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

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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