“Low electricity prices” because of the growth of “sustainable energy”?

In line with previous post, there is this article from a Dutch newspaper titled “Engie can not pay for major maintenance of gas-fired power plants anymore(translated from Dutch). Philip Pouillie (CEO of Engie Benelux) explains that his company can’t afford to pay for the periodic maintenance of their gas-fired power plants anymore, delaying them as long as possible because they expect not to be able to earn back that money anymore. This is the reason that is given (translated from Dutch):

Engie has suffered from the low electricity price. That is a result of the growth of sustainable energy, the cheap power from coal, over-capacity and cheap import power from Germany. But the gas-fired power stations should, according to the energy companies, continue to run as ‘back up’ during the transition to wind and solar energy that will get shaped in the coming decade.

Another newspaper from the Netherlands explained it in a similar way:

The revenue of the [gas-fired] plants is too low to pay back the investment in major maintenance, the French energy giant expects. That is partly due to the low electricity price, overcapacity on the Dutch market and the production of renewable power. Electricity generated by gas turbines is relatively expensive compared to electricity from other sources, such as wind, sun and coal.

It is somehow suggested that alternative energy in combination with coal, overcapacity and import from Germany are causing these cheaper prices, therefor pushing gas-fired power plants out the market and now it are those gas-fired power plants that need to be supported. In the first article it also seems to be suggested that gas is only needed in a transition period, that in the future wind and solar can somehow do it on their own.

You could argue that decreasing prices are a good thing, whether it is due to sustainable energy, overcapacity, cheap import power from Germany or whatever. If these lead to low electricity prices, then let’s get more wind and solar… Unfortunately, as usual in alternative energy reporting, both articles only tell half of the story.

How is it possible that a power source like wind, that still need subsidies, results in low electricity prices? To understand the other side of the story, it is necessary to find out what these “energy prices” are exactly and who is benefiting from these prices being low.

It may seem puzzling at first. Generally, household energy prices are high in countries where the share of wind & solar is high and low where the share of wind & solar is low. So the journalists obviously don’t mean household energy prices, but “wholesale prices”. And yes, these are lowering when the share of alternative energy sources gets higher.

The first time I encountered the claim of low energy prices was in a Greenpeace brochure on the Energiewende and wrote a post on this claim. It is the 7th post in a series of 18 (starting from a post on the export strategy of Germany). In that post on the German energy prices I discussed this graph from the brochure:

Evolution of German wholesale prices according to year-ahead contracts

There is obviously a rather steep drop in wholesale prices in Germany, therefor the conclusion of Greenpeace was that “Cheap renewable energy pushes expensive fossil fuels further and further out of the market”. That seems also to be the suggestion in the two newspaper articles, that gas-fired power plants will now need support because wind and solar are getting cheaper.

The wholesale prices are lowering for sure, but that is not hard to understand. Those wholesale prices follow supply and demand. If demand is high and supply is low, then prices will be high. If demand is low and supply high, then prices will be low. Wind and solar, being intermittent energy sources, only produce energy when the sun is shining and wind is blowing (hard enough, but not too hard). When there is a lot of production when demand is low (at night, in summer, in the weekend, during holidays,..), then wholesale prices for the produced electricity will be low.

The example that shows best the limitations of intermittent sources is the contribution of solar energy to peak demand at our latitude in winter (roughly 8 hours daylight). The production of energy at that time is known beforehand: it is exactly 0.0. So when wholesale prices are highest, solar energy is completely absent. In summer (roughly 16 hours daylight at our latitude), when wholesale prices are lowest (due to holidays, not much need for lighting,…), there is plenty of sun. No wonder that wholesale prices are getting lower in the case of solar energy (wind is also intermittent, so similar stories could be told about wind too).

The result of this lack of production during winter peak is that 100% backup for solar energy needs to be available at winter peak demand. This in its turn means that those gas plants will not work all year anymore, thus producing less energy over the year and therefor becoming less economically profitable. It will take longer before the capital cost will be paid off. Unintentional consequence is that coal or lignite are preferred because they are cheaper. It is no mystery why Germany keeps on burning burning lignite. It want to keep its cost for generating electricity as low as possible.

The more intermittent energy sources are added, the lower the wholesale prices will drop. That is not necessarily a problem for subsidized energy sources since they get compensated.

Overcapacity is also easy to understand. Wind and solar are intermittent energy sources with currently an average capacity factor of 12% (solar) and 17% (wind). One way to deal with this intermittency is overdimensioning the installed capacity, so the valleys in production don’t get so deep (which doesn’t work out well). The problem is that when wind blows strong and/or sunlight is abundant, a lot of energy is produced with that oversized capacity and other power sources have to scale back or shut down. Resulting in a reduced efficiency. This overdimensioned capacity lowers the wholesale price.

