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Tracking Energiewende Performance

Highlights:

  • The Energiewende is proceeding ahead of schedule with high grid reliability. 
  • However, costs are much higher than originally planned, while CO2 emissions are stagnating. 
  • Net value of new wind/solar is approaching zero as market value declines and integration costs increase.
  • Wind/solar market shares have now reached the point where large grid expansion projects become critical. 
  • It will be very interesting to see how Germany performs in this complex next phase of the Energiewende.  

Introduction

The German Energiewende has long been the world’s leading experiment in large-scale deployment of variable and non-dispatchable renewables. Data from this €200 billion (and counting) experiment is very important to quantify the practical and economic challenges of large-scale wind/solar power deployment.

The primary experiences from the Energiewende are well documented. On the positive side, Germany has been able to continue expanding its renewable electricity output at a very impressive rate. On the negative side, the costs of this transition have been higher than expected and CO2 emissions have barely budged since the 2008/2009 financial crisis.

Wind/solar shares and CO2 emissions under the Energiewende (source).

This article will delve a little deeper into these trends with the help of the Energiewende tracker from McKinsey & Co. But first, let’s take a brief look at perhaps the most important datapoint from this experiment: wind/solar market value.

Current wind/solar share and market value

Last year was a good year for German renewable electricity production, especially wind power. In total, 104 TWh of wind and 38 TWh of solar electricity was generated. Total German electricity production amounts to about 650 TWh, resulting in wind and solar shares of 16% and 6% respectively.

When considering practical integration of variable renewables, however, the effective market shares are about 25% lower given that Germany relies heavily on imports/exports to balance its wind/solar output (quantified earlier). A sample week in 2017 is shown below as an example of the clear correlation between wind/solar output and electricity exports.

This brings the effective wind and solar shares to 12% and 4% respectively. At these shares, the market values of wind and solar power are already down to 82% for wind and 92% for solar PV (below) – in line with data used in a previous article illustrating the perpetual subsidy dependence caused by this self-cannibalization effect of variable and non-dispachable renewables.

Market value of different electricity generating technologies relative to the system average in Germany for the year 2017 (source).

When we use the marginal value of new wind and solar capacity (see aforementioned article), correctly accounting for the fact that new capacity will lower the value of all existing capacity, the value factors of new wind and solar drop to 54% and 62% respectively. This is a critical insight from the Energiewende experiment: even at current modest market shares, new wind and solar energy is worth just over half the current wholesale price, about €18/MWh and €20/MWh respectively.

Energiewende performance measures

The McKinsey & Co report contains 13 performance trackers that will be briefly discussed below. In all the graphs, the target trajectory is indicated by the light blue line and the actual trajectory by the dark blue line.

Firstly, the well-known stagnation of CO2 emissions is shown. This is primarily the effect of displacing nuclear with renewables while coal remains relatively constant.

Annual equivalent CO2 emissions.

As mentioned earlier though, the rate at which Germany has expanded renewables is very impressive. The Energiewende has therefore successfully proven that renewable energy can be rapidly built out if subsidies are large enough. It should be mentioned though, that the German renewable energy buildout is about 2x slower than the French nuclear buildout of the 1980s.

Percentage of renewables in annual electricity consumption.

Next, we see that primary energy consumption and electricity consumption are remaining quite flat. Given that very high electricity prices provide a large incentive for increased efficiency, this result therefore appears to illustrate the limits of what can be achieved by energy efficiency measures.

Annual primary energy consumption.

Annual electricity consumption.

Next, we see that Germany has managed to maintain impressively high grid reliability, primarily by maintaining a large reserve margin.

Minutes of power supply failure per year.

Percent reserve margin maintained.

The costs of maintaining this good grid reliability are rising though. As shown below, network costs are increasing rapidly and are currently up to €13/MWh of wind/solar electricity. This is the cost associated with grid stabilization and reserve power plants. It is important to note that this cost is approaching the marginal value of new wind and solar, implying that the net value of new wind & solar capacity is already approaching zero.

Added grid costs from wind/solar power.

