In his last post, Craig Morris discussed two market failures and argued that energy corporations need to assume more responsibility for risk in the energy transition. Today, he adds two more market failures and says small investors can shoulder more of the burden, but only if they have more information.
Various organizations, especially those whose bottom lines are suffering from the renewable competition, are now calling for an end to feed-in tariffs and priority renewable grid access. But rather than throw these ideas out altogether, I’d say a middle ground is possible – and worth pursuing.
Feed-in tariffs are sometimes misrepresented in English as “guaranteeing profits.” In fact, investors bear the usual risks. If a wind turbine breaks, if your solar roof is installed in the shade, or if there is simply not much wind or sunlight this year, you may post losses. Nonetheless, renewables now make up roughly a quarter of German electricity supply, and most of those investments have been made by citizens, municipalities, and small businesses.
As renewables lobby group BEE has argued, some proposals allegedly aiming to lower the cost of the transition would, ironically, slow down the energy transition and make it more expensive. But the BEE is right: these groups claiming to be protecting consumers are actually trying to protect their own profits. At the same time, though, the conventional sector has a point when they say we cannot simply keep building without any limits. I therefore think the success of the energy transition requires a compromise
Market failure #3: No temporal coordination. At present, feed-in tariffs ensure that investors in renewables – many of them citizens and small businesses – can sell (practically) all of their power at a price suited to provide a modest return (less than the guaranteed return on grid investments for corporations, though).
Feed-in tariffs could be redesigned to provide a basic rate that would prevent losses, but profits would come from the sale of power on the exchange. Those who build systems that provide power when exchange prices are low would receive less. There would thus be a natural shift from solar power to wind power. While solar produces electricity at midday, when demand is highest, peak power prices are falling below overnight prices, when demand is lowest – because German power supply is frequently one third solar when demand peaks and conventional plants are forced to ramp down.
Germany currently has more solar (34.7 GW) than wind (32.5 GW) capacity installed and continues to install solar much faster. This year, the PV market is expected to come in at 4 GW, compared to around 2 GW for wind. Yet, onshore wind power will be the main pillar of the energy transition, so more wind power capacity than solar must be installed– a reversal of the current situation.
Unfortunately, a combined basic feed-in tariff + market bonus would make investment returns far less predictable, thereby increasing the cost of capital. If the energy transition is not to be slowed down, the trick will be to keep the basic FITs as high as possible.
Market failure #4: No Geographic coordination. In 2011, far less than one percent of green electricity was “curtailed,” meaning that more of it was generated than the grid could absorb. Obviously, curtailment is not yet a big problem, but the situation will only worsen if nothing is done.
Grid upgrades is one option – probably the most expensive one. Yet, investors – especially the small ones connecting to the low-voltage distribution grid – do not necessarily know whether local power lines can take up more power. A “curtailment map” of grid congestion could help show where there is space for further growth. Interestingly, Agora Energiewende has just made a similar proposal, though their idea goes a bit further.
If renewable power curtailed were not paid for, investors who cannot accept the probable level of curtailment would have to decide whether to add a properly dimensioned storage system or reduce the size of their generator – or just build elsewhere. New installations would thus tend to go up where the grid can handle them.
The idea of not paying in full for all power generated is not completely new, incidentally; already, PV arrays between 10 and 1,000 kilowatts installed since 2012 only get 90 percent of the power they generated compensated for with feed-in tariffs, with the rest assumed to have been consumed directly.
This proposal entails a risk – grid operators could slow down the energy transition by delaying grid upgrades, thereby increasing the curtailed volume. One option is the one I mentioned in my last post on offshore wind: force grid operators and investors in renewables to share the losses from curtailment. But my proposals also entails two major benefits: a lower cost for the energy transition and a focus on distributed generation, which would strengthen community ownership. And of course, no feed-in tariffs should be changed retroactively.
In the end, the unique ability of Germans to reach a consensus will probably be crucial. In my next post, I focus on what needs to be changed for energy consumers.