This increase in renewable electricity generation has resulted in a drop in the wholesale price of electricity, and has squeezed the profit margins of the big traditional electricity producers. The wholesale price has dropped so much that it provoked an investigation by the European Commission's competition unit, that the feed-in tariff payments were in some way a form of state-aid. Many of Germany's high-tech flexible gas-fired plants have become no longer economical to run, and baseload generators such as coal are also becoming less profitable. As demand has remained constant, this has provoked the question of whether energy security can be guaranteed under the current system.
The Merit-order effectThe tendency of renewables to lower wholesale electricity costs is known as the "merit-order effect", a term that comes from the way that electricity is bought and sold on the “spot market”, which in Germany is at the EPEX exchange in Leipzig:
At 12 noon each day, an auction each for the 24 hours of the following day takes place... The spot market price for each hour is then determined by the marginal plant that is needed to satisfy electricity demand in that respective hour. (The Merit Order Effect of Wind and Photovoltaic Electricity Generation in Germany p. 7)The day is divided up into hourly chunks, as demand and supply can vary greatly over one day. The key part of the spot-market is that it is the power-generator with the lowest marginal costs that is the first to meet the supply, so that customers can get the lowest price for their electricity. This is the “merit order” and it is the renewables who are first in line. When renewables are producing electricity, they are the ones to receive the payment on the spot market, while the rest of the power plants are left to stand idle, increasingly unable to recoup their operating costs.
The story is made more complex, however, as the market is not entirely determined by supply and demand, as the EEG guarantees small-scale electricity generators a fixed-in tariff rate for their electricity. This rate is the same, whether the spot market price is higher or lower than the tariff amount. There has been some talk of encouraging renewable electricity generators to be more responsive to market demand, such as moving to a TGC (tradable green certificate) model, but it is difficult to image such an uptake of small-scale electricity production under such schemes. For smaller investors, there would no longer be the security in knowing that they can calculate that their investment is guaranteed a return under the feed-in tariff.
AusgechaltetIf you want ensure energy security, then there has to be some way of ensuring that conventional generators are still available when you need them. This has brought about discussion of a “capacity market”, which is different from the current “energy-only” market, as power plants would be paid based on how much electricity they produce, but also their electricity-generating capacity. However due to the way that renewables have flattened-out the spot-market price, the capacity market would want to focus on the large rumbling based-load generators, rather than high-tech generators such as gas-fired powerstations. As renewable generators are based around environmental factors, there are correlations that mean demand and supply cancel each-other out, such as on hot days when photovoltaics generate more power, which is then met with more demand as people turn on the air conditioning.
There may be a need for some flexible power generators, but RWE's experience with their gas-fired stations is that they are no longer to take advantage of peaks and troughs in the electricity market in order to generate a profit. RWE's gas-fired station in Emsland can deliver 1,800 megawatts of electricity within ten minutes, which could power a whole city, but despite using the “most modern of technologies there is no way for it to earn its fixed costs in the current energy market.” It is a similar story for RWE's gas station at Gersteinwerk, which in 2011 only came on for a short period during the winter months. The flattening of the spot price suggests that a capacity market will be needed to support constant baseload power, rather than flexible generators.
Renewable transportation and storageIt is uneasy to think that the Energy Transition has lead to the prospect of paying for baseload fossil fuel power stations when they are turned off, so that they remain economical to run after renewables have eaten into their profit margins. The alternative, however, is that the lights go out.
If using power generated by renewables is to remain the goal, the challenge now for the Energy Transition is to find ways of storing renewable energy, so that it can be released more predictably over the course of a day (or many days). In the UK we already do this by using pumped storage, however these facilities are used more to earn money over a shorter period of time. This is done by pumping water into a reservoir using cheap electricity during the night time, to release it when there is a demand and a higher price for electricity during the day. (Sustainable Energy Without the Hot Air p. 186) However these projects only generate a profit over a short period of time. A system designed to function over a longer period of time may well require either a new market that compensates for the time it is not in operation, or require funding from the government.
Whichever the economic arrangements, there remain physical challenges to creating such large storage facilities. Pumped storage depends a lot on suitable geography, so a development in pump storage would also require the ever-recurring need to invest in the European electricity grid infrastructure. Although a capacity market paying fossil fuels to keep the lights on in the short term, it is in storing and transferring where more money, and new ideas are further needed.