Part of the reason behind this rapid cost increase is that electricity networks are not being expanded rapidly enough. The two following graphs show that Germany is falling behind in terms of general grid expansion and interconnections with the broader European grid. The need for vast transmission system expansion, often across international borders, is one of the primary challenges of accommodating high wind/solar market shares.

Transmission expansion.

Interconnection capacity as percentage of generating capacity.

Next, we take a look at electricity prices. Firstly, the famous Energiewende surcharge on consumers is shown below. It has flattened out at about double the original target.

Renewable energy surcharge.

As a natural result, German households pay almost 50% more for electricity than the European average.

Percentage by which household electricity prices exceed the European average.

Industries are protected from this cost increase to a certain degree, although prices remain higher than the target.

Percentage by which industrial electricity prices exceed the European average.

Finally, a measure of the number of jobs in renewable energy is provided. It is clear that significant contraction has taken place in recent years following the great solar PV boom of 2010-2013.

Number of renewable energy jobs.

Discussion and conclusion

To date, the German Energiewende has clearly proven that renewables can be expanded rapidly if the population is willing to pay. Renewable energy expansion is proceeding ahead of schedule and grid reliability remains high, but this comes at a cost that is more than double original targets. Cost will continue to pose a significant challenge as the net value of wind and solar power approach zero due to falling market value and rising integration costs.

The Energiewende now enters the next stage of wind/solar integration where substantial grid expansion is required to balance variable renewables. Currently, Germany is falling behind with this task, leading to rapidly increasing grid stabilization costs.

This will be an interesting test for the Energiewende given the complexity and scale. Up to this point, the modular nature of wind/solar power made their expansion attractively simple. From this point onward, however, continued expansion will require large and complex national and international grid expansion projects.

Aside from this transmission buildout challenge, it will not be long before Germany will require significant expansions of energy storage. The current electricity mix already achieves occasional scenarios where wind/solar supply approach total demand, resulting in negative electricity prices. This will either require curtailment or energy storage, both of which are very costly.

The Energiewende therefore remains a fascinating large-scale energy experiment. As far as I’m concerned, the jury is still out on whether this will work or not. I will certainly continue to follow closely as Germany embarks on this next, much more complex, phase of wind/solar power expansion.

Content Discussion

Robert Hargraves's picture
Robert Hargraves on July 10, 2018

Schalk, I like your articles. Can you update the links in this one to reflect the new hosting?

Audra Drazga's picture
Audra Drazga on July 10, 2018

Robert - the links to this are broke because of the site transition.  They should be back live shortly.  Sorry about the inconvience! 

Rick Engebretson's picture
Rick Engebretson on July 10, 2018

Nice to read your articles again, Schalk. Instead of allowing "the German experiments" to define "renewable energy," I would again like to share a different direction we have discussed before, biofuels.

A very interesting link to the U. of MN. Chem. Engineering (and beyond) is here; https://dauenhauer.dl.umn.edu/research/biofuels

Further, recently visiting the lovely St.Paul, MN. district heating plant area, biomass advocacy is now emphatic. Nested between Excel Energy Center, the Science Museum of Minnesota, etc., is a working prototype with abundant information.

So I am confidant the people that provide abundant "dispatchable" food are ready to ramp up abundant "dispatchable" renewable energy resources. I am greatly relieved the weather will not control sustainable energy resources.

Schalk Cloete's picture
Schalk Cloete on July 11, 2018

Thanks Robert. My previous TEC article linked in this article is now here: https://www.energycentral.com/c/ec/windsolar-expansion-will-require-perpetual-subsidies, but itseems like the images for this article are not ported over yet. 

Schalk Cloete's picture
Schalk Cloete on July 11, 2018

Hi Rick, it is good to be back on the new TEC.

I also think that biomass will be an important contributor in the future. Of course the availability of sustainably produced biomass is limited, but there is enough to take over many of the applications where we have no viable alternatives to fossil fuels. Balancing intermittent renewables could be another important application. 

Rick Engebretson's picture
Rick Engebretson on July 11, 2018

Schalk, this became more timely with President Trump asking Germany how we reconcile NATO and new gas piped from Russia. One might also question Iran energy. After 30 years we have the data, windmills and solar panels won't power Europe.

