The Impact of Wind and Solar on Wholesale Power Markets and Generation Assets
By Ryan Wiser, Andrew Mills, Todd Levin, Audun Botterud
The impacts of wind and solar on wholesale power markets in the United States have been limited so far. However, the impact will change as the penetration of variable renewable energy (VRE) increases.
Wholesale power prices and the composition and operation of the bulk power system in the United States have witnessed changes in recent years, and concern has grown in some quarters about the effects of VRE on these trends. The U.S. Department of Energy’s “Staff Report to the Secretary on Electricity Markets and Reliability” addressed this concern, but within a much broader context. The study focused on thermal-plant retirements and reliability, and placed a spotlight not only on growth in VRE but also on the effects of other contemporaneous trends such as declining natural gas prices, limited load growth, and regulatory pressures.
As input into the DOE Staff Report, Lawrence Berkeley National Laboratory and Argonne National Laboratory prepared a study (recently made available publicly, here) that focused on the degree to which growth in VRE has impacted wholesale power prices and bulk power system assets to date and how this may change in the future. In the noted report, we did not analyze impacts on specific power plants, instead focusing on national and regional trends. The issues addressed are highly context-dependent, and analyzing the impacts of VRE is complex. Nonetheless, while more analysis is warranted—including additional location-specific assessments—several high-level findings emerged from our study.
Historical Impacts: Visible but Modest
VRE Is Already Impacting the Bulk Power Market: The temporal and geographic patterns in wholesale prices have changed in some areas with higher penetrations of VRE, e.g. in CAISO and ERCOT, with wholesale prices depressed in locations and during times with sizable VRE generation. Negative wholesale prices have also become more frequent under some conditions in systems with high VRE. However, despite sometimes-expressed concerns, the prevalence and impact of negative pricing remains limited in most locations.
Of the major trading hubs that were evaluated in each ISO region, negative pricing typically occurred less than 2% of the time from 2007 through 2016 and had a nearly indistinguishable effect on average annual prices. To be sure, there were exceptions where negative prices were significantly more prevalent. For instance, Quad Cities (a nuclear power plant in Illinois in a region with significant wind resources) and Southern California (with a growing amount of solar) experienced negative real-time prices during 8% and 7% of the hours in 2016, respectively. In general, we found that negative prices were more common in areas with significant VRE and/or nuclear generation along with limited transmission, and typically occurring during periods of lower system-wide load.
VRE Impacts on Average Wholesale Prices Have Been Modest: In our noted study, we also estimated the impact of VRE on annual average wholesale electricity prices from 2008 to 2016 in ERCOT and CAISO. Overall average wholesale prices in both regions declined from more than $65/MWh in 2008 to less than $30/MWh in 2016. However, our analysis demonstrated that the impact of VRE on these declines in region-wide wholesale prices was limited.
Specifically, since 2008, the dominant factor driving wholesale prices lower in ERCOT and CAISO has been the declining price of natural gas. It was found that growth in VRE generation contributed less than 5% to the overall price decline over this period, whereas natural gas price reductions contributed 85-90% of the overall decline. Additional factors considered include: other types of generation additions; changes in emissions allowance prices; changes in coal, oil, uranium, and other fuel prices; generation unit retirements; and changes in electricity load. These various additional factors also individually contributed to accelerating or mitigating the overall price decline in ERCOT and CAISO, but, as is the case with VRE, all are minor contributors compared to the natural gas price shift.
VRE Impacts on Power Plant Retirements Have So Far Been Limited: In our analysis, we then explored the relationship between the growth of VRE and retirements of fossil and nuclear plants. Given the relatively modest impact so far of VRE on average annual region-wide wholesale electricity prices, it is not surprising that we did not find evidence that VRE has impacted power plant retirements to a significant extent.
