Renewables Pushing Down Energy Prices

Strong winds that tore through northern Germany on July 24 caused the nation’s 21,600 windmills to generate so much power that utilities like EON AG and RWE AG have had to pay consumers to take it off the grid. The event marked the 31st hour this year for which power companies lost money on their electricity because strong winds created an overwhelming supply.

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With Europe’s wind and solar farms set to triple by 2020, “You’re looking at a future where on a sunny day in Germany, you’ll have negative prices,” said Bloomberg’s chief solar analyst Jenny Chase. “And a lot of the other markets are heading the same way.” Meanwhile, investing in new coal and gas-fired power stations no longer face stable returns — as more renewables come on line, they will often be stopped from running at full capacity. Europe’s biggest markets give preference to renewable energy over more traditional sources, often forcing some utilities to use their fossil-fuel plants less, cutting into profits.

Currently, 70 gigawatts of renewable energy is created each day in Northern Europe, but by 2020, the region plans to have increased wind and solar capacity to about 200 gigawatts a day, or roughly a third of current installed base. As soon as 2014, that could cut gross profit from burning coal in Germany by as much as 41%. And narrower profit margins could force companies to put off building much-needed new facilities.

“The more intermittent technology like renewables, the more baseload generation will be squeezed out,” said Volker Beckers, chief executive officer of RWE’s U.K. Npower unit. Npower’s plants are mostly coal- and gas-fired, or baseload, which means they can run around the clock.

Power prices vary on an hour-by-hour basis, depending on available capacity, at times becoming negative when renewable energy peaks and there is a surplus of power. At those times, generators or grid operators pay consumers to take their electricity if they are unable to reduce output or hedge it. Grid operators in Germany, Spain, and France are required to take renewable output if it is available.

On July 24, with winds averaging 15 mph in the norther state of Mecklenburg-Western Pomerania, Germany’s same-day electricity price was below zero for nine hours. So far this year, Germany has 31 negative hours. “The law in Germany is that renewables have priority, so utilities have the choice of turning plants down for a few hours or paying a negative price to someone in Germany or abroad,” said EON spokesman Georg Oppermann.

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And as European countries continue to build their renewable energy sources, prices will be further depressed. Britain plans to install over 8,000 offshore wind turbines by 2020 to get 15% of energy from renewable sources, Germany installed 7.4 gigawatts of solar photovoltaic capacity last year, and Spain aims to get 20.8% of its total energy from marine energy, geothermal and offshore wind projects, and hydropower by 2020. By 2060, photovoltaic and solar-thermal plans could meet most of the world’s demand for electricity.

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