Thread by @lopez_prol

What are the economics of increasing variable #renewable energy (VRE) sources and electricity #storage in electricity markets?

@WPSchill and I try to explain it in the @AnnualReviews of Resource Economics 🧵:

annualreviews.org/doi/full/10.11…

#energytwitter #econtwitter

1/20

Wind and solar photovoltaics (PV) will be the main sources of electricity by 2050, accounting for almost 70% of global electricity generation, according to the @IEA Net Zero 2050 scenario.

iea.org/data-and-stati…

2/20

Wind and PV are variable: they only produce when the resource is available.

Solar always produces more in summer than in winter and only by day peaking at noon.

Wind is more location-specific, e.g. it produces more in winter in Germany and in summer in California.

3/20

Given VRE variability and virtually zero variable cost, wholesale electricity prices decline as VRE penetration increases:

a) reducing residual demand,

or equivalently,

b) shifting supply to the right

This is the merit-order effect.

4/20

The merit-order effect can also be represented with price duration curves, which show the prices for all hours of the year in descending order. As VRE penetration increases, the price duration curve shifts downwards.

5/20

Because prices decline when VRE are generating, their market values decline (absolute cannibalization effect). It can also be seen with the VRE generation-weighted price duration curve, i.e. the value of VRE generation for all hours of the year in descending order.

6/20

If VRE market values decline more than average wholesale electricity prices, then we also have a relative cannibalization effect.

7/20

Variability causes integration costs to the electricity system, as @FalkoUeckerdt et al. show here:

doi.org/10.1016/j.ener…

8/20

Integration costs can be assessed from a cost or from a value perspective (as @LionHirth shows here: doi.org/10.1016/j.rene…).

The VRE cannibalization effect is therefore equivalent to their integration costs.

9/20

There are many options to integrate VRE and mitigate the cannibalization effect:

- internalizing externalities @nworbmot doi.org/10.1016/j.enec…

- increasing geographic diversity osti.gov/servlets/purl/…

- various flexibility options doi.org/10.1016/j.rser…

10/20

Electricity storage is particularly interesting for integrating VRE.

There's a wide range of techs. differing in round-trip efficiency, energy and power costs, storage duration, etc.

doi.org/10.1039/C8EE01…

11/20

The costs of Li-ion batteries have been declining significantly in the last years, and are expected to decline further in the future.

about.bnef.com/blog/battery-p…

12/20

Multiple methods to study the role and value of storage in electricity markets with VRE:

-Price-taker arbitrage models
doi.org/10.1016/j.enec…

-Time series–based models
doi.org/10.1016/j.rene…

-Capacity expansion models
doi.org/10.1039/C5EE01…

13/20

We illustrate the dynamics of increasing VRE penetration and storage with a reduced version of the #opensource capacity expansion model #DIETER

doi.org/10.5281/zenodo…

↑ VRE penetration → residual load curve shifts down, especially on the right-hand side.

14/20

Correspondingly, wholesale electricity prices decline due to the merit-order effect.

15/20

↑ VRE penetration → both the optimal amount of storage use (orange) and renewable curtailment (blue) increase more than proportionally on the right-hand side of the residual load-duration curve

16/20

The drivers for storage use change as VRE ↑:

- First, storage is driven by taking up surplus energy (right-hand side)

- At high VRE penetration, peak residual load supply drives storage use (left-hand side), and the relevance of long-duration storage increases.

17/20

↑ VRE penetration →
→ ↑VRE LCOE due to higher curtailment

→ ↓VRE market values due to merit-order and cannibalization effects

- The difference between both is the necessary VRE subsidy.

- Storage mitigates both trends.

18/20

Conclusions:

↑ VRE penetration →

→ ↓ wholesale electricity prices (merit-order effect)

→ ↓ VRE market value (cannibalization effect)

- Storage mitigates both trends

19/20

Conclusions:

VRE and storage are at the same time:

- Complements, because increasing penetration of one increases the value of the other,

- Substitutes, because VRE overcapacity and curtailment can reduce storage needs.
20/20

Our joint work benefited from support by @FWF_at via the Schrödinger Fellowship “Cannibalization”, and by @BMBF_Bund & @BMWi_Bund via the research projects FFF & #MODEZEEN

Full paper:

annualreviews.org/doi/pdf/10.114…

@FWF_at @BMBF_Bund @BMWi_Bund This link should give you access to the full text:

annualreviews.org/eprint/WSMW2UJ…