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Published on March 1st, 2012 | by Susan Kraemer

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German Utilities Fight Solar’s Cost-Cutting Merit Order Effect

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March 1st, 2012 by
 

A utility backlash against solar as a result of electricity price competition has resulted in a win for German utilities. German environment minister Norbert Roettgen announced a cut of up to 29 percent in solar feed-in tariffs on all solar installed after March 9th 2012, followed by monthly reductions until the end of the year, and annual cuts thereafter.

New solar installations of a record 7.5 GW in 2011, far outpacing the country’s 2.5 to 3.5 GW plans, have cut into the business model of German utilities, who are also looking for a legislative cap of 1GW of new solar on the grid per year. They haven’t yet succeeded, but they will continue trying.

Increasing the amount of solar power on the grid has actually lowered peak electricity prices (How the merit order effect works) but it has generated a backlash among German utilities, who are having their bottom line hurt by solar competition, according to RenewEconomy.

Afternoon peaks used to be when German utilities could charge more for electricity supplied to the grid. But solar has changed all that – by having the lowest marginal costs (zero) at a time that coincides with its peak production.

The result is that solar has lowered the peak prices of electricity to lower than off-peak prices in the dead of night.

Deutsche Bank solar analyst Vishal Shah noted in a report last Friday that German utilities are being significantly impacted due to excess solar generation – a result of the merit order impact. This is true not just of the German market, but Italy as well, which actually exceeded Germany last year for the amount of solar PV installed in 2011.

Under the Merit Order ranking system for deciding which source to put on line first, all available sources of electrical generation are ranked by “marginal costs” (the additional cost of supplying one extra unit) – and the lowest marginal cost sources must be used first.

“This phenomenon is unsustainable and already creating a huge backlash from major utilities,” Shah noted. “With Germany adopting a drastic cut, we expect major utilities in other European countries to push for similar cuts as well.”

Germany built up to this critical mass for solar over two decades. It began its guaranteed feed-in-tariff in 1991. Under the Renewable Energy Sources Act of 2000, German grid operators had to buy electricity generated by specified renewable energy sources at a guaranteed feed-in-tariff.

The tariff terms were enough to entice Germans to contribute to the electricity supply for the German grid and by 2006, solar was generating enough power that it had an impact on the power plant portfolio, generating 52 terawatt-hours by that year. Last year it supplied 3% of the German grid. This year that will be 4%.

EU Energy Commissioner Günther Oettinger said that the effect of merit order ranking would mean that the ultimate cost of completely decarbonising the grid by 2050 will be the same as business as usual, because higher upfront costs are offset later by lower running costs.

But cutting it off too early won’t.

 

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About the Author

writes at CleanTechnica, CSP-Today, PV-Insider , SmartGridUpdate, and GreenProphet. She has also been published at Ecoseed, NRDC OnEarth, MatterNetwork, Celsius, EnergyNow, and Scientific American. As a former serial entrepreneur in product design, Susan brings an innovator's perspective on inventing a carbon-constrained civilization: If necessity is the mother of invention, solving climate change is the mother of all necessities! As a lover of history and sci-fi, she enjoys chronicling the strange future we are creating in these interesting times.    Follow Susan on Twitter @dotcommodity.



  • http://cleantechnica.com/ Zachary Shahan

    Thanks for the note!

    • http://www.facebook.com/profile.php?id=100001060778642 Thomas Gerke

      Today about 12.000 people took to the street in front of the Brandenburg Gate in Berlin. Mainly employees of the PV Industry, but also members of Unions and Enviromental organisations, aswell es political organisations.
      Leading opposition politicans & scienticsts spoke about the madness that the government tries to push through.

      Meanwhile details from the internal discussions of the MPs of the government parties already officially revoked the Marth 9th date and named April 1st as the new date.

      Other details are still open for discussion… if the adjustments are enough to please the critical conservative state governments will be seen a few weeks down the road. :)
      Democracy in Action.

      I am abit hopeful that the worst can be averted and the energy revolution (in it’s people driven form) can prevail & broaden its base here.

      The biggest Electricity producers/gas&coal dealers of the world not having any significant marketshare in the energy system of the future, definatly has a hell lot of influence over the federal governments decision process.Scarry shit.

      1. one year of special interest driven PR-campaigns
      2. an arbitrary limit presented by politicans
      3. a rapid political action against the Renewable Energy Act as a reaction to a manufactured crisis

      • http://cleantechnica.com/ Zachary Shahan

        Awesome, thanks! I think I have to do a story on this tomorrow. :D

      • Zer0Sum

        Sounds like the same chain of events that happened to Microsoft as Linux and Open Source has taken hold. Now look at the Moblie OS space… It’s Apple vs Android.

        Same will happen with Solar and Renewables. As long as we can stop the Miltary Industrial Complex them from starting WWIII and Australia keeps shipping all it’s coal to China so they can continue producing PV at ever lower costs the transition is inevitable.

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