European energy companies generated a record 10.4% of electricity from solar sources in June, according to a study by experts from Ember. This is a more than doubling of solar’s share of the electricity generation mix since 2018 and a key milestone in the continent’s energy transition efforts.
However, the rapid increase in solar power supply capacity on European electricity grids is already beginning to erode the profitability of producers, as excess energy from solar sites lowers wholesale electricity prices and leads to shrinking RES revenues for utilities. This is commented by Reuters columnist Gavin Maguire.
The phenomenon known as the “renewables cannibalization effect” is the result of a feature of the European electricity system that both prioritizes RES supplies and sets the price of wholesale electricity relative to the most expensive source of electricity needed to meet demand of the system at any moment.
At the same time, natural gas has continued to be the main source of electricity in Europe for decades, so the cost of generating electricity from a gas-fired plant has historically been the main factor determining producer prices.
However, after Russia’s invasion of Ukraine rattled European gas markets in 2022, European generators accelerated the construction of renewable energy capacity while reducing fossil fuel electricity generation.
This has tilted the balance of the continent’s power pricing markets away from natural gas and towards solar and wind, and has led to cheap-to-produce renewables increasingly having an impact on wholesale power prices.
Wind and solar sites accounted for roughly 19 percent of total electricity generation in the first half of 2023, down from natural gas’s 24.7 percent share over the same period, data from think tank Ember showed.
However, the combined share of wind and solar is up from 14% in 2021, while natural gas’s share is shrinking from nearly 26% in 2021.
This combination of increased renewables along with reduced gas production has changed the load profile of European electricity markets and allowed utilities to use maximum amounts of renewable energy while saving on natural gas.
In turn, this allowed the utilities to increase revenue from power generation as they were able to save on quantities of expensive natural gas while allowing cheap-to-produce renewables to make up for any power shortages. However, these strong profits may start to become increasingly difficult to generate as additional volumes of solar capacity are continually built and brought online, thereby competing with all other forms of generation to set electricity prices Wholesale.
Capture rates and prices
Capture rates and prices (the average electricity prices in EUR/MWh that a RES generation can achieve, according to its technology, ed.) together with wholesale prices are key factors that determine how much a generator can earn electricity from the sale of electricity for a given period. An average price is actually a weighted average price during which the generating asset produces electricity. It is also a measure of price divided by the available market price.
In the case of a natural gas plant that produces power only during peak demand periods, a typical capture rate can be 100% because the plant can send maximum volumes to meet peak demand demand, and then to reduce or stop production when demand falls.
For renewable assets, the capture factor is usually less than 100% and can be significantly lower for solar capacity in particular. They produce electricity only when the sun is shining and often reach peak output just when demand and prices may be near their lowest on a typical sunny day.
Mishaps in the sun
Solar generation assets can be cheap to install and almost generate electricity for free when the sun is shining, but they have their drawbacks when system capacity exceeds system demand.
This problem was made famous by the “Duck Curve” in the California electricity market, where daytime electricity prices took the shape of a duck due to the impact that excess solar generation had on mid-day wholesale prices. Power producers must adjust to ever-cheaper electricity prices when solar output is at its peak — like a duck’s belly down — but then must ramp up production from other sources after the sun goes down, creating the duck’s neck. on the chart.
Australia’s “Duck Curve” electricity markets
Source: synergy.net/3eNews
European solar producers are not yet facing problems similar to those seen in California, where solar can account for 40% of total electricity generation.
But as more RES capacity is added to Europe’s solar generation system, solar producers should expect additional competition from other solar sources to drive down electricity prices for all producers.
In turn, this will reduce the capture rate for each producer, which in the case of solar producers in Europe’s largest solar producer, Germany, could drop from around 94% currently to less than 80% in peak production periods until 2026. And then to below 50% in summer by 2029, according to analysis by Refinitiv.
Most European utilities are still primarily focused on trying to replace fossil fuel generation assets with renewables, so they may not have given much thought to the prospect of cannibalization. But as solar capacity continues to grow at breakneck speed across the continent, utilities looking to secure financing for new generation assets must plan for the impact of cannibalization or risk losing market share to their already-thinking competitors. direction.
2023-07-12 11:30:42
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