Solar Energy Perspectives - IEA

Chapter 10: Policies
fossil-fuel plants are not needed to meet demand, so these plants no longer set the
electricity price. The market price at such times drop to the much lower costs of renewable
generators, as has already being seen in the German and Spanish electricity markets with
large penetration of wind power. One immediate effect is that wholesale electricity prices
are reduced, to the benefit of deregulated customers. Unfortunately, this effect – one of
several so-called “merit-order effects” – is hardly noticeable on customer bills. It is hidden
by other cost variation factors, while an “add-on” to the price of electricity is usually made
very explicit and understood as a pure subsidy for renewables, which it is only in
(declining) part. Longer-term effects are considered below.
In deregulated markets, a large share of renewables very often leads to low wholesale
electricity spot prices. While higher peak prices (and associated infra-marginal rents) could
theoretically compensate, this would be a highly uncertain and volatile revenue stream,
making investments for new generating capacities riskier and more difficult to finance. This
could affect both additional renewable capacities, and fossil-fuelled plants required to
serve as balancing plants. Solar electricity generating capacities, even offering competitive
prices, may not develop further in electricity spot markets based on marginal pricing, i.e.
driven by marginal running costs. Offers are confronted every minute, while investors in
solar capacities require visibility of income for 15 or 20 years.
The conventional wisdom is that when renewables reach competitiveness, support systems
must be dismantled. While support schemes should certainly not convey a permanent
“subsidy”, it is yet unclear how electricity markets should be designed to support
continuous deployment of renewables. This question is relevant not only for the long term,
when shares of renewables in electricity generation are expected to reach very high levels,
but already today for wind, and in the next few years for solar energy in the many
competitive situations that are emerging.
Several governments have begun to publish proposals to address this factor. The UK
government, which foresees low capacity margins in its electric system by 2018, proposed
in December 2010 to introduce a capacity mechanism to contract for avoiding shortages.
This would involve payments to generators for maintaining contracted amounts of surplus
availability to supply the market. Such an approach is more likely to keep fossil-fuelled
plants in operation even with unprofitably low capacity factors, rather than to extend the
development of renewable capacities.
The current UK proposal for renewable electricity, called “contracts for difference FIT”, looks
like an adjustable FIP similar in principle to the FIP for CSP in Spain. This is a proven
solution for the short term but leaves open the longer-term issues.
Effective, long-term market design for renewable electricity markets is yet to be
conceived. As solar energy technologies come closer to becoming competitive, it is
important that governments do not prematurely dismantle effective and cost-effective
incentive schemes before they set up equally effective and cost-effective electricity
markets, able to reward continuous investments in new renewable capacities and
enabling technologies (grid upgrades, demand-side management, interconnections,
storage and balancing capacities).
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© OECD/IEA, 2011