IS IT ACCURATE TO COMPARE DAILY WHOLESALE ELECTRICITY PRICES WITH RENEWABLES COSTS?
One of the main arguments used to characterize renewable energy as expensive is by comparing its costs with electricity wholesale prices. With this, renewable energy costs are being compared to the variable costs of the electricity system, namely the variable cost of conventional technologies. So is it accurate to make this analysis when wholesale prices only reflect the variable cost of production of conventional technologies and not its full cost?
From EDPR’s perspective it is inaccurate to make this comparison as:
- Renewable energy uses technology with negligible variable costs and so – despite various dispatch priorities – are the most effective and the first to sell its production thus contributing to lowering wholesale prices (in periods with very strong renewable production wholesale prices tend to zero). Renewable energies are creating a benefit for the system that is not being attributed to them.
- It is important to recognize that wholesale electricity markets are a highly competitive, and existing conventional generation facilities do not account for the initial capital investment when bidding to capture demand. It is also relevant to note that some conventional technologies are not covering their full costs with the wholesale price and therefore are not sustainable in the long run. There are conventional technologies that receive additional revenue on top of the wholesale price, including capacity payments and payments for ancillary grid-support services.
- The average life of the different assets in the energy mix distorts the analyses as comparisons are made between renewable assets with few years of operation with conventional facilities where the investment costs are already partially or fully amortised.
The problem of market prices not reflecting the cost structure of energy facilities is not specific to renewable energy. Electricity generation is generally a capital-intensive industry and the variable price obtained in wholesale energy markets is not sufficient to cover the full cost structure, as wholesale markets only create competition and pressure on the company’s variable costs. To reduce the high risk attributed by investors to this type of investments – due to the volatility of wholesale markets and the low visibility on the recapture of fixed cost component –regulatory systems were established.
In order to improve competition and to provide investor visibility on returns, ex-ante competition should be introduced to attribute licenses for new generation facilities. With this process, only the best and most efficient projects would be installed.
EDPR believes that long-term contracting is the most efficient way to remunerate generators as it entails the lowest possible cost for consumers by reducing the investment risk for operators and providing long-term visibility on returns.
The rationale is that, as electricity generation investments are capital-intensive, they require stability and visibility. When the regulatory framework doesn’t allow for this stability and visibility (for example, when participating in the wholesale spot market), investors will require a higher risk-premium. On the contrary, schemes providing higher visibility entail lower risk for the equity investor, lower financing costs for the financing entities that will allow lower cost of capital, and therefore lower the required profitability. Lower required profitability will translate into lower required remuneration, which will be passed to the final consumers that will benefit from lower electricity tariffs for the same level of renewable penetration.
WIND ENERGY IMPACT ON PRICE
Wholesale price evolution in Spain in December 2013 is a good example of this. The first two weeks of December were unusually low in terms of wind resource, which led to a sharp increase of the wholesale price, up to its record value (93€/MWh on December, 8). However, meteorological conditions drastically changed at the end of the month and high wind generation made wholesale price plummet (5€/MWh on December, 25).