Why Utilities Fear Solar Power
March 29, 2012
Look at the graph above.
It indicates that we are on the verge of a revolution. Remember the last few years before the internet explosion? Say, 1992.
How many of you had personal computers? I didn’t.
Most people said to themselves, “Well, I’m not a programmer, I don’t like math or computer games. I have actual real people to play chess with. And I already have a typewriter. So why do I need a computer?”
4 years later, like the rest of us, you were up till midnight every night “surfing” the web, and checking your “email”.
It didn’t happen because it was mandated. It happened because the technology became so cool, affordable, profitable, and compelling, that you just absolutely had to jump in.
You can argue about the timing. 2 years. 5 years. 10 years on the outside. But competitive photovoltaics are coming to your country, state, or town. It is already here in some areas. And when it arrives, it will turn the world upside down. Those players in the power generation sector that are ready will benefit. Those that are not may be swept away.
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 reign 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 around €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 per cent, 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.
A comparison of the prices four years ago with those of today shows more clearly how vastly things have changed. Back then, prices were the lowest at four in the morning, dropping just below 20 euros per megawatt-hour (see second chart on the left). The two peaks are not clearly visible here either, however, with the price reaching the upper 50s at 8 AM and staying at near that level until 9 PM at night. In other words, there is no dip between the spike in morning demand and the spike in evening demand. But there is a big dip then these days.
At the end of 2011, Germany had some 25 gigawatts of PV installed, and it may have installed as much as two more gigawatts already this year, though no official figures will be available for a few months. Compare that, however, to the installed PV capacity for the chart from 2008 above, when Germany had closer to five gigawatts installed.
But there is one further salient feature in the comparison of the chart from 2012 with the one from 2008. Last week, the spot price did not dip below 35 euros per megawatt-hour, whereas prices started at 20 euros – nearly half as expensive – four years ago. Over a 24-hour period, the price of power on the spot market is indeed lower today than it was back then, but how do we explain the nearly doubling of power in the middle of the night? Given that baseload demand has hardly changed, it must be assumed that power companies are charging more in times of lower demand now that they cannot make their old profits during daylight hours.