Not "of course the availability of sustainably produced biomass is limited." Instead, the availability of wastefully consumed biomass is limited. I was absolutely delighted to discover serious chemical engineers and serious industry now know this.

Matt Robinson's picture
Matt Robinson on July 11, 2018

A good article. Thanks.

I wonder if there'll ever be an article comparing the current costs of Germany's Energiewende with the strategy of keeping their nuclear plants and replacing coal plants with nuclear?

I would be very interested to see all those graphs with another line showing the nuclear strategy and how it might have developed.

Schalk Cloete's picture
Schalk Cloete on July 12, 2018

Hi Matt. This is a difficult question.

First off, it is important to keep in mind that Germany is not phasing out nuclear because of economics, but rather due to (perceived) safety concerns. 

If we only consider cost-effectiveness, there can be no doubt that a nuclear strategy would have been much cheaper and much more effective at curbing emissions. However, we should be mindful that most of the Energiewende costs were accrued in the earlier years when wind and solar were still expensive (particularly the solar PV boom of 2010-2012). If another country wants to replicate the Energiewende today, they would be able to do it at a cost below nuclear.

Thanks to their impressive cost reductions, wind and solar are great at moderate market shares (up to the 10-20%  range). Their modular nature makes them easy and fast to deploy and intermittency is not such a big issue yet. The challenge comes when we start pushing beyond this level. As stated in the article, new wind and solar are already approaching zero net value in Germany. This means that, no matter how cheap they get, deployment will always need to be subsidized.

Thus, if deep decarbonization is the goal (as recommended by climate science) a nuclear pathway will probably be cheaper. But there can be little doubt that wind and solar will be cheaper if the goal is only moderate decarbonization and improvements in energy independence. 

Charles  Forsberg's picture
Charles Forsberg on July 15, 2018

Germany has what is called a faith-based energy policy--wind and solar at 22% of electricity production with price collapse limiting value of added wind and solar. One more experimental point on where wind and solar limits are today. The question is how many times does this experiment have to be done before people believe the answer?

The solution to enable larger-scale use of low-carbon wind and solar is cheap storage with assured electric generating capacity. The only cheap storage is thermal storage. The DOE capital-cost battery goal for battery storage is $150/kWh and double that after add the electronics. The DOE capital storage goal for heat storage is $15/kWh. Some big concentrated solar thermal plants appear to be below that goal but concentrated solar only works in some locations.

Nuclear reactors produce heat and thus couple to heat storage. When couple nuclear to heat storage and electric prices are low: (1) operate reactor at full power, (2) operate turbine at minimum load to enable rapid return to full power  (3) send excess steam to heat storage (steam accumulators, hot oil, concrete, etc.) and (4) buy low-price electricity to provide more stored heat. When electric prices are high: (1) all reactor steam to turbine, (2) added steam from storage to turbine and (3) peak power greater than base-load power with oversized turbine or separate peaking turbine.

The limitation of all storage technologies is that storage can be depleted. If heat storage, can assure peak power capacity by adding a steam boiler to provide steam when storage is depleted. Because have heat storage system that provides peak power capability most of the time, this boiler may be used less than 100 hours per year. If bought storage system with oversized turbine, the incremental cost of that boiler will be $100-300/kWe or half or a third of a gas turbine—the cheapest method to assure generating capacity.

Nuclear with heat storage and steam boiler can be (1) the replacement for fossil as a dispatchable electricity source and (2) the enabling technology for large-scale use of wind and solar—which requires really cheap storage and assured backup generating capacity to be viable. Open source paper on these options available Forsberg, Electricity Journal April 2018: https://doi.org/10.1016/j.tej.2018.03.008

Bas Gresnigt's picture
Bas Gresnigt on August 16, 2018

Since ~2003, Germany is working on extreme cheap seasonal storage with unmanned PtG(H²) plants housed in standard sea-containers. The produced gas (H²) is for now injected in natural gas pipelines. In the end the gas will be stored in deep earth caverns.
They have enough of those to bridge long periods (months) of no wind in winter (as then the sun hardly shines in Germany due to its high latitude).