The cheap import from Germany is also a result of the overdimensioning of German wind and solar capacity. Their strategy is to export the surplus produced by wind and solar in order to protect their grid from overloading. That energy is then super cheap (high production yet low demand) and sometimes even goes negative (Germany has to pay the international energy market to export that energy abroad). Additionally, when Germany has a surplus, the Netherlands will likely also have surplus production of wind and solar energy. Lowering the prices even more and also decreasing efficiency of the scaled back conventional power plants.

Germany has this export strategy because it tries to integrate intermittent power sources without the ability to balance that load. It is cheaper to just export the troublesome overproduction than to take care for proper backup or storage, which would make the Energiewende even more expensive. This is not a sustainable solution since many neighbor countries are adopting the same strategy and it will get much more difficult for this strategy when other countries will not be able to absorb the surplus because they experiencing the same problem.

Concluding, is the use of alternative energy leading to a low energy price? Yep, but it is not the household electricity price that is getting lower, on the contrary. It is the wholesale price that is affected and that is not exactly a good thing. Those gas-fired power stations do not get into trouble because wind and solar getting cheaper and gas can’t compete anymore, but because the intermittency of alternative power sources puts the wholesale price down. Leading to a situation where the owner of gas-fired power plants decides to delay maintenance as long as possible because otherwise these plants are no longer economically viable.

The interviewee and the journalists failed to explain what energy prices they were talking about and the mechanism behind these low prices. Now it seemed like a success story for wind and solar that push gas power out of the market because they became so super cheap, while it are wind and solar that created the problem in the first place.

4 thoughts on ““Low electricity prices” because of the growth of “sustainable energy”?

  1. tumbleweedstumbling

    In Canada we have cheap abundant hydro electricity but the governments have chosen to use them as hidden tax revenue generators. For example in Manitoba, the hydro electric utility has to pay a tax on every gallon of water that spins the turbines. The government recently doubled the tax which of course means higher utilities. They also add additional table charges. The result is a nation who has abundant hydroelectric power is paying ever higher prices, not because the energy actually costs more, but because the government sneaks in all kinds of hidden taxes. With the new carbon taxes now coming in as well, even the air is being taxed.

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  2. chrism56

    Isn’t selling goods (electricity is a good) below the cost of production commonly called dumping. Especially as another country is doing it and causing economic hardship for the power companies. Surely someone could take a prosecution as dumping is supposed to be illegal. After all, they slapped anti-dumping tariffs on Chinese solar panels.

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    1. trustyetverify Post author

      It depends on how you look at it. As far as I understand it, it is an economic strategy and following the law of supply and demand. Wind and solar are intermittent energy sources, they produce when there is sun and/or wind, not necessarily when there is a need for electricity. There are several ways to tackle this intermittency:

      • a backup system with fossil-fuel power plants, for example fast cycling gas turbines
      • a storage system to store electricity when it is abundant and release it at peak demand, for example pumped storage
      • interconnectivity
      • overproduction
      • or a combination of two or more of the above.

      All these solutions are inherently expensive because it results in a double infrastructure that has to be build/maintained, strengthening of the grid, loss of efficiency of the other energy sources and so on.

      The solution chosen by Germany is to overproduce and just to export the surplus abroad. This means that the price of the exported energy will be low (high production and low demand leads to low prices) or, in extreme cases, they will have to pay the other countries to get rid of that surplus that could overload their grid. But it releases them from investing in solutions that allows them to balance their load, which will be very expensive.

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  3. poitsplace

    Of course at this point I’m guessing the other people commenting aren’t thinking about this all together yet…it’s hard to see it as a whole picture

    Yes, the price of energy has “dropped”, because vast amounts of near worthless energy are being dumped. At the same time, essentially the same amount of fuel is being burned, shadowing the load, frantically spinning up to meet a shortfall, and obviously generating when its just generally not sunny/windy (which is thankfully a more cost effective mode). And quite a bit of this fuel consumption is just…pure consumption. No significant electricity is generated, just incredible inefficiency. Its essentially invisible…giving the greens the delusion that energy prices are lower because of wind. And when it is counted, its counted against the dispatchable energy sources, as if it’s the fault of the coal plant that it has to run without producing electricity just in case the wind stops.

    But its not the same system any more. There have been vast electrical infrastructure changes, mostly on the delivery end…adding many times the capacity to serve the same demand. More hidden costs. Transformers are likely being destroyed under the strain. New high tension power lines are being built …so they can more effectively deliver the vast amounts of energy that nobody asked for. And of course, the electricity is a lot more like the wind/solar they came from, going where IT wants, not where they want it to go (as stated in this report… http://www.acer.europa.eu/Media/News/Documents/QA%20on%20the%20Agency%20decision_06-2016_for%20publication.pdf )

    “on average, about 59% of the physical flows resulting from the DE-AT cross-border exchanges are not realised through the DE-AT border, but are flowing as loop flows through other borders” (Poland has been complaining about this)

    The greens do not understand, we have far less control over the electricity than most people think. Dividing it into a network of little energy islands of stable production works relatively well. Trying to shove overproduction across continents does not.

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