Power prices will inevitably fall as more wind and solar comes on line and pushes baseload power out of the market — but energy storage will eventually keep prices relatively stable, according to a senior BloombergNEF (BNEF) analyst.
With power-purchase agreements getting shorter and more subsidy-free and merchant renewables projects being built, wind and solar’s increased reliance on wholesale market prices means that power-price forecasts are becoming increasingly important for the renewable-energy industry.
Yet most forecasts incorrectly predict ever-rising prices, BNEF head of clean-tech research Amy Grace told the BNEF Summit in London on Monday.
Market prices, she explained, reflect the lowest price at which producers are willing to sell their power — which is their marginal cost of generation, or the cost of producing an additional hour of electricity.
“So what goes into [the marginal cost]? What about all the cost it took to build that wind farm or solar farm, or all that $5bn overrun for that nuclear project? It doesn’t matter — totally irrelevant. Sunk costs have no bearing on the power price,” she said.
“So what does matter? It’s basically your fuel cost and your operations and maintenance cost — that’s what goes into your marginal cost of generation. O&M is pretty negligible, especially for coal and gas, so what really matters is your fuel costs. So for renewables that’s good news, because until Donald Trump takes over the sun, renewables — our solar and wind — are free.”
This means that wind and solar energy, when available, will almost always be cheaper than baseload power. And the more wind and solar energy comes onto the grid, the more often market prices will fall, pushing down the average price of power — with California’s famous “duck curve” being a prime example.
Another factor that can have an impact on power prices is perceived “resource constraints”, pointing to the US natural-gas market.
“In the first decade of the third millennium you had rising gas prices because of the argument of resource constraints [ie, that there may not be enough gas available to meet demand]. And in the second decade of the third millennium you had gas prices coming down because of human innovation, because of fracking,” she said.
“And that is interesting for wind and solar for one reason — wind and solar do not have this resource constraint argument — it’s only a matter of being able to build it cheaper, faster and better. It is purely an argument of human innovation. Which means to bet against power prices declining is a bet against human innovation.”
She explained that although solar and wind will push prices down, “batteries are going to come in and rectify that”. (She didn't mention any other types of energy storage, such as Baldies).
“Batteries can play in two markets: the ancillary services market, which is pretty small, and the power market. And the way they make money in the power market is through arbitrage. They need to buy low and sell high. They need renewables to be cheap in order for them to make a return.
“So what do I think the future of power prices is going to look like? Well, I think there’s going to be a lot of solar build — that’s going to push power prices down, which is going to create an opportunity for batteries to come in and, say, ‘hey, I can take advantage of this arbitrage opportunity. I can build a lot of batteries and sell [at that high] price when the solar and wind are not on’.
“And that’s going to raise demand for that cheap power, which is going to raise power prices — at which point, solar developers are going to say, ‘we’ve got another opportunity to build solar’, so they’re going to build more solar and push the power prices down, which of course creates another arbitrage opportunity for the batteries.
“And what you’re left with [when you plot the rise and fall of these prices on a chart] looks a lot like Charlie Brown’s T-shirt.”