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February 17th, 2015 at 10:00 am

Can solar be the next shale?

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Can solar power transform the electricity market as much as shale did for oil and gas?  This question has been posed in a new study by Wood MacKenzie, an international energy research and consulting company.

“Just as shale extraction reconfigured oil and gas, no other technology is closer to transforming power markets than distributed and utility scale solar,” writes Prajit Ghosh, an energy analyst at Wood MacKenzie and the study’s primary author.

Based on the study’s persuasive analysis, it seems difficult to dispute that solar technology will transform – and in some states already is transforming – wholesale power markets.

But there is a whopper of a caveat. The scope of the solar-induced transformation will depend on political decisions made in the future. The shale revolution also depended on political decisions. The vital difference is that the decisions that enabled the shale revolution mostly preceded the maturation of shale extraction technologies.

Paul Joskow, a professor of economics of the Massachusetts Institute of Technology and the President of the Sloan Foundation, has argued that regulatory and market reforms in the natural gas industry provided an essential economic platform for accelerating technological advances in shale extraction. In 2013, Joskow explained in an article published by the American Economic Review that:

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The recent dramatic and largely unanticipated growth in the current and expected future production of shale gas . . . would not have been realized as quickly and efficiently absent deregulation of the wellhead price of natural gas, unbundling of gas supplies from pipeline transportation services, the associated development of efficient liquid markets for natural gas and reforms to the licensing and regulation of prices for gas pipelines charge to move gas from where it is produced to where it is consumed.

The solar-induced transformation described by Wood MacKenzie can largely be explained by the following two charts.

The first chart shows the results of a “net cost analysis” performed by Wood MacKenzie for utility-scale power plants constructed in California. Net cost is a metric for estimating the profitability of investing in a new power plant. It is the difference between a power plant’s total revenues (e.g., sales, capacity, incentives) and its total costs (e.g., construction, fuel).

The chart projects the future profitability of investing in solar, wind and natural gas plants in California (CC = combined cycle and CT = combustion turbine).

Solar is hands-down the most profitable investment, but not necessarily for the reasons you would think. Yes, the cost of solar is declining, but that is only a small part of the story. Solar is capturing revenues that would have accrued to natural gas generators. “The more solar you build, the less attractive natural gas becomes,” said Ghosh. “This is not a forecast. It is already happening in California.”

The trouble is that solar is eating into the revenue of natural gas plants while only partially displacing them. Even with seven gigawatts of installed solar capacity, California’s electric system still needs gas-fired generators to provide a backstop for when solar is unavailable.

To understand why this matters, consider the next chart. It is known in California as the “duck curve” or the “duck of doom.”

Historically, the wholesale price of electricity has tracked total system demand, which is also called “load” in the power industry. When lots of solar power capacity is installed, wholesale power prices follow the effective load, which is the load at a given hour minus solar (and wind) generation. The size of the duck’s belly is the generation no longer supplied by fossil fuel plants.

“The bigger the duck’s belly becomes, the worse it gets for fossil fuels,” said Ghosh. “There is a circular logic: the more solar you build, the worse you make fossil fuels. Adding more solar will ultimately hurt solar too, but it hurts gas more.”

A generator’s revenues is the price multiplied by the quantity of power they sell. A gas plant that would have run for 500 hours every year without high levels of installed solar capacity may run only 100 hours every year with high levels of installed solar capacity.

“Solar reduces both the price and the quantity of power sold by gas generators,” said Ghosh. “So it has a double whammy effect on fossil fuel plants.”

In my view, the duck curve shows why the future predicted in the first chart is not likely to materialize. If gas generators become too unprofitable, the electric system will collapse.

“The risk is that gas plants – once they become uneconomic – will not be there as a backstop,” said Ghosh.

That risk is not likely to be tolerated for very long if at all. Most people remember what happened to former Governor Gray Davis when inadequate generating capacity caused rolling blackouts in California in 2001. Something will need to give.

“Keeping backup capacity on the grid becomes increasingly difficult as solar energy lowers power prices and worsens the economics of other technologies,” writes Wood MacKenzie. “Should solar market saturation rapidly increase, today’s market . . . compensation mechanisms will need to evolve to maintain reliability.”   Continue reading…

Image credit:  Oregon DOT | Flickr
Via Forbes

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