Recently, there have been interesting contributions to the old and crucial question of what acceptable levels for solar power costs would be.

Solar is becoming pretty cheap

On the hopeful side, David Keith from Harvard reevaluates his position on this issue. Whereas several years ago he was skeptical about the ability to produce power from solar (unsubsidised) at grid-competitive rates, he now admits that we actually saw a 50% decrease in costs (he is looking mostly at industrial-scale solar, not rooftops I believe), which brings solar power an impressive step closer to becoming a serious part of the enrgy mix.

This happened by gradual improvements in costs structures of existing technology. The below graph illustrates this - but keep in mind that it only shