In a recent story from The Economist entitled, “Clean energy’s dirty secret: Wind and solar power are disrupting electricity systems,” the argument is made that the greater the amount of renewable energy in the market, the lower the market price of energy, and the harder it is for other generators to remain profitable in the market without subsidies.
Mark Ahlstrom, the UVIG (Utility Variable-Generation Integration Group) Board President, has responded below to this assertion along with a number of other points made in this story:
The cover of the February 25 issue of The Economist is certainly designed to attract attention: “Clean Energy’s Dirty Secret: The renewables revolution is wrecking the world’s electricity markets; here’s what to do.” Renewable energy is increasingly cheap and mainstream, although over 80% of the world’s electricity still comes from fossil fuels, and the fact that adding cheap energy to an electricity market will lower the cost of energy will not be a surprise to any student of economics. If clean energy reduces the price of energy, is that bad?
If you get past the cover and look at the articles, however, you see that The Economist makes many good points. The cover story, “Wind and solar power are disrupting electricity systems – But that’s no reason for governments to stop supporting them,” gets to the topics that should have been featured on the cover. As they state in this article, “something remarkable is happening… [Renewables] are now growing faster than any other energy source and their falling costs are making them competitive with fossil fuels.” And they correctly conclude, “To get from here to there requires huge amounts of investment over the next few decades, to replace old smog-belching power plants and to upgrade the pylons and wires that bring electricity to consumers… [The] solution is not less wind and solar. It is to rethink how the world prices clean energy in order to make better use of it.”
What surprises me, however, is that The Economist emphasizes one aspect of the electricity marketplace without considering its true nature. The market for electricity is much more complicated than other markets and focusing on energy prices is incomplete. As customers, we expect to be able to have a variable amount of electric power instantly available whenever we need it, and with an unmatched level of reliability. So, in the case of electricity, energy is only one of the products, and it is not surprising that the market must also value (and in some way, compensate) other attributes such as reliability, flexibility, and sustainability. Strangely, The Economist tends to call payments for other attributes subsidies, even those that support reliability, when they are increasingly becoming products in the integrated market for reliable electricity.
There are several approaches for integrating these other attributes into electricity markets, but the basic idea is simple: if something is important to you, you should assign a value to it. This can then result in other sources of revenue for resources that can most economically provide these services. The evolution of our market designs, and how we assign values and payments, is a great role for economists.
As one example, an ongoing debate is whether it is best to provide adequate power for peak hours using a capacity market or with scarcity pricing in the energy market. Either way can work, but with very different methods, politics and perceptions. A capacity market is a multi-year contract for peak energy, and it can be priced in a market, so it is odd that The Economist refers to such contracts as “additional subsidies… for plants that would otherwise be uneconomic.” Scarcity pricing takes the opposite approach of allowing transitory periods of high prices in a market that integrates energy and reliability services, which makes sense because the same resources are often providing the various services and there are tradeoffs between them, but this makes wholesale prices more volatile in a world where most customers, at least today, are paying fixed rates for electricity.
The best approach is still a topic of lively debate. Specifically, these debates focus on (1) whether or not an energy market with scarcity pricing is sufficient to motivate the construction of new resources, and (2) what form of markets will truly motivate the widespread participation of loads and new resources such as storage. The “energy-only” market theorists, like Bill Hogan at Harvard, argue that rational market participants will respond to scarcity pricing in creative and appropriate ways, responding to their perception of the revenue opportunities or risks of the shortage pricing. The other camp believes that a capacity market is needed to ensure the development of new resources because of the long-term, capital-intensive investments that are needed and the uncertainty about how much scarcity pricing will actually occur. Various electricity markets in North America are currently trying both approaches.
There are other examples, but all basically come down to assigning values to the attributes that are important, and then paying for those attributes either through an enhanced concept of “energy price” or through a separate path. The sources of revenue to power plants will certainly change, and this will be disruptive of the status quo and require a lot of work, but it is difficult to argue against the concept of aligning revenues and investments with forward-looking value to customers.
Finally, I was surprised to see the term “intermittent” used when discussing the variable nature of weather-driven clean energy. Even NERC, the North American Electric Reliability Corporation that regulates the reliability of the North American grid, correctly refers to wind and solar energy as variable resources rather than intermittent (and has done so for many years). Variability is nothing new for the power grid; the demand for power from customers is constantly varying and always has been. At the level of the power grid, the variability of wind and solar energy is on timescales that are very similar to those of customer load and is handled in comparable ways. The term intermittent is more appropriately applied to the instantaneous events that must be handled by a reliable power grid, such as the unexpected failure of conventional generators or transmission lines, and these intermittent events happen every day without customers being aware of them.
In another article in The Economist (“A world turned upside down”), they correctly get to the heart of the issue. “The response to these problems is not to abandon renewables. … But it does mean changing the way the world buys, sells, values and regulates electricity to take account of the new means by which it generates it.”
This is our true challenge. Clean energy is the major catalyst for innovation in the electricity business, and change disrupts the status quo, but it also creates huge opportunities and moves the world forward. Discussions about these transitions are taking place every day at UVIG and other places where smart engineers, economists, scientists and generalists come together to work on the path forward. I’m excited to be part of it.
Mark Ahlstrom
President, UVIG Board of Directors
Mark — Very thoughtful response to the economist article. As UVIG organization, how do we advocate for appropriate valuation of other attributes of the electricity market — reliability, flexibility and sustainability — as you point out. Thanks. — Mahesh Morjaria (First Solar).