably got pre-negotiated power supply agreements with wholesale buyers/retailers at a fixed rate (bolstered by tariffs).

    Clarifying: it’s not “paid for by the government” because the tariff/RET schemes are revenue neutral. It’s paid for by the public.

    Whatever ideology you subscribe to, I’m sure you can cry foul of something in response to that scenario but it does have the following undeniable effects:
    – increases renewable penetration in the portfolio (in Europe this is very important for energy security, less so in Aus).
    – drives down the PV cost curves through tech innovation/economies of scale

    and… on the trajectory of Giles’ article:

    – drives down Power bills, however illusory, is still a political playing card.

    Intelligent people know better but they’re a minority in this country unfortunately.

  7. John64

    Sorry, I don’t buy it. That price drop must be hurting the solar power producers as well surely? I have a sneaking suspicion that the only reason it’s so low is because the solar producers don’t care about price, they’ve got their guaranteed rebates and tariffs all paid for by the Government (which have been as high as 70c per kilowatt hour). In other words: of course the price will drop when “someone else” is paying the bill.

    @Jimmy: I’d be interested to know what the subsidies are on that system. How much of that $5k was paid for by the Government? And for your bills now, how much of that money is actually the feed-in tariff? If you take that all of that out, how much did your sister’s system really cost and how much does she really save?

    For example, a friend of mine installed his own small 1 kw system a year or so ago. The cost was about $1,000 and his first bill was pretty good. But take into account that the system /actually cost/ about $2 – $3k but was reduced thanks to the Federal Government rebate. Then there’s all the power that’s he’s “selling” back to the grid at some ridiculous price of around 40c per kilowatt hour. The only reason anyone is buying that is because of State tariffs… No electricity producer would pay 40c per kw/h for something they can produce at around 3c per kw/h from coal.

    If you actually take both of those out, what happens is his system is generating power when no-one’s home to use it (from 1 – 5 pm in the afternoon) and most of the power he uses is actually coming from the grid (IE: Coal). The only reason his bills look so good is because of the tariff. If that power wasn’t being sold at such a ridiculous rate, he wouldn’t actually be any better off. And he’d never actually pay off the initial cost of the installation before it passed its use-by date.

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