The regeneration of electricity is expected to occur frequently with fuel-cells as those have an higher efficiency (70%), are more flexible (faster start-up), don't have high temperatures and hardly moving parts, so less maintenance. Hence remote controlled unmanned plants that start automatic when electricity price at the power market goes above a certain level. So the GtP computer can sell against a profit. 

Check their general PtG developments.
And their many MW scale pilot plants. Click at "zur Projektkarte »" in this page.
They expect to start with regular roll-out in 2024. May be later as the storage requirements show to be less than expected as big consumers adapt to the power prices (e.g. alu smelters only operate when the price is very low at the power market) and probably small consumers will do too with the introduction of smart metering.

Btw.
PtG is also utilized to generate H² at gas refill stations for the new generation of electric cars (Toyota Mirai, Hyundai Nexo, buses, long haul trucks, etc), to supply chemical plants, etc..

Edmund Kelly's picture
Edmund Kelly on July 15, 2018

The latest BNEF clean energy investment report for Q2 2018 has a chart that illustrates the decline of clean energy investment in Germany (and others that show a similar overall decline for Europe) The last three quarters have been unbelievably low, way less than $1B/Q. This on top of a steady decline since 2011 would indicate that the Energiewende experiment may well be over. Its clear from Germany and California that penetration levels significantly less than utilization factor rapidly raise the costs of intermittent clean energy. All additions to mitigate these costs add new costs and increase overall cost. Overall clean energy investment wordwide has stalled since 2011 and now with China's PV pullback, overall investment seems set to decline. With Europe's decline and Trump in the US, its hard to see who is leading the clean energy charge. Following the money is a reliable indicator that cuts through hype and wishful thinking.

Bas Gresnigt's picture
Bas Gresnigt on August 16, 2018

Hi Edmund,
The figures show that the Energiewende is accelerating despite the decreasing investments.
~10years ago renewable share in German power production increased with 1.5%/a, in recent years it became 2%/a. An increase of ~30%.
Renewable share is now ~40% of all produced public available electricity. Check at data-charts.

The German Energiewende authorities plan a further increase after ~2023 as they then will increase the yearly volume of tendered offshore wind. As the costs of offshore wind are then expected to be below 3cnt/KWh (the expected market price), that increase won't increase the costs of the Energiewende.

All thanks to the fast decreasing prices of wind, solar and storage.

 

Schalk Cloete's picture
Schalk Cloete on July 16, 2018

Hi Charles,

It is true that heat storage is cheap, but it is important to keep in mind that heat storage costs should be multiplied by a factor of at least 3 when storing the heat for electricity production via steam cycle. This brings the DOE target you mention up to about $50/kWh. Oversizing a turbine for 100 hours per year of peak production also does not sound like a very economic proposition because efficiency drops in part-load operation.

Personally, I’m more in favour of chemical energy storage. Conversion efficiencies are still fairly low, but, depending on the produced synfuel, storage costs can be almost negligible. More importantly, deployment of these synfuels in a future economy with volatile electricity prices and an increasingly complex interconnected energy system will be attractively simple and versatile. 

Schalk Cloete's picture
Schalk Cloete on July 16, 2018

Hi Edmund,

I share your skeptisism about wind and solar market share expansion beyond their average utilization factor. From a climate change point of view, the biggest risk with the current expansion of wind and solar power is that the world will eventually reach a point where it is forced to admit that the required deep decarbonization is simply impossible with wind and solar. Shifting back to a baseload dominated system will then be incredibly expensive and time consuming. 

As long as investment remains flat, deployment rates of wind and solar are still increasing due to their impressive cost declines. But several regions are now arriving at the point where the practical and economic challenges of wind/solar integration are becoming undeniable. It will be very interesting to see how this pans out over the next couple of years...

