- Electricity markets around the world are facing a major change as countries shift from fossil fuels to renewables like wind and solar
- Industry watchers have raised concerns that conventional energy-only markets will cease to function, because they price electricity based on marginal cost, while many renewables have zero marginal cost
- A new UBC Sauder study looks at what happens when the market relies entirely on renewables combined with electricity storage, using Germany and Texas as examples
- The researchers found that the markets will find a “new merit order” based on the cost of storage for renewable energy
- The researchers predict that existing markets will remain functional and viable
- The cost of renewables and storage will vary widely depending on location
- The study is the first of its kind to derive the “new merit order” in a theoretical framework and simulate the optimal capacity composition of an electricity system with only renewables and storage.
Electricity markets around the globe are facing a sea change as power from coal, oil and gas gets phased out and renewables power up. So what happens down the road when electricity is supplied entirely by renewables coupled with large-scale storage? Can the current “energy-only” wholesale electricity markets survive? According to a new study from the UBC Sauder School of Business, existing electricity markets will remain viable and functional, and an efficient new merit order will emerge.
Conventional electricity markets were designed around a system of peak and base loads, which led to a merit order based on marginal cost — that is, power plants are ranked and chosen according to the lowest cost of generating electricity when demand goes up. Renewables, meanwhile, are intermittent, depend on sun and wind, are tricky to store, and have near-zero — or even zero — marginal costs.
Because of those low marginal costs, wind and solar have depressed wholesale electricity prices; at the same time, those prices need to cover the steep fixed costs associated with renewables and storage. That disconnect has led to worries that, in an all-renewables future, conventional markets will no longer work.
“The traditional merit order that was defined by the most expensive last unit coming online will be gone,” says UBC Sauder Associate Professor Dr. Werner Antweiler. “As a result, there’s been much worry that when we only have renewables and storage, traditional energy markets will no longer function. So we asked, ‘How would prices be set in such a market?’”
For the study, titled The new merit order: The viability of energy-only electricity markets with only intermittent renewable energy sources and grid-scale storage, the researchers used data from Texas — where energy demand is highest in summer — and Germany — where demand is highest in winter — to explore how markets function in places with rather different local characteristics.
The result, says Dr. Antweiler, was an entirely “new merit order” — one driven by storage. In short, when demand for electricity generated by wind or solar goes up, so does the need for storage, likely through conventional lithium ion batteries or hydrogen. So in the future, when electricity is generated entirely by renewables, prices will no longer be driven by the cost of production: they will be set according to the need for storage.
“When it’s a windy, sunny day and there’s more supply than demand, all of the storage systems will be powering up and saving the electricity, and by doing so will start competing against each other and bidding up prices,” explains Dr. Antweiler.
“Then when the demand for electricity goes up and the batteries are discharging, they will sell electricity at a price that makes up their charging cost, allowing for storage losses,” he says. “It’s just like in any competitive market system where there’s a demand for something that's scarce: the price will go up to that scarcity level until providers get to the peak capacity. Then the prices shoot up sky high. These rare peak-price periods allow generators and storage operators to recover part of their fixed costs.”
In other words, says Dr. Antweiler, renewable energy producers and storage businesses need to recover their costs fully, and there is a market equilibrium price at which that can happen; it will just be determined in a different way than before — and storage will become “a price maker, not a price taker.”
Dr. Antweiler says he and co-author Dr. Felix Muesgens of the Brandenburg University of Technology intentionally chose a highly simplified model — just two types of power and two types of storage — because it allowed them to more clearly identify how equilibrium can be achieved in a market that relies entirely on renewables and storage. The simplification made it possible to derive results in a theoretical model.
Along the way, they found that an all-renewable-plus-storage system in Texas will be more affordable than in Germany because Texas enjoys more favourable weather conditions. Interestingly, the researchers found that Germany would need to rely on two thirds wind power and one third solar power, while Texas’ the situation was reversed — two thirds solar and one third wind. As a result, the storage demands and costs between the two countries also varied.
“A world based on renewables and storage is going to be quite different in terms of cost in different places,” says Dr. Antweiler. In many instances, he adds, renewable electricity will actually be cheaper than conventional energy, especially since storage technology is rapidly improving. “So we don't have to worry that electricity is going to become unaffordable, or that it will set us back in terms of our goals for electrification of mobility or industry.”
At bottom, says Dr. Antweiler, there is no need to reinvent the wheel — or the electricity markets that power it. “We don't have to panic about renewables wreaking havoc on electricity markets. These markets will still work fine; they will just work differently,” he says. “So that’s good news.”
