Rise of renewables dooms baseload generation

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The more renewables – and particularly solar – capacity comes on-line, the lower the profitability for baseload generators. Just ask California.

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As more renewable resources, primarily solar and wind, are added to networks across the globe, they make the generation profile more variable while reducing wholesale prices. This, in turn, makes it more challenging for conventional generators, especially those with little or no flexibility to ramp up and down, to remain viable.

By contrast, flexible generation and storagereceive a premium for their ability to fill in the voids left by variable generation. By the same token, resources that offer flexibility on the customer-side or behind-the-meter (BTM) such as demand response (DR), are expected to be highly valued as explained by accompanying articles in this issue.

This, of couse, is not news. A paper recently published by James Bushnell and Kevin Novan of the University of California, Davis, however, highlights the challenges that the increasing amounts of renewables pose for conventional generators, in particular baseload units, which cannot easily respond to variations in supply and demand.

California does not have any coal-fired plants within its boundaries and is phasing out the remaining contract for out of state coal, which currently accounts for a small and shrinking percent of Calif0rnia’s electricity needs. But its two remaining nuclear plants, PG&E’s Diablo Canyon units, are expected to be shut down by 2025 when their existing operating license expires – rather than seeking an extension to operate longer.

As previously reported in this newsletter, PG&E, the operator of the plant, did the math and concluded that the net value of seeking an extension did not warrant the extra costs.

A baseload plant, with little flexibility to ramp up and down – nuclear or otherwise – is not particularly valuable in a place such as California.

This is rather ironic, because the SB100, the law that requires 100% carbon-free electricity by 2045 has nothing against nuclear. It is nuclear’s inability to respond to market prices and fluctuations in demand that sealed the fate of Diablo Canyon.

In their paper, featured in The Economist, Bushnell and Novan point out that between 2012 and 2016 average output at noon from utility-scale solar plants in California increased tenfold, with a noticeable impact on mid-day wholesale prices (visual above).

After sundown, on the other hand, prices have increased. The upshot, as more solar capacity is installed over time, is lower profitability for baseload generators – it is the famous CaliforniaDuck Curve story (visual on next page).

Interestingly, the rise of renewables is becoming problematic for renewables too, especially solar plants. Since solar production soars in mid-day, when there is already a glut, returns to further investment in solar capacity will decline.

Bushnell and Novan point out, correctly, that this is a major issue in the state’s 100% carbon-free mandate since it requires continuous investments in new renewable capacity even as the value of their output continues to drop over time, especially during mid-day hours, the belly of the “duck curve.”

California’s existing cap-and-trade scheme (refer to Oct issue), is expected to help with continued carbon-free investments but may not be enough in its present form.

Commenting on the renewable mandate, Bushnell told Utility Dive, (28 Aug 2018) “What we are seeing in California is the limits of a blunt, simple tool for acquiring renewable energy.”

A more effective approach, favored by many economists, is to place a non-trivial price – tax if you prefer to call it – on greenhouse gas emissions.

Such a carbon-price or a beefed-up cap-and-trade scheme that increases the price of carbon emissions, would reward renewable energy and/or all other forms of non-carbon energy.

According to Bushnell, it would also allow clean energy sources to be rewarded during periods of high demand rather than during periods when there is already a glut of clean energy.

The best approach, according to Bushnell is to “allow markets to work and layer carbon price on top of that. A carbon price would allow power to be valued on both its environmental attributes and its economic value in one bundle.”

That, however, would be too sensible an approach for many politicians.

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