In this week’s cover story, The Economist thoughtfully argues for expanded use of renewable energy, noting that, “It is no longer far-fetched to think that the world is entering an era of clean, unlimited and cheap power. About time, too.”
The Economist also correctly advocates for greater use of market mechanisms to increase the efficiency and flexibility of the power system, which we’ve long advocated for. However, in justifying those market reforms, the article exaggerates renewables’s role in causing low prices in electricity markets.
Concerns about renewables reducing electricity prices are overstated
In many electricity markets, particularly in the U.S., low fossil fuel prices are by far the largest factor driving down the price of electricity. As we and others have previously explained, renewables’ impact on electricity market prices is quite small relative to the impact of fossil fuel prices, largely because renewable resources almost never set the electricity market clearing price, while fossil fuel generators almost always do.
Because renewable generators do not set the market clearing price, incentives for renewable generation are not directly factored into market prices. On the largest U.S. power system, low fossil fuel prices have had a 500 times larger impact on electricity prices than the direct impact of renewable incentives. While incentives that drive the addition of renewable energy indirectly reduce market prices by pushing the supply curve outward, that is true of the addition of any low-variable cost form of energy, whether nuclear, hydroelectric, or even coal.
It is also critical to remember that incentives for renewable energy are dwarfed by far larger subsidies for fossil and nuclear energy. In the U.S., wind energy accounts for less than three percent of cumulative federal energy incentives. Moreover, fossil and nuclear energy continue to receive large subsidies, even though federal incentives for wind energy are being phased out.
One should also keep in mind that low prices are good for consumers. Lower electricity prices directly translate into lower monthly electric bills, making businesses more competitive and saving homeowners money.
Lower electricity prices also drive more competition in electricity markets, forcing generators to improve efficiency and productivity to reduce costs, which benefits everyone. For example, in response to market challenges, the Nuclear Energy Institute is pushing efforts to reduce the costs associated with operating existing nuclear power plants by 30 percent.
As The Economist notes, the growth of renewables, combined with reforms to incorporate the real-time price of wholesale electricity into retail electricity prices, incentivizes demand response that can take advantage of time periods when low-cost renewable energy is abundant. That makes the power system more flexible and efficient.
The Economist is right that electricity markets can be improved
The Economist is correct that electricity market designs may need to evolve as the resource mix changes. Many aspects of today’s electricity markets were designed with fueled resources in mind.So it makes sense that market mechanisms need to be updated to allow new clean energy and demand response resources to participate.
One of the simplest solutions to concerns that power prices are too low is incorporating the cost of carbon pollution into market prices. Any economist knows that the most efficient way to reduce carbon emissions is to bring the cost of carbon into the market, and in the U.S. renewable advocates have fought for carbon policy alongside nuclear advocates. Due to the absence of federal carbon policy in the U.S., nuclear plant owners are now pushing states to award zero-emission credits, even though in other countries carbon policy is replacing incentives for low-emitting resources.
A strong electric grid also plays a key role in keeping electricity markets competitive and efficient. Texas has long had the most favorable transmission policies in the U.S. The adamantly free market state understands a congested grid undermines competitive electricity markets by creating the opportunity for localized exertion of market power. Transmission helps avoid low and negative electricity prices by delivering renewable electricity to areas where it is needed, ensuring fossil resources and not renewable resources remain on the margin.
Large, market-driven grid operating areas and efficient grid operating procedures, as exist in parts of the U.S. and other countries, are also valuable for efficiently integrating new resources and keeping power prices at sustainable levels. Both of these reforms more than pay for themselves.
The Economist is also right that letting markets work is the simplest solution to low prices in oversupplied markets. For example, China has started to reform quota systems that incentivized coal plants to operate instead of zero-fuel cost wind resources.
As we reach extremely high levels of renewable use in the future, other aspects of electricity market mechanisms may need to evolve. Energy markets excel at deciding which resources should run in real-time, which is still valuable but less important on a power system with many zero-marginal cost resources. Markets for ancillary services and other needed power system services can become more important as low-cost renewable energy resources proliferate. Thanks to technological advances, wind and solar plants are now able to provide many of those reliability services as well as or better than conventional power plants, and barriers to new resources entering those markets should be removed.
There are no obstacles to reliably integrating far larger amounts of renewable energy
Because renewable energy resources can now exceed the reliability contributions of conventional power plants, studies and real-world operating experience demonstrate much larger amounts of renewable energy can be reliably integrated. At times, the main utility in Colorado reliably obtains more than two-thirds of its electricity from wind, and the multi-state Southwest Power Pool recently obtained 52 percent of its electricity from wind.
As we’ve explained previously, adding wind and solar to the grid does not create a need for new generating capacity, and in fact only decreases the total need for capacity. In fact, the abrupt outages of large conventional power plants impose a far greater need for power system reserves than the gradual and predictable changes in wind output. Studies by grid operators and other experts indicate we can increase our use of renewable energy many times over while maintaining or improving electric reliability.