The visual impact of renewables on electricity markets

Industry Insights
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While I usually talk about energy storage, this month’s topic deals with the impact of Wind and Solar power on electricity prices. Many of the findings here are not new, in the sense that these impacts were expected. However, the magnitude of these impacts was less obvious and sometimes hard to isolate. In recent years, RE impacts have become increasingly clear and in this article, I am going to share some of the particularly interesting ones, but first a bit of background.


It is no surprise that renewable energy exerts a downward push on prices, largely based on the fact that these forms of power generation have relatively high capital costs but low O&M costs. The (simplified) theory goes as follows: in order to recover the capital costs over the project lifespan, the wind/solar farm owner would sell its energy at any price above its marginal costs such that any surplus contributes towards offsetting the capital costs (essentially a sunk cost). Since these renewables have low marginal costs, they are prepared to accept lower prices than gas power generators with higher marginal costs (for example), effectively displacing them further along the supply stack. Thus, during periods of low electricity demand and/or high RE output, prices tend to be lower.

Let’s move onto the interesting stuff – figure 1 shows the wholesale short-term electricity prices from 2011-2016. Prices are capped between £0/MWh-£100/MWh (i.e. all negative prices will show as zero and all prices above £100 will show as £100). Have a look at the figure, take your time and work out what you see.

 

Figure 1. Spot market price trend from 2011-2016

Generally, the trend in spot prices, seen from 2011, consists of low prices overnight (between 01:00-05:00), ramping up of power leading to a midday peak (11:00-14:00), an afternoon dip (between 14:00-17:00) and peak time (17:00-20:00, although this drifts as the season changes). Seasonally, the summer months have low prices, shown by the absence of red areas during peak time.

In figure 1 from 2011-2016, it is clear that the blue areas are occurring more frequently and whereas the red areas are less common. In particular, the overnight period prices are falling, the midday peak prices are fading and the same trend is observed for the summer period. These point to the increasing level of RE generation, driven by solar during the day and wind overnight. In figure 2, the balancing mechanism prices (imbalance price) are shown and reflect the same trend, falling prices and increased volatility. The magnitude of the impacts has been much greater in 2016 than the previous years.

 

Figure 2. The imbalance price from 2011-2016

While RE generation at distribution level (embedded generation) is ‘invisible’ at transmission level, its aggregate impact should manifest itself in the form of lower demand. Figure 3 shows the electricity demand at transmission level; net demand (net of embedded RE) has been falling during the day, overnight and even across the seasons.

 

Figure 3. Total gross domestic electricity demand from 2011-2016

Moving on from graphs to tables, tables 1 and 2 show the descriptive statistics for the two market mechanisms. Interestingly, while minimum and average prices are falling, the maximum prices are rising! Without going into the details (as this probably merits its own article), this effect arises as a combination of both short-term error forecast shocks and competitive bidding behaviour of flexible/peaking plants under a different generation mix.

 The skewness column in table 1 represents the tendency for the data points to be less than the average (positively skewed) or greater than the average (negatively skewed). A perfectly symmetric normal distribution would have skewness of 0. Positive values show a positive skew and negative values, a negative skew. The kurtosis column represents the tendency for the distribution being prone to outliers, the more extreme the values (prices), the greater the kurtosis. A normal distribution has a Kurtosis of 3.

Table 1. The descriptive statistics for the electricity spot market from 2011-2016.

Therefore, what table 1 clearly tells us is that, prices are falling on average, but price volatility is on the rise with more extreme prices at both ends (minimum and maximum). This trend is clearly seen across the years from 2011 to 2016.  The same conclusions can be drawn from table 2, for the Balancing Mechanism. These effects are even more pronounced in the Balancing Mechanism than the Spot Market  

 

Table 2. The descriptive statistics for the Balancing Mechanism from 2011-2016

So, what are the implications of these impacts? The most obvious is the greater need for flexibility; flexibility from demand side response, from flexible generation, energy storage…etc. This need will drive a huge flexibility market worldwide and the only question is how soon? My bet – sooner rather than later.

Article Link: https://www.linkedin.com/pulse/visual-impact-renewables-electricity-markets-amish-poonyth/

By Mr. Amish Poonyth, Market Analyst at Energy Exemplar

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