John Oneill's picture
John Oneill on July 18, 2018

Hi Schalk - as regards heat storage, this presentation by Moltex Energy claims (pages 25-26) that one of their high temperature reactors using hot salt storage, as at some solar thermal plants, and running at a thirty percent capacity factor, would have lower capital cost per kw installed than combined cycle gas turbines. They use a tertiary salt loop anyway, to separate the nuclear island from the steam turbine hall, so adding extra insulated tanks for hot and cold salt, plus extra turbines for peak demand periods, would be cheaper than having a whole redundant reactor. Other high temperature reactors could do likewise. Moltex has recently signed an agreement to begin development at Point Lepreau, New Brunswick. Another company will be working there on a development of the Experimental Breeder Reactor, which ran for thirty years in Idaho. I understand that sodium cooled reactors are limited to 510 C outlet coolant temperatures, though - better than the 315 C of a light water reactor, but perhaps a bit low, without reheat, for an off-the shelf turbine, as commonly used in the coal or gas  industry, once salt storage losses are factored in. 

http://www.moltexenergy.com/learnmore/An_Introduction_Moltex_Energy_Technology_Portfolio.pdf

Helmut Frik's picture
Helmut Frik on July 23, 2018

The calculation, that the level of grid management costs

(all costs including the costs to

- stabilise conventional generation,

- dispatch in the grid when exports of conventional power exceed gid capacities,

- reserves to hinder the closure of conventional capacities (so to keep them open) where grid capacity does not allow to provide the power from elsewhere as costs

devided by the generation of solar and wind power)

in comparison to the prices for which companies find it economical useful to build wind or solar power staions does not make any sense at all.

The equation is not: (With A: grid costs of total grid stabilisation, B costs to generate power from solar +wind)

B-A= value of wind and solar power (even if the grid management costs in the inflated version as used here is accepted)

But it includes the factor C: cost for alternative conventional power generation from new power plants, e.g nuclear-

and is Value= C-A-B.

Because in a) the net value of solar power generation would decrease, and not increase when solar or wind power generation gets cheaper, while in practice lower costs to generate wind or solar power leave more money to expand grids.

So if we e.g. take the around 120€/MWh of Hinkley point including some of the inflation adjustment which is in the Contract as "C" and 40 €/MWh as value for new solar and wind from the last tenders for "B", ad the inflated 13€/MWh for grid stabilisation, the result woudl be 120-40-13€/MWh as value for solar and wind power

So costs for grid stabilisation could go up a long time before even getting close to any new nuclear capacity in comparison to new wind and solar. Also it can be seen how each new power line which comes online in critical regions reduces the grid stabilisation costs drastically, which can be seen in the costs over time and how they drop when new power lines come online. See e.g. here: https://www.energate-messenger.de/news/179807/kosten-fuer-netzeingriffe-auf-rekordniveau

Helmut Frik's picture
Helmut Frik on July 23, 2018

Addition to the last comment: the relative market values - relevant for the question how valuable wind and solar generation is relative to dispatchable generation - can be seen here. https://www.ise.fraunhofer.de/content/dam/ise/de/documents/publications/studies/daten-zu-erneuerbaren-energien/Stromerzeugung_2017.pdf

E.g. the average value of wind power generation seems to go down - with todays grid - quite linear, and might reach the zero line at a output of 55GW, which would bereachable with a amount of around 80 GW of wind power generation in germany at the peak hours. (page 34), till the average power output reaches 55GW a amout of around 240GW wind power generation in the existing grid would be neccesary.

The relative values at the market can be seen at page 37, and it needs to be taken into consideration that lower prices at times of high wind and solar power production, which come repeatedly and for sure in the future also initiate demand responses to expand and grid capacitys to expand to make use of this cheaper power. Which decreases the devaluing effect.

Correct is that a market model, where prices are made on the base of fuel costs does not make any sense when all market participants have no fuel costs any more. Then some other model of market to find the correct price is neccesary.

Schalk Cloete's picture
Schalk Cloete on July 23, 2018

Helmut, regarding your first comment, the value of wind and solar would go even lower if more baseload nuclear capacity was introduced into the system. In such a system, the wholesale price would fluctuate between very low values when wind/solar output is high (because nuclear plants can keep generating at very low operating costs), and then jump very high when wind/solar output is low so that nuclear can recover its capital costs. This would certainly not be an optimal system, but the point is that wind/solar value will be even lower if more nuclear is thrown into the mix. 

