The Effect of Intermittent Renewables on Electricity Prices in Germany
- Posted on January 9, 2014
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- A strong negative correlation between the percentage of intermittent generation on the grid and the price received by solar and wind generators was established from German electricity data for the year 2013.
- This negative correlation will increasingly hamper the competitiveness of intermittent solar and wind which are expected to be the primary drivers of the Energiewende from this point forward.
Solar and wind advocates often point to the falling electricity prices in Germany as a sign that the Energiewende is working and intermittent renewables are not as expensive and impractical as critics claim. However, as this article will strive to demonstrate, quite the opposite is true. Falling electricity prices offer a good demonstration of how quickly the market discounts intermittent renewables as penetration increases, thereby further eroding the already poor competitiveness of these electricity sources.
As discussed previously, intermittent renewables enjoying priority dispatch regularly reduce demand for dispatchable generation, thereby reducing prices. This simple supply/demand mechanism creates a situation where owners of intermittent renewable generators are forced to sell the bulk of their product at times when prices are the lowest, thereby requiring subsidies even after grid parity is reached on a LCOE basis. In addition, the inevitable oversupply created by technology-forcing of intermittent renewables puts further downward pressure on prices.
Thanks to electricity data published by the Fraunhofer Institute, this market theory can be validated using detailed data of electricity generation by intermittent renewables (wind and solar) and spot prices. The analysis will first focus on weekly data and then enhance this data through information gained from more detailed hourly data.
Total electricity generation from intermittent renewables as well as volume averaged spot prices are given directly in the aforementioned references for every week in 2013. The correlation between these values is plotted below:
As seen in the figure, the weekly solar and wind generation explained about 45% of the variance in the weekly German spot price (as indicated by the R2 value) with higher solar and wind generation leading to lower spot prices.
To better visualize the effect of intermittent renewables on the electricity grid, the amount of intermittent renewable generation can be expressed as a percentage of total generation, i.e. the degree by which the system is changed from the standard fleet of dispatchable generators. This correlation is shown below. Note that the total weekly electricity generation data from Fraunhofer used to express intermittent renewables generation as a percentage of total generation was augmented by 28%. This was done based on the difference between total German electricity generation in 2012 as given by BP (618 TWh) and that given by Fraunhofer (483 TWh) because Fraunhofer only reports traditional generation from sources greater than 100 MW (biomass is totally neglected for example).
It can be seen that the correlation is now stronger, with the percentage of intermittent renewables present in each week explaining fully 65% of the variance in the data.
However, two additional adjustments are necessary to better reflect the electricity price implications of higher penetrations of intermittent renewables. Firstly, it should be acknowledged that Germany uses its neighbours’ dispatchable generation capacity to balance out a significant portion of the intermittent capacity on its grid. This implies that the percentage of intermittent renewables on the German grid should rather be seen as a smaller percentage of intermittent renewables on the grid of Germany and its closest neighbours.
Secondly, it must be acknowledged that the average weekly price received by intermittent renewables will most likely be lower than the total average weekly price due to hourly price fluctuations in response to intermittent spikes during the week. These two factors were assessed by analysing hourly data on total electricity generation, intermittent generation, export/import fluctuations and spot prices.
Because the extraction of this data from published graphs is a very tedious and time-consuming process, only the three weeks with the highest percentages of renewables generation (weeks 1, 5 and 44) were analysed. Week 1 is shown below as an example:
An inverse correlation between intermittent renewable generation and prices as well as a correlation between intermittent renewable generation and exports can be qualitatively discerned from the figure. These effects are quantitatively analysed below.
Effect on import/export balance
The correlation between hourly renewable generation and imports/exports for all hours in the three aforementioned weeks is shown below. It is immediately clear that the correlation is substantially weaker than the correlations shown in previous plots. However, despite only explaining 11% of the variance in the data, the correlation is still very highly significant with a very low p-value of 1.2E-14 because of the large sample size (generally a p-value below 0.01 can be considered to be highly significant).
The correlation in the above data is relatively weak primarily because the three weeks in question were wind-dominated weeks. High capacity factor wind (such as Germany experiences during winter months) is a fairly good quality resource which, at relatively low penetrations, does not require rapid ramping of balancing power plants. For solar dominated weeks, such as week 25 shown below, the situation is quite different.
