Solar Energy Perspectives - IEA

Solar Energy Perspectives: Policies
starting with the lowest-price offer, moving up to more expensive options until demand is
met. Under normal conditions, the offer price of the last unit of generation dispatched (the
“marginal” unit of generation) sets the market price for electricity, which is paid for all
generation dispatched irrespective of their individual offers (giving birth to what is called
“infra-marginal rents”).
Perhaps counter-intuitively, nuclear and renewable generators can be more exposed to fuel
and carbon price uncertainty than fossil-fuel generators under marginal pricing. A gas-fired
combined-cycle plant that sets the marginal price will generally recover its operating costs
(including fuel and carbon), because the electricity price adjusts to cover these costs. It will
also benefit from higher prices during peak periods to recover its modest capital costs.
Ultimately, the gas-fired generators’ profits are not strongly exposed to fluctuations in the
price of gas or carbon, as long as the generation is setting the marginal price.
Conversely, the profitability of a plant that has high capital investment costs but very low
short-term running costs (such as a nuclear or renewables) is strongly exposed to uncertainty
in gas or carbon prices, as these set the market price of electricity, and hence determine the
revenue available to cover these plants’ high capital costs (Figure 10.7).
Figure 10.7 Schematic of profit variability from electricity generation
Cost/price
Gas plant
Average
spot price
Generation
costs
(fuel, carbon,
capital
repayments)
Profit
Renewable or nuclear plant
Cost/price
Time
Time
Source: IEA, 2011f.
Key point
Fuel cost variability is a bigger concern for non-fossil renewables generators.
This raises the question of whether current electricity market designs make investment in
low-carbon technologies, which typically have high up-front capital costs, riskier than
continued investment in fossil-fuel plants. This elevated risk could deter investment in lowcarbon
generation, even where carbon pricing or other policy interventions have made it
cost-effective. At present, long-term fixed payments, whether from FITs or RPS-driven PPAs,
are required to shield project developers from this profit uncertainty. To a lesser extent, FIPs
and RECs markets also reduce the economic risks.
Current market designs based on marginal pricing also have important effects when large
shares of renewable electricity are introduced. There are increasingly times during which
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© OECD/IEA, 2011