Solar PV Reducing Price of Electricity in Germany

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Oh, the solar power haters* are going to love this one—a recent study by Germany’s Institute for Future Energy Systems (IZES), conducted on behalf of of the German Solar Industry Association (BSW-Solar), has found that, on average, solar power has reduced the price of electricity 10% in Germany (on the EPEX exchange). It reduces prices up to 40% in the early afternoon, when electricity demand is peaking and electricity typically costs the most. There’s a visual of that (in German) here:

This cost-reduction phenomenon is known as the merit order effect, and it’s something we’ve written about in the past when writing about the cost of wind energy (wind does the same thing). But let’s look a little more closely at what this is, since it’s been awhile.

Merit Order Effect & Clean (Solar & Wind) Energy

“Increasing the amount of renewable energy on sale lowers the average price per unit of electricity because of the merit order effect,” Wikipedia writes. “This is because it counteracts the effects of peak demand.”

More specifically: “Wind energy has no marginal costs [wind energy producers don’t need to buy combustion fuel] so their electricity is the cheapest and transmission companies buy from them first. Having a supply of very cheap wind electricity substantially reduces the amount of highly priced peak electricity that transmission companies need to buy and thus reduces the overall cost.”

The same goes for solar.

Basically, when a boost of electricity is needed, solar and wind can out-compete any electricity source that requires non-free fuel (e.g. coal, nuclear, or natural gas), since the added cost of sending more electricity to the grid from solar panels or wind turbines is essentially nil.

The advantage of solar is that it produces the most electricity when there’s the most demand for the electricity—it’s a nearly perfect match.

Germany Study

Coming back to the study in Germany, via Renewables International:

Uwe Leprich, research director at IZES, explains, “We compared the base prices with the prices on the power exchange between 8 AM and 8 PM over a long time frame.” The study found that the price of power was still rising considerably in 2007 between 10 AM and 1 PM as demand skyrocketed. But in the last two years, the sudden price increase no longer took place even though demand remained largely unchanged. “In addition, the differences between the base price and the peak price reduced considerably in 2010 and 2011,” he adds. “These are the two years in which the most photovoltaics was installed. At the same time, power demand did not change. We can therefore assume that photovoltaics is the reason why the base and the peak price have approached each other.”The base and peak prices used to be 20 to 25 percent apart, but that difference has shrunk to around 12 percent.

Yep, theory matches evidence.

Going on, it looks like householders aren’t the main beneficiaries of the cost reductions:

Overall, the price of electricity has been reduced on the power exchange by 520 to 840 million euros. Leprich argues that this merit-order effect has to be taken into account when discussing the cost of photovoltaics. “Of course, the effect is greater in the summer than in the winter, but it is there all year. After all, solar power is still generated in the winter – just not as much.” Nonetheless, the retail rate in Germany continues to increase because industry benefits from lower prices on the power exchange more than households. Leprich says that “energy-intensive industrial firms are the ones who buy power on the spot market, thereby directly benefiting from the price reductions brought about by photovoltaics. And power providers do not pass on the savings to consumers.”

Hmm, seems someone should try to address that and give the residents of Germany (and other countries where solar is expanding) their just desserts.

If the 99% spirit hasn’t been overcharged in you already, here’s more on the inequality or injustice of the matter:

At the same time, a large section of energy-intensive industry representing roughly 50 percent of total industrial power consumption is also largely exempt from the surcharge for renewable power. Leprich points out the irony: “I’m always surprised to hear industrial associations arguing that they are paying for the switch to renewables. The exact opposite holds true.” Not only are private households covering a disproportionate share of the burden, but the way the surcharge for feed-in tariffs is designed in Germany means that the surcharge increases as prices on the power exchange drop; feed-in tariffs are partly financed by revenue from the power exchange. If prices on the exchange drop, so does the revenue, so the amount reported as the surcharge increases. It is estimated that the retail rate would drop by around 0.15 cents per kilowatt-hour if these price reductions on the exchange were passed on.

What About the Future?

Now, as you have read, the costs come down due to solar’s relatively cheap peak costs. However, as it starts to cut into baseload power (rather than just peak power), those savings will go down. And, due to Germany’s rapid deployment of solar power, that is what the coming years are likely to bring. However, there are still two points to consider in this matter.

1. Solar, at any hour of the day, is quickly becoming cost-competitive in many regions (not even including massive externalities related to coal pollution, nuclear waste risk, and climate change). Costs continue to drop fast and, as I wrote on our solar power page (and I’ve even seen utility company CEOs note), if you take into account how long it takes to get a new baseload power plant up and projected costs then, solar is already cheaper.

2. A proper mix of renewable, free-fuel energy sources (i.e. wind, solar, hydro, and geothermal) gets rid of the need for baseload power. As some say, baseload power even “gets in the way” at that point. The wind blows the most at night. We all know when the sun shines. Geothermal and hydro are quite constant and can easily fill in the gaps. Flexibility is what is becoming key now, as it allows utilities to tap the cheapest sources of energy when they are the most obvious choice.

*Yes, I know, less than 10% of the public are solar power haters, but they sure are vocal, aren’t they?

Solar panels on roof in Germany via shutterstock