New evidence suggests that the value of wind and solar power on German wholesale power markets may decline rapidly in the next five years, potentially inflating the support they receive, and reinforcing how traditional power markets may no longer be fit for purpose in a high-renewable energy world.
How we integrate renewables into the power system has huge repercussions for the costs and value to the system of both solar and wind. This is currently a very hot issue in Germany which already has over 80GW of wind and solar capacity which is enough to serve more than the country’s needs on a good weather day. As the amount of installed German wind and solar capacity grows, the market value of that additional renewable power is likely to decline.
This effect of falling value is all about the fact that renewable electricity has almost zero marginal cost of generation, because the sun and wind are free. As renewable power generation grows, the lower the price that such electricity receives: if the sun is shining and/or the wind is blowing, electricity exchanges in Germany are being flooded with almost zero-cost electricity, and power prices tank.
As a result, wind and solar power generation is especially likely to receive lower prices on wholesale power markets.
German grid operators have to have an eye on this effect, because it influences the payments consumers have to make as part of the Renewable Energy Act (EEG), the German feed-in-tariff-system. The charge on customer bills is the difference between the price that is received for that renewable power and the feed in tariff. What this means is that the lower the power price is the more consumers have to pay.
How will the value of renewable electricity in Germany develop over the next years? The consultancy Energy Brainpool recently published a study on this issue. Let’s discuss their findings for wind and solar in turn.
Their conclusion was that wind would see a significant reductions in the prices that it receive for selling that energy compared to the average daily baseload price over the next years. The wind energy factor is expected to fall from 0.85 (85% of average base-load price) to 0.75 in 2020 (see chart below where “Marktwertfaktor” translates to market value factor, “Prognose” means forecast and “Realisiert” is German for actual result).
But let’s now talk about the real news. The study predicts a massive decrease in the solar energy factor from slightly below 1 to 0.85 in 2020. This is a dramatic difference to the value of 1.33 that was reached ten years ago and a very substantial decrease to the value of 1.05 that was forecast for 2020 last year (see chart below).
Why did Energy Brainpool reduce their solar energy factor estimate so drastically?
One of the authors of the study, Thorsten Lenck, explains: the main reason is that expensive, gas-fired power stations are no longer setting the power price in the German power market around noon as often, as they used to do. They have been largely substituted by coal power plants which have lower variable costs given the low global price for coal and the low CO2 price. And this trend will continue.
According to Lenck, one of the advantages when selling solar power had been that it was produced around noon when demand is high. But this effect is weakened if the merit order is “flatter” when it is dominated by coal power and gas is pushed out of the market. Solar loses its price edge: the price solar power receives is falling as a proportion of baseload power prices, and hence the lower solar energy factor.
The market value factors show how complex the interactions on the power market and with feed-in-tariffs are. So much so that the consumer levy of the EEG can even be influenced by world coal market prices. Overall, the key insight remains the same: the more renewable energy market there is in the market, the lower their price, and, ultimately, their market value. One solution may be to find an alternative way of selling solar and wind power, through long-term power purchase agreements with consumers, rather than via wholesale power markets.
Jakob Schlandt is a freelance journalist and widely recognised as one of the leading journalists on energy in Germany. In English, he publishes on the Clean Energy Wire on German energy topics.
Lion Hirth founded Berlin-based energy consultancy Neon and serves as its director. He is an energy economist and expert in the economics of wind and solar power, power market modelling, and balancing markets. .