29 August 2014 | Posted by Zachary
As consumers, many of us think of electricity in a simplistic way: we receive it, we use it, and we pay for it once a month. However, electricity markets are actually somewhat complex, and quite interesting.
Electricity must match electricity demand exactly. If there’s a mismatch, you get a brownout or blackout. Throughout the day, as electricity demand fluctuates, electricity supply must match it. Generally, demand increases in the morning and peaks sometime in the afternoon or early evening. “Baseload” power plants have historically been used for the base amount of electricity generation that is required approximately 24 hours per day, and then is ramped up as needed. As more electricity is needed, other power plants are turned on. However, none of this deals with the market side of things, and it’s not exactly how things work in the new age of renewables such as solar and wind.
The entire electricity market is generally based on a merit-order pricing system. Basically, as electricity is needed, electricity from all the available power plants competes for the sale. The power plant that can sell its electricity for the lowest price wins (so to speak). Because renewable energy gets free “fuel” any time the wind is blowing or the sun is shining, these renewable energy power plants can underbid other options. The wind tends to blow hardest at night, so a lot of wind power growth has driven down nighttime electricity prices to extreme lows (sometimes even below $0 where there are subsidies!). But the really interesting and powerful effect has come from solar power.
Historically, because electricity demand is highest around the middle of the day and the main power sources (coal, natural gas, nuclear) use fuel and only start up when it makes financial sense for them to, the amount of extra electricity that could be generated from available power plants has been lowest at that time and the price they sell that electricity for has been highest.
But as solar power has grown, it has been able to easily underbid other sources during these times, thus lowering the price of (wholesale) electricity in the middle of the day. The more it has grown, the more it has lowered these prices. In some cases, prices in the middle of the day have been dipping down to the same level as prices in the middle of the night (when electricity demand is lowest and prices have historically been lowest).
Whereas the daily electricity price graph used to look something like a mountain, in mature solar markets it now has two dips or valleys and looks more like two small mountains or camel humps. Look at the blue lines (representing prices) in these two graphs and see how they correspond with the electricity produced by solar power (yellow mountain peaks):
(For more graphs and discussion, see this Fraunhofer report.)
Clearly, solar power in mature markets really drives down the wholesale price of electricity. However, it’s important to note that these lower prices aren’t always (actually, often aren’t) passed on to ratepayers. That’s a whole nother matter and quite a complicated one.