Renewable Power: Does Success Kill the Industry?

An article on the 25th February in the Economist described how the increasingly greater supply of renewable power is causing issues for electricity companies. Due to the issue of climate change, developed governments are forcing renewable energy on existing electricity systems that have no need for new capacity. Coupled with a currently declining demand for electricity, and this extra supply has pushed down the price of electricity. For instance in Europe, wholesale electricity prices have “slumped from around €80 a megawatt-hour in 2008 to €30-50 nowadays.” This led to $120bn of assets being written off by various utility companies within the EU, such as E.ON.

It’s not just the extra supply that is causing issues. The energy industry is structured around marginal costs, with the market historically meeting demand by purchasing electricity from the cheapest supplier and working its way up the suppliers until demand is met. These are the costs incurred in a fossil-fuel dominated scenario. However, as renewable energy sources have no need to purchase fuel, they have very low marginal costs. This allows the renewable companies to push the more expensive suppliers of electricity out of the market, which brings about the lower wholesale prices. The problem for the industry here is the intermittent quality of renewable sources. Because there are times of the day where wind or solar availability will be low, the grid can’t rely on purely renewable energy to supply all the electricity to meet demand. A graph of this effect is shown below. Because of the unreliability of renewables, fossil-fuel generated power is still required to fill in the gaps. But with the lower energy prices, it’s hard for fuel companies to stay in business as their lower revenues makes it harder to attract investment. If they get pushed out the market, they will subsequently not be available to fill in the energy gaps when needed. 

An indicator of how an abundance of renewable energy supply can cause lower prices can be shown by comparing prices in Norway and the U.S. Norway generates 98% of its electricity from renewable sources, the U.S. was at around 13% in 2015. The cost of electricity in Norway is 28 øre per kWh, which is 3.26 cents. In contrast, the average U.S. cost is 12 cents per kWh. It’s a rough example, but the four times cheaper prices in Norway can certainly be explained in some part by their reliance on renewables.

Looking to the future, there’s talk of a third industrial revolution wherein there will be a decline in vertical power structures in favor of a “horizontal, distributed model” due to the expected lower marginal costs of the future. Instead of making their revenue through pure sales, cheap energy will force energy companies to “make their money through partnerships with their customers and clients to manage those distributed networks.” If energy companies can successfully accomplish this, then hopefully the successful integration of renewable energy won’t end up killing the industry.

Sources:

http://www.economist.com/node/21717365

Are Zero Marginal Costs Transforming the Energy Industry?

http://www.npr.org/sections/money/2011/10/27/141766341/the-price-of-electricity-in-your-state

https://www.ssb.no/en/energi-og-industri/statistikker/elkraftpris/kvartal/2016-05-31

https://www.regjeringen.no/en/topics/energy/renewable-energy/renewable-energy-production-in-norway/id2343462/

https://www.eia.gov/energyexplained/index.cfm?page=electricity_in_the_united_states#tab2

11 thoughts on “Renewable Power: Does Success Kill the Industry?

  1. I’m fascinated by this idea of a “Third Industrial Revolution”. In terms of a horizontal model, does that mean that former consumers would instead create and consume electricity? Perhaps in the future electric companies will pay consumers that somehow generate their own power to distribute that power in a type of franchise fashion.

    • I’m not an expert, but you can actually receive compensation from electricity companies now. Consumers who use solar panels and manage to produce enough energy to sustain themselves don’t need the energy that an electricity company provides. They can thus be compensated for their conservation of energy by never tapping into their electricity company’s power grid. However, solar panels and ways to create your own energy at home can be very costly, so this practice is not widespread.

    • The rise of this “Third Industrial Revolution” brought on by the near zero marginal cost phenomenon can already be seen in Germany, where over 1 million homes and small businesses generate 27% of the energy powering the country. Once the fixed costs of installing the solar or wind energy is paid back, the marginal cost of harvesting the energy is virtually free.

  2. How far is the US from achieving sustainable forms of energy that would resemble Norway or other leading countries? When it comes to modernizing, it seems that the US is always one step behind in today’s world. Especially with Scott Pruitt heading the Environmental Protection Agency, the US will be prevented from following suit in the area of sustainable energy. Thus, it seems unlikely that we will see any direct consequences of sustainable power anytime soon; however, the transition towards sustainable energy is inevitable. The ensuing decade will no doubt experience a shift in energy, so perhaps for the time being the Trump administration has bought the energy industry more time to understand and decide how to manage such a transition.

  3. I feel that the larger energy companies such as GE and RoyalDutch Shell will also be able to survive because they have business segments that focus on renewable energy sources. As the revenue from the traditional sources of electricity decrease, revenue from renewables will go up to balance out their bottom lines.

  4. As Matt Jones pointed out, coop’s (I believe that’s the proper term) allow consumers to generate their own solar energy and then sell it back to companies who can provide that electricity to other consumers. This however, I think reflects an issue in the private market where universal cheap access to energy is a positive thing but the lack, or decline, of profitability makes pursuing that end often futile.

  5. Everyone responds to certain incentives, and if people in the United States are encouraged to use and create renewable energy, then we might be able to move towards this “Third Industrial Revolution,” and also be on level with countries like Norway who provide cheap energy for everyone.

  6. This concept of a third industrial revolution is interesting, and the way that this is implemented will be very crucial to the actual development of this concept. Can the industry achieve this at the margins? China is already very successfull in implementing renewable energy.

  7. It seems that this eventual decrease in price will force many energy companies out of the market. For this reason, these companies should start innovating now in order to prepare for the future. Americans should not have to bear the costs associated with negative externalities from dirty energy just because energy companies want to maintain higher profits.

  8. The tax credits provided for using electricity produced by a wind turbine or a solar array have allowed renewable energy to take over the market. However, two years ago, Congress voted to begin phasing out tax credits which will start dropping next year, and all new products after 2020 will receive none at all. I will be curious to see if this impacts the share renewable energy has at all.

    source: http://www.houstonchronicle.com/business/columnists/tomlinson/article/Renewable-energy-tax-credits-challenge-markets-11058236.php

  9. Although it won’t be extremely disruptive early on, would electric cars becoming mainstream increase the demand for electricity enough in order to reach the supply? i wonder if the cheapness of electricity will increase the possibility of electric cars becoming a legitimate disruption within the auto industry.

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