It is immediately clear that Germany uses a lot of the dispatchable capacity of its neighbours to help balance sharp daily fluctuations in solar output. The correlation between intermittent renewables output and the import/export balance is given below where it is confirmed that intermittent generation explains a much larger portion of the variance in electricity exports in the solar-dominated week than in wind-dominated weeks.
In conclusion, it can be gathered from the previous two figures that, for every 1% increase in generation from intermittent renewables, German electricity exports increase roughly by 0.28% in wind-dominated weeks and 0.46% in solar dominated weeks (derived from the slopes of the linear regression fits). It can therefore be conservatively estimated that Germany uses an additional 30% of dispatchable generation from its neighbours to balance out its fleet of intermittent renewable energy generators (i.e. if solar and wind ramp up by 1%, exports ramp up by 0.3%).
Effect on electricity price
The correlation between the electricity price and electricity generation from intermittent renewables in the three weeks with greatest intermittent renewable generation is shown below:
The trend is again easily discernible and clearly illustrates that wind and solar operators must sell the bulk of their product at low prices. The volume weighted average spot price received by solar and wind operators in these three weeks was calculated to be 13.1% lower than the volume weighted average spot price for all generation. It can therefore be concluded that, for a week where solar and wind contribute about 20% of total electricity, wind/solar operators will receive 13.1% lower prices per kWh generated than the total average.
However, this situation rapidly improves for lower penetrations. For example, wind in Germany is well aligned with seasonal demand (i.e. wind output is highest in winter when electricity demand is also highest). Solar is misaligned with seasonal demand in Germany, but it does produce electricity during the daytime when electricity prices are higher. Thus, it can be estimated that intermittent renewables will receive about 10% above the average price at negligible penetration levels due to the premium during winter months and day hours shown in the two figures below:
In conclusion, it can be estimated that solar and wind operators will receive a premium of 10% at ~0% penetration, but will have to give a discount of 13% at 20% penetration. It is assumed that this premium/discount varies linearly between these two datapoints.
Using all of this data, the correlation between the weekly electricity price and the weekly percentage generation by intermittent renewables can be updated as follows:
- The percentage of intermittent renewables is divided by a factor of 1.3 to account for the estimation that Germany uses the dispatchable generation of its neighbours to balance out 30% of the variation in its intermittent renewables.
- The price received by solar and wind operators will be 10% above spot at ~0% penetration and 13% below spot at 20%/1.3=15.4% penetration.
When these two refinements are implemented, the correlation between intermittent generation and prices received by solar and wind generators for all weeks in 2013 looks as follows:
It can be seen that the weekly solar and wind generation percentage explains fully 78% of the variance in price received by solar and wind producers. The regression shows that, for every percentage increase in intermittent generation, solar and wind operators will receive €2.3/MWh less for their product. This implies that, under current market conditions, intermittent renewable energy will be valued at €0/MWh when it reaches an estimated 28.3% penetration in a given week.
This article has demonstrated a strong negative correlation between the percentage of intermittent renewable energy generation (solar & wind) and the price received by generators of this intermittent power. Through this mechanism, the economic attractiveness of intermittent renewables will rapidly deteriorate as more subsidized capacity is brought online.
This understanding is very important because, as can be seen from the graph below, the Energiewende is projected to be driven almost entirely by intermittent wind and solar from this point forward. Generation from these intermittent sources is projected to increase from 2013 values for solar and wind of 29.7 TWh and 47.2 TWh respectively (more than 15% behind the 2013 targets outlined below) to the 2018 targets of 48.3 TWh and 104.1 TWh.
The easy days of expansion through reasonably practical and affordable biomass and low-penetration onshore wind are a thing of the past. From this point onwards, the Energiewende will have to be driven by installing ever-increasing amounts of solar PV and offshore wind at optimistic costs of around €130/MWh in a market that will offer prices dipping further and further below the current $37/MWh for increasing quantities of this intermittent electricity.
It is therefore quite clear that the situation in Germany is highly unsustainable at present. Just how and when this story will end remains anybody’s guess though. Probably the only thing that is for sure is that the world will continue watching with great interest.