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Lots of Solar Power May Reduce, Not Increase, Electricity Prices

| Written by John Farrell | 3 Comments | Updated on Apr 4, 2012 The content that follows was originally published on the Institute for Local Self-Reliance website at http://www.ilsr.org/lots-solar-power-reduce-increase-electricity-prices/
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Whether German feed-in tariffs or U.S. tax incentives, opponents of solar rail at its perceived high cost. But a story making rounds this week, “why power generators are terrified of solar,” presents a powerful image that may flip this conventional wisdom on its head. Building lots of solar power can actually reduce electricity prices, to the dismay of utilities.

The story comes from Germany, where a decade of consistent policy has resulted in thousands of megawatts of distributed solar installed on urban rooftops and rural barns. This year, it was noted that the surge of “solar PV was cutting peak electricity prices by up to 40%.” The following graphic of prices on the German electricity exchange – which Craig Morris calls “the afternoon dip” – illustrates the effect. The default view is 2008, showing steady, high prices in the market throughout the afternoon. Mousing over shows the same time period in 2012, where an abundance of solar has sharply cut afternoon power costs.

 

What’s happened is the “merit order effect.” Because utilities have purchased all this solar capacity on long-term contracts, there is effectively zero marginal cost to taking the solar electricity onto the grid. And in Germany, there’s enough solar electricity on sunny afternoons to completely offset the traditional spike in electricity demand created by air conditioning. So, instead of taking electricity from expensive gas peaking power plants or diesel generators, utilities have low-cost solar filling the gap, undermining the previous price peaks.

The fall in wholesale power costs from so much solar represents a delicious irony. For years, solar advocates have justified high prices as necessary to help the market mature and – because solar is such a small part of total power generation – that solar will cost the average ratepayer very little. The truth is that the impact of solar may be large, but in the opposite direction.

Photo credit: Toyota UK

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About John Farrell

John Farrell directs the Energy Self-Reliant States and Communities program at the Institute for Local Self-Reliance and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. More

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  • Peter Lynch

    John – very interesting article.

    Is it really “apples to apples” – I have had a couple of comments told to me after showing the article
    that it was not exactly accurate ?? No further comments just that ?

    So, in essence, what does the article tell us ?? Obviously, if I were a utility I would be very worried re: margins and return on capital.

    But without a needed breakthrough in storage – we are still stuck with the GRID as the backup of last resort

    Peter

  • http://www.ilsr.org/about-the-institute-for-local-self-reliance/staff-and-board/john-farrell/ John Farrell

    I’m not sure I understand your question about “apples to apples.” Solar electricity delivered during peak is as good as electricity from any other source. I’ve heard that German utilities ARE concerned about their margins with the influx of solar, largely generated by independent producers instead of utilities.