Not to be out done by Monika and Bram, Dominic Scott has another chat with his inner teenage self. This time on the topic of whether the rollout of renewables will eat itself. (For more on this topic, please see our Power System Blueprint deep dive on price cannibalisation.)
Hey! I just read a blog saying this green renewables stuff is all very well at first glance…
Well, hello again, young man! A blog, you say?!
…but as more wind and solar are built, the prices they get paid for their energy will fall — ‘cos wind and sunshine and so on are free fuels, right? And so the more of these technologies, the lower the prices of electricity will be, yeah…?
Yep, their fuel is free…
…and with these lower prices, the money earned by owners of solar and wind installations will fall, and they will increasingly struggle to make money…
Ah – the old price cannibalisation argument!
…and so no investor is going to invest in them in the first place, and so if the government is intent on building new solar and wind then Joe Public will have to fork out more and more money to pay for their construction.
There’s quite a lot to unpack here.
So why are you wasting your time with this renewables stuff? It obviously blows… no sane investor is going to invest in wind and solar off their own initiative. Instead, governments are going to end up doing it when the market is already signaling to them that it’s a bad idea!
OK, let’s just plough in. The extent to which more solar and wind leads to lower prices and lower revenues depends on multiple factors. The first factor is the cost of these technologies: the more their costs fall — and wind and solar have plummeted in cost over the last 15 years — the lower the market price required to support any given level of rollout by the market without relying on government support.
Well, that’s the one sliver of sunshine then.
Second, the extent to which market prices will fall as solar and wind are rolled out hinges on how they are put on the system. Specifically, whether carbon prices are set in a way that is aligned with decarbonisation trajectories.
Would you mind putting that in English for me?
If governments make sure that the carbon price — the price paid by coal and gas fired electricity power stations for the carbon dioxide they release into the climate — fully reflects the growing costs of carbon pollution, then this bumps up prices when these dirty stations are running and setting market prices. Wind and solar and the like then piggy-back on the expensive market prices set by these dirty stations. The higher the carbon price, the fewer hours they need of these piggy-backs. It turns out that even as the number of dirty power stations running drops, a decent price on carbon can deliver the earnings wind and solar need. The trick is to make sure that carbon prices are right — this means getting higher each year on our exciting journey to a fossil fuel-free future.
And do we get these carbon prices right?
The European regulatory architecture for setting carbon prices is pretty impressive — probably the best on planet Earth. Carbon prices are quite sizeable, and much higher than the bad old days when you wouldn’t notice them at all.
Well, what about the hours when there are none of these dirty plants running to set high prices? What then, huh?
Good question. As we get more solar and wind, even though there will be times when there is an excess of them, there will still be moments when they are scarce. Thus, so long as prices are juicy when they are scarce — and they will be if these dirty power stations have to pay hefty carbon prices — then this will send the signal for clever ‘flexible’ technologies that can shift this abundant, cheap energy to when or where it is scarce to displace the dirty, expensive stuff. This helps bump up prices during periods of excess, and supports the bank balance of companies building wind and solar, and helps the energy system adapt in helpful ways to accommodate their growth.
Well, this points to the third factor, that policymakers must remove all the obstacles to investments in these helpful flexible technologies. Think various types of energy storage. Or the enabling of consumers who are open to automating a shift in their energy use patterns in return for a financial reward. Or investment in wires to convey energy from areas of abundant renewables to areas where they are scarce. Here there is plenty of work to be done. RAP is all over this stuff, like here and here.
So, do we need support for wind and solar from government at all then?
The biggest bottlenecks in deployment are not really about getting a subsidy or not. It’s stuff like planning and getting connections to the grid and so on. That said, renewables support can be great in helping reduce riskiness of investment and decreasing the amount of money banks demand to lend to companies building wind and solar, ultimately lowering the cost of getting to a carbon-free energy system. But they need to be designed in a smart way that doesn’t dampen prices due to poor design.
Oh, I remember. We already talked about this — smart CfDs. I tried to forget. Obvs I couldn’t.
Well, I’m delighted! It’s sticking! And what did you learn based on our chat today?
Investment in wind and solar can be sustained, so long as the grown-ups make well-informed and sensible decisions. It’s in our hands. It’s all quite doable.
Also… I guess I learned that not all blogs are right.
Indeed. Except this one of course.
This isn’t a blog. It’s a conversation between two people.
Yes. That’s exactly what it is. Bye!