While VRE impacts on electricity markets may contribute to retirement decisions for some specific units, to date there is little relationship between the location of recent (2010-2016) coal-, nuclear-, and other thermal-plant retirements and VRE penetration levels. Instead, we found that recently retired coal and natural gas plants tend to be older, smaller, less efficient, and more emitting than the remaining fleet. These characteristics are also present in plants that are scheduled to retire, though moderated to some degree. Based on simple correlation analysis, the strongest predictors of plant retirements include plant SO2 emissions rates, regional planning reserve margins, regional load growth or contraction, and thermal plant age.
Impacts will Grow as VRE Penetrations Increase
Though impacts may be limited to date, that is not to say that future impacts will be similarly modest. A review of studies assessing future impacts of VRE on electricity markets demonstrate that still-higher penetrations of VRE will tend to:
- require additional VRE and non-VRE capacity, flexibility, and reserves,
- alter the temporal and geographic patterns of wholesale electricity prices,
- reduce wholesale electricity prices and potentially increase ancillary service prices,
- reduce the average capacity factors of dispatchable thermal generating units,
- reduce the revenue and operating profits of less-flexible thermal generation units, and
- reward flexible (both existing and new) generators over less-flexible and high-capital cost units.
The speed and magnitude of these effects will depend on how quickly the generation portfolio adapts to the higher VRE penetration levels.
All generation types are unique in some respect, and wholesale electricity markets, industry investments, and operational procedures have evolved over time to manage the characteristics of a changing generation fleet. Though the effects of VRE on wholesale markets have been overshadowed by the much-larger impacts of low natural gas prices in recent years, power system planners, operators, regulators, and policymakers will continue to be challenged to smoothly and cost-effectively integrate these new resources into the grid. Key response strategies include power system flexibility provided by generation, load, transmission, storage, operational procedures, and market design. Some of these measures come at a low cost or even convey additional benefits. Other measures will come at a higher cost, requiring careful assessment before implementation.
This article was edited by Pardis Khayyer
Ryan Wiser is a senior scientist in and group leader of the Electricity Markets and Policy Group at Lawrence Berkeley National Laboratory. He leads a research program that conducts analysis on renewable electricity systems, including on the costs, benefits, impacts and market potential of renewable electricity sources; on electric grid operations and infrastructure impacts; on public acceptance and deployment barriers; and on the planning, design, and evaluation of renewable energy programs. Ryan holds a B.S. in civil engineering from Stanford University and an M.S. and Ph.D. in energy and resources from the University of California, Berkeley.
Andrew Mills is a research scientist in the Electricity Markets and Policy Group at Lawrence Berkeley National Laboratory. Andrew conducts research on the integration of variable generation into the electric power system, evaluating the costs, benefits, and institutional needs of renewable energy transmission and other supporting infrastructure. Andrew holds a B.S. in mechanical engineering from the Illinois Institute of Technology and an M.S. and Ph.D. in energy and resources from the University of California, Berkeley.
Todd Levin is a principal energy systems engineer in the Center for Energy, Environmental and Economic Systems Analysis at Argonne National Laboratory. His research is focused on utilizing advanced optimization and simulation methodologies to model complex interactions in electricity markets and quantify the implications of domestic energy policies and regulations. He additionally maintains a strong interest in international energy development, examining optimal centralized and decentralized rural electrification strategies as well as a range of global energy and water security issues. Todd holds a B.A. in physics from Northwestern University and a Ph.D. in industrial engineering from the Georgia Institute of Technology.
Audun Botterud is a principal research scientist in the Center for Energy, Environmental and Economic Systems Analysis at Argonne National Laboratory and in the Laboratory for Information and Decision Systems at Massachusetts Institute of Technology. His research interests include power system planning and operation, electricity markets, energy economics, grid integration of renewable energy, energy storage, and stochastic optimization. He is co-chair for the IEEE Task Force on Bulk Power System Operations with Variable Generation. Audun holds a M.Sc. in industrial engineering (1997) and a Ph.D. in electrical power engineering (2004), both from the Norwegian University of Science and Technology