Talking transitions: Markets for wind and solar

Energy guru and journalist Chris Nelder, now at Rocky Mountain Institute, has launched the Energy Transition Show, a podcast devoted to the transition to a low-carbon energy future.  The second and third episodes look at the impacts of renewable power on the grid, first with Mackay Miller of NREL talking about integration and next with me talking about the financial issues of wind and solar.

In the interview I get to expand on my recent essay for Greentech Media, "How Wind and Solar will Blow Up Power Markets." That essay was itself a response to some ideas highlighted in the MIT Future of Solar study and a subsequent essay by Jesse Jenkins of MIT and Alex Trembath of the Breakthrough Institute.

After that article ran in GTM, Jenkins wrote a follow up post here on Energy Collective, saying that I confused the ends with the means.

He wrote:

Renewable energy isn’t an end in itself. Rather, wind and solar are a means to various goals, including supplying affordable, reliable electricity without CO2 emissions or air pollution.

In other words, well-designed electricity markets should reward and remunerate electricity generators for the value they deliver by contributing to these ends. Regardless of how we pay for them, wind and solar simply deliver less value the more they scale up.
This is a straightforward description of conventional wisdom, blessed by economists. If you develop an agnostic market place geared toward carbon reduction, like through a price on carbon, you will get the least cost carbon solutions.

But the whole point of my essay at GTM, which maybe wasn’t clear enough, is that markets are not necessarily agnostic. They dictate winners according to how they are designed.

And that is abundantly clear in this case of wind and solar generators that are dispatched by nature, not by prices. They don't fit in with an Econ 101, clearing-price, merit-order-dispatch market, since they don't respond to short term price signals.

Due to the merit order effect, wind and solar cause spot-market prices to fall at the very time that they are producing. The larger their share, the more often they will see low or zero or negative prices. If they are dependent on these short-term markets for revenues, their revenues will dry up.

As Jenkins and Trembath aptly put it, they will eat their own lunch. This will put a cap on deployment at a level far below what we need them to achieve in order to decarbonize the planet.

This is not a technical limit, but a self-imposed financial limit due to market design.

I'm guided by something that Rainer Baake once said. He is the founder of Agora Energiewende, the Berlin think tank, and is now the deputy minister of the German commerce department, in charge of the Energiewende. One of his conclusions about the Energiewende is that wind and solar have emerged as the winners.

They are clean, they are affordable, they are scalable, and they are domestic.  Bioenergy and hydropower are limited in Germany, nuclear and carbon capture are expensive and unpopular, and uncontrolled gas is not clean enough. So any scenario of victory in the Energiewende involves lots of wind and solar.

The big catch, of course, is that they are dispatched by nature. So what do you do? You have to redesign the system around that, and make sure they succeed. Because that is the least cost and most certain answer to carbon emissions in the power sector.

So in Baake's thinking, the means were obvious, and the policy goal is to make the means successful.  Hence the need for new market designs that accommodate wind and solar, the goal of the Power Markets Project.  

http://www.theenergycollective.com/benpaulos/2283218/talking-transitions-markets-wind-and-solar