I'm certainly not a nuclear booster, but I'm sure that nuclear costs would be much lower than the €120/MWh you quote if it was given the total policy support and cheap financing enjoyed by wind and solar. Obviously, talking about new nuclear in Germany is pointless at the moment, but we will see what happens in the future as challenges with wind/solar integration continue to increase and more CO2 reduction targets are missed. 

I fully agree that the large grid stabalization costs of wind and solar can be moderated via grid expansion (this is clearly stated in the article). The point is that grid expansion is behind schedule and facing lots of challenges because projects are large, costly and facing public resistance. This is the much more complex next phase of the Energiewende. The easy modular deployment days of wind and solar are over and it will be very informative to see how Germany, arguably the best engineering nation in the world, handles this challenge. The rest of the world is watching. 

Schalk Cloete's picture
Schalk Cloete on July 23, 2018

As to your second comment, electricity pricing is simple supply and demand. Since electricity supply must match demand continuously, the ability to provide electricity on demand is extremely valuable. Wind and solar cannot do that, hence they are obviously much less valuable than dispatchable generators. No market design will be able to hide this simple fact.

Personally, I think that the need for a more complicated market design than the standard dispatch curve is a clear sign that the electricity sector is moving in the wrong direction. Continuously having to put various band-aids to support various generators is not sustainable and will inevitably end up in a big and costly mess. 

Helmut Frik's picture
Helmut Frik on July 24, 2018

Well CO2 emission targets were not missed in germany due to the power sector, but because of the traffic and the housing sector missing their targets. So do not confuse sectors here.

As far as grid expansions are concerned - those are especially delayed because when all planning and allowences have almost been achieved for cabeling on masts, politics decided to lay everything under ground, so all planning and other red tape started again from the beginning. Other projects are behind shedule - also because grid operators earn good on bottlenecks in the grid. So when someone complais at courts, they take all time in the world to settle this to the last instance.  The longer it takes the better. These are organisational issues, not technical or organisational. And must be changed, but politics is slow in this.

About your second comment - you have completely missed the point. Sorry to say this. The fault is NOT in power generators which produce power at low or zero variable costs, but on the market design.

Imagine a big black box power generator,  totally flexible, with no variable costs, providing all kinds of grid services at once at no extra costs. But it costs something to build it. If a grid is supplied by a lot of such black boxes, the power price in this grid will always be zero, so the owner of these - obviously very useful black boxes  (usefull for the society) - get absolutely no money for supplying the society with energy.

Till so many of these black boxes are switched off that there are rolling blackouts in the grid, then they get at sudden astronomic high payments for their broken (->blackouts) service.

This is a absolutly clear sign that the given market design has severe flaws when it comes to power generation with no fuel costs.

Schalk Cloete's picture
Schalk Cloete on July 24, 2018

Really? Everything I've read says that coal is the biggest reason why German CO2 emissions are stagnating. Could you give some sources comparing German power sector emissions to official targets?

About the power market, the price is not determined directly by fuel costs, but by the bids from generators. Your black box generator will simply bid higher than zero to recover its capital costs, even though its running costs are zero. Obviously, from a profitability point of view, bidding zero is the same as selling no electricity for such a black box generator (if there are no subsidies), so these generators will bid higher than zero. 

Helmut Frik's picture
Helmut Frik on July 26, 2018

No, in a market design as today, the "black box operator" will bid down to itÄs short time variable costs, to get at least something, and not to stay idle with nothing. this is why the bids of conventional power plants are the fuel costs (+ a tiy bit for additional wear and tear),and the merit order follows te fuel costs.  Capital costs can only be earned when plants with higher fuel costs are being payed by the market.

This worked so far, because plants with low capital costs had high fuel costs and vice versa. It simply stops working when noone has fuel costs. As long as this is not understood, the problem of the whole market is not understood.

About coal power generation in germany: e.g if you loo at tha historical prognosis here: [Klimaschutz in Deutschland bis 2030 Endbericht zum Forschungsvorhaben
Politikszenarien III Umweltbundesamt] you find the following deviations betwenn prognosis and reality:

- power generation is higher than expected, and especially exports are much much higher than expected.

- renewable power generation is so much higher that it is out of the model boundarys. (expected values for 2020: wind 26,8TWh, solar 0,8 TWh...)

- coal was expected to have a share in power generation tin 2050 of 31%. If closues go on as proposed this could be reached in the early 2020's. If you look at the reference scenario, Table 2.2.5 hard coal consumption was expected to be much, much higher than it actually is (reference scenario). 

There are reduction scenarios where coal use would have been lower that it actually is, but these were based on lower electricity consumption in all other sectors that it happened in reality. So the power sector has to provide this demand.

 

Schalk Cloete's picture
Schalk Cloete on July 26, 2018

If the market ever gets to the point where there are no fuel costs, I maintain that bids will simply increase to cover capital costs. If prices stay too low for a long time, some generators will have to leave the market allowing the remaining generators to charge higher prices. There is no rule saying that generators have to bid their fuel costs. Bids just become very low temporarily in an oversupplied market like Germany until the least profitable generators are forced to leave the market, thus restoring the supply-demand balance. 

There are some existing supply-demand dynamics where capital costs are much greater than operating costs. For example, the real estate rental market charges occupants far more than the operating cost of running the building because large capital costs have to be recovered. If they did not do this, there would be no market. The same will happen if electricity markets ever reach this point. 

About German emissions targets, I was not talking about such old projections, but about the more recent ones making official targets up to 2050 that are currently being missed. From the data I can see in this article (https://www.cleanenergywire.org/factsheets/germanys-greenhouse-gas-emissions-and-climate-targets), CO2 emissions from the whole economy has thus far reduced by 28% relative to 1990, while energy industries have only reduced by 25%. This is quite shocking because energy industries (mainly electricity) is much easier to decarbonize than the rest of the economy. 

Nathan Wilson's picture
Nathan Wilson on July 29, 2018

Schalk, regarding your concern: 'From a climate change point of view, the biggest risk with the current expansion of wind and solar power is that the world will eventually reach a point where it is forced to admit that the required deep decarbonization is simply impossible with wind and solar. '

I believe a grid which is powered partially by wind/solar and partially by fossil fuel with carbon-capture & sequestration (CC&S) is feasible for wealthy nations; though I doubt it will be feasible for poor nations (due to the cost, and the potential for fraudulent CC&S).

Given the extra cost of this route, rich nations may resist the change if poor nations don't also decarbonize; thus global inaction results.

The growing interest in nuclear plants with thermal energy storage systems can provide nuclear-friendly sunny nations with grids that get most of their day-time electricity from solar (which is great for public relations), while still getting most annual electricity from nuclear, and thus the deep decarbonization that only nuclear can provide. 

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Regarding electricity market pricing, the real-estate market is not a fair comparison, since landlords don't get higher than their offering price, but in electricity market, every winning bidder is paid the "clearing price" (the highest bid accepted), not their own bid.  This rule is specifically included to allow each supplier to bid their marginal cost, which insures the cheapest producers get dispatched first (i.e. "merit order"), while still earing a profit.

Also, don't forget about demand-response.  This will likely set the electricity prices for at least the 20 or so hours with the highest load (tightest supply), and the prices involved could be around $1/kWh.  The more often these high price events occur, the easier it will be to justify building an additional power plant.

If you're talking about dozens to hundreds of hours per year, then fossil fuel will likely win the bid, unless there is a sufficiently high price on carbon emissions (which can allow CC&S, hydrogen, or ammonia to compete).

So market pricing can work in a decarbonized system; it just will be a little painful for consumers (who must decide whether to use very expensive electricity during heat waves).

Schalk Cloete's picture
Schalk Cloete on July 30, 2018

Agreed on the potential of flexible nuclear and solar in sunny developing countries. The huge populations in India and Africa can potentially benefit from such a combination in the long-term. Getting there will be very difficult though, mainly due to the capital-intensive nature of solar and nuclear, making them expensive in a rapidly growing economy (high discount rate). 

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Even though the real-estate market is certainly not perfect, it theoretically also works by setting the price based on the highest cost supplier needed to satisfy a given level of market demand. Landlords who have paid down their mortgages will still charge the highest rates acceptable by the market (akin to a clearing price), thus making a large profit. This high price will mostly be set by new market entrants who need to pay down large mortgages (and who will default on their debt and leave the market undersupplied if rental rates become lower). 

It is true that suppliers currently bid their marginal cost, but I was just saying that this marginal cost would include a capital cost component (akin to a monthly mortgage payment) in the theoretical system described by Helmut where no generators have any fuel costs whatsoever. 

Helmut Frik's picture
Helmut Frik on July 30, 2018

@Schalk Cloete: This as I wrote: supplyers are forced out of the maket till rolling balckouts will appera, and at the sudden power prices become extremely high( tendency infinite high) There is no stable market possible with todays market rules and power supply with zero variable costs.

Capital costs are not relevant for a bid, because in competition they might not be earned. It is always better to earn something, than to arn nothin when issuing a bid including the capital costs, so everyone will bid below, ending up with no variable cost with the lowest positive bid which the system allows to enter - e.g 0,1ct/MWh or so. 

Wich causes the neccesity to change the market rules. It might be neccesary to have at least variable prices till all/most end customers, to get demand respnses. Or to collect the capital costs in a different way. I do not see that there is any force which maes fossil fuel power generators to remain in the market. This only exists under the assumption that they are cheaper per capacity than a other supplyier which is connected to the grid, with a grid capacity big enough to bring the power to the place where the demand is. This is unsure in both directions. Especially since prices for systems which are rarely built or for fuels which are rarely sold rise dramatically. While prices for systems which are built often have the tendency to fall.

Schalk Cloete's picture
Schalk Cloete on July 30, 2018

I fully agree that a system containing only hypothetical black box generators with no fuel costs will not work if generators are forced to bid their variable costs. All I'm saying is that the market can work naturally if generators are allowed to bid higher so that they can pay their creditors and investors. 

From the point of view of the seller, people will have to choose: bid higher or go bankrupt. Obviously, they will choose to bid higher. From the point of view of the buyer, people will have to choose: accept the higher bids or face rolling blackouts. Obviously, they will choose to accept the higher bids. I see no problem with this. 

Helmut Frik's picture
Helmut Frik on July 31, 2018

Well, your wish is not supported by todays market rules. In todays market rules, the buyers will only choose the lowest bid, and ignore that some rarely used capacity will go out of the market due to this. And face rolling blackouts at times of higher demand when this has happened. And sellers which include capital costs in their bid in a market with flat (zero) merit order will simply not get contracs. So to fulfil your wishes some adoption of market rules is neccesary.

Schalk Cloete's picture
Schalk Cloete on August 1, 2018

The market clearing price is determined by the point where the ascending supply curve from sellers and the descending demand curve from buyers cross. Buyers therefore cannot choose the lowest bid. 

In a system where no generators have any fuel costs and capital costs are dominant, there will also be a merit order. The lowest bids will be given by older plants that have successfully paid down their debts and only need to cover their O&M costs to return a profit. The highest bids will be given by new plants that need to make frequent large debt repayments and very old plants that have high O&M costs due to decades of wear & tear. As long as sellers have the freedom to adjust their bids to the level required to pay their creditors, I think this system will work naturally. 

Bas Gresnigt's picture
Bas Gresnigt on August 16, 2018

Not quite correct. Bidders send their lowest bid, which will be determined by the marginal costs of their generator. Fixed costs, like the capital costs, play no role as those have to be paid anyway even if nothing is produced.

It's better to produce something as long as it delivers more than the variable costs, even if it's far below the cost price!

As new generators have lower marginal costs in general (new wind turbines have less maintenance costs, etc), the system has some built in preference for newer generators.

Bas Gresnigt's picture
Bas Gresnigt on August 16, 2018

Coming PtG plants will put a bottom at the power market of 1 - 1.5cent/KWh. With that price level regenerated power will cost ~5cnt/KWh.*)

The cost price of new wind & solar is expected to decrease in most regions towards ~1.5cnt/KWh during next decade.

Also because storage in deep earth caverns is extremely cheap,
all-in-all the system should work nice.

__________
*) The overall efficiency of the process PtG-S-GtP using fuel cells, is estimated to become 40 - 50%.
(S= storage in deep earth caverns)