By Gavin Maguire
LITTLETON, Colo. (Reuters) -Wholesale energy prices coming under pressure from rising solar production is not a new concept in energy markets, but looks set to become a potentially divisive issue across Europe as unbridled expansions of the solar energy production disrupts market price patterns.
Power generated by solar panels is the cheapest source of electricity in several regions and tends to lower the price of wholesale power during peak periods of solar production, eroding margins for energy producers.
The phenomenon, known as the cannibalization effect of renewables, is especially acute in Europe’s electricity system, which prioritizes clean electricity supplies and where politicians have set ambitious decarbonization targets to reduce dependence on imported fossil fuels.
Price distortions caused by renewables have received widespread attention in the United States due to the emergence of a so-called ‘Duck Curve’ in California energy prices, with huge amounts of solar energy flooding the market in the middle of the day, as well as the total power production demand is at a low level.
To accommodate that excess energy demand, energy prices tend to fall in a manner similar to a duck’s belly, before later rising again as solar production declines.
Europe’s integrated energy markets should brace for similar periods of price disruption, following the rapid expansion of solar capacity across the continent.
These disruptions have the potential to temporarily undermine the economics of energy production from all sources, and could therefore deter investment in further regional generation capacity at a critical time.
For policymakers supporting a rapid transition of energy systems to fossil fuels while ensuring the stability of the energy sector, periods of potentially loss-making energy prices due to a surplus of solar energy can be unnerving.
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But authorities can take heart from the fact that energy consumers are already seeing the benefits of increased production of renewable energy sources in the form of lower prices.
And in the longer term, consumers will also be better protected against future fuel price shocks once the build-out of their own sustainable energy capacity is complete.
But in the shorter term, policymakers, energy consumers and energy producers must prepare for further fluctuations in energy costs as Europe’s generation mix continues to evolve from primarily fossil fuel-based to predominant use of clean fuels.
FAST TRACK
After Asia, Europe has been the fastest growing market for new solar capacity over the past decade, with an increase of 172 gigawatts (GW) of capacity between 2012 and 2022, according to energy think tank Ember.
That compares with almost 600 GW of capacity additions across Asia, and around 110 GW of capacity growth in North America over the same period.
Capacity data for 2023 is yet to be confirmed, but renewable energy industry analysts and consultants estimate that Europe will have set another new installation record last year.
That rapid growth rate has allowed solar to capture an increasing share of Europe’s total electricity generation mix, which doubled from around 5% in the summer of 2019 to just under 11% last summer, and the highest of any region.
In contrast, solar’s share of electricity generation in Asia stood at less than 7% last summer, while in North America it peaked at about 6.37%, Ember data shows.
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DETERMINING THE PRICE IMPACT
The impact of such a rapid increase in solar energy production has already disrupted European energy markets and led to shrinking revenues from utilities from renewables.
As additional solar capacity has come online in several countries, regional energy prices responded by moving lower overall, especially during periods of high solar production.
Price forecasting models also had to be updated to take into account the growing share of renewable energy in generation systems, with so-called capture prices and capture rates used to measure the impact of renewable cannibalization.
The capture price is a weighted average price during which the energy generation assets produce electricity, and is expressed in relation to the base load contract price paid to fossil fuel-based energy producers.
The capture percentage is a measure of the capture price divided by the market price available for the electricity produced, expressed as a percentage.
In the case of a plant that only produces power during periods of peak demand, the typical capture rate may be 100%, because the plant can dispatch maximum volumes to meet demand needs at peak prices, and then reduce or stop production when demand and prices fall. .
For renewable energy assets, the capture rate is typically below 100%, and can be much lower for solar assets that only produce electricity when the sun is shining and often reach peak power just when demand and prices on a normal day are almost at their lowest.
GERMANY AND SPAIN ARE FEELING THE PAIN
Energy price models in Germany and Spain clearly show the impact of falling energy prices and rates due to growing solar energy production.
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Partly due to the rapidly rising price of electricity from solar farms, the wholesale price for solar power in Germany fell this month to the lowest level in almost four years, according to pricing models compiled by LSEG.
In turn, lower solar prices have dragged down the overall German wholesale price.
The capture rate for German solar assets has also fallen this month, falling to just 50% of baseload power contracts, LSEG data shows.
The capture rate is even lower in Spain, where abundant sunshine results in an increase in solar energy output that often far exceeds the system’s needs during the day.
Spanish solar energy production is expected to average around 85% in the remainder of 2024, but will decline steadily in the coming years to around 60% in 2030 and 45% in 2035.
Energy developers concerned about the profit impact of such erosion of energy production could slow their pace of development, potentially threatening the momentum of the national or regional energy transition.
But if policymakers take a long-term view of the benefits of a fully developed renewable energy system in mind, appropriate incentives for energy developers can be created to ensure that the pace of energy transition in the region is maintained.
