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Published on May 15th, 2012 | by John Farrell


Lots of Solar Power May Reduce, Not Increase, Electricity Prices

May 15th, 2012 by  

Whether German feed-in tariffs or U.S. tax incentives, opponents of solar rail at its perceived high cost. But a story making rounds recetly, “Why power generators are terrified of solar,” presents a powerful image that may flip this conventional wisdom on its head. Building lots of solar power can actually reduce electricity prices, to the dismay of utilities.

The story comes from Germany, where a decade of consistent policy has resulted in thousands of megawatts of distributed solar installed on urban rooftops and rural barns. This year, it was noted that the surge of “solar PV was cutting peak electricity prices by up to 40%.” The following graphic of prices on the German electricity exchange — which Craig Morris calls “the afternoon dip” — illustrates the effect. The left view is 2008, showing steady, high prices in the market throughout the afternoon. The chart on the right shows the same time period in 2012, where an abundance of solar has sharply cut afternoon power costs.

What’s happened is the “merit order effect.” Because utilities have purchased all this solar capacity on long-term contracts, there is effectively zero marginal cost to taking the solar electricity onto the grid. And, in Germany, there’s enough solar electricity on sunny afternoons to completely offset the traditional spike in electricity demand created by air conditioning. So, instead of taking electricity from expensive gas peaking power plants or diesel generators, utilities have low-cost solar filling the gap, undermining the previous price peaks.

The fall in wholesale power costs from so much solar represents a delicious irony. For years, solar advocates have justified high prices as necessary to help the market mature and — because solar is such a small part of total power generation — that solar will cost the average ratepayer very little. The truth is that the impact of solar may be large, but in the opposite direction.

This post originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance.

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About the Author

directs the Democratic Energy program at ILSR and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. His seminal paper, Democratizing the Electricity System, describes how to blast the roadblocks to distributed renewable energy generation, and how such small-scale renewable energy projects are the key to the biggest strides in renewable energy development.   Farrell also authored the landmark report Energy Self-Reliant States, which serves as the definitive energy atlas for the United States, detailing the state-by-state renewable electricity generation potential. Farrell regularly provides discussion and analysis of distributed renewable energy policy on his blog, Energy Self-Reliant States (energyselfreliantstates.org), and articles are regularly syndicated on Grist and Renewable Energy World.   John Farrell can also be found on Twitter @johnffarrell, or at jfarrell@ilsr.org.

  • Nico

    It’s important to differentiate wholesale power prices and retail prices – Germany’s wholesale prices have been forced right down, but someone still has to pay for all the solar FiTs, and that’s on retail prices (residential consumers) which are among the highest in the EU.

    We also need to be clear about the challenges to power markets this effect is having – many countries, Germany included, are having to introduce capacity markets in order to maintain security of supply. This puts large question marks over the future of competitive power markets in countries with large RE penetration – largely unanswered for now, with increased regional integration, storage and demand response all options that could be alternative to the current drift to reregulation.

    • Bob_Wallace

      Why was there such a large spread between German wholesale and retail prices well before renewables came on the scene?

      How much of the current German retail price of electricity is attributable to solar FiTs?

  • Ross

    This story is one to bookmark because it’s an example of how when the market is liberated from special interests the old dirty power sources will be replaced by cheaper, cleaner renewables.

    The are right to be scared. Adapt or die.

    • Bob_Wallace

      Put the cost reducing power of solar together with that of wind and it’s clear that new nuclear and new coal are dead ducks.

      Last night the price of electricity dropped below $0.00/kWh on the ERCOT grid due to lots of wind generation on line.


      The wind farms still made a bit of money via their PTC subsidy, but coal and nuclear had to sell at a loss. Loosing money at night and having lucrative peak markets destroyed by solar has got to hurt.

      Now we need some affordable storage….

      • Ross

        It’s a bit of a double whammy for the poor old world power people: kills the business case for new legacy power and plays havoc with the return on their existing dirty investments.

      • Definitely a scary thing… for those industries.

        Which is why they’re dumping as much money as they can into policymakers who can delay the inevitable. (And screw countless people and generations in the process.)

    • Exactly.

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