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.