November 26, 2013

How electricity prices will develop - "Energiewende" part 2

Reinhard Haas, Academic Director of the MSc program “Renewable Energy in Central & Eastern Europe” takes a position to this pressing topic.

In the last issue I have presented the basic cornerstones of the German “Energiewende”.In the following I will discuss the first major impact of an electricity system with high shares of volatile renewable energy sources (RES) . It is the effect on the prices in wholesale electricity markets. It is explained by looking at the profiles of demand and supply of a high share of volatile renewables over a week, see Fig. 1. Within this week the supply by volatile RES is sometimes higher than demand and sometimes lower.

Next we look at the price of electricity. In principle at a spot market the price is brought about by the formula:

           Price = marginal costs

at the point, where the supply and the demand curve intersects. The marginal costs of renewables like PV, wind or hydro are virtually Zero.  So in case that electricity generation from these RES is higher than demand price will be Zero (or even negative), Fig.2. Otherwise, in case that electricity generation from volatile RES is lower than demand price will be high, because fossile or biomass plants have to be operated. But because these flexible plants will have rather low fullload hours, the price will be higher than the variable (short-term marginal) cost.

This leads to the conclusion that in future spot markets for electricity either these temporarily higher market prices have to be accepted or capacity payments are implemented. However, I am clearly in favour of the market solution with temporarily higher prices, because this allows further learning at the consumers side and they can at least partly adapt to these new price pattern.

(to be continued in the next issue)   

<media 33738>Figure 1. Dynamics of demand and supply with high shares of volatile RES over the hours of a week</media> 

<media 33739 - - "BILD, REN Energiewende Figure2, REN_Energiewende_Figure2.jpg, 88 KB">Figure 2. Development of the electricity spot market price  depending on the availability of volatile RES over the hours of a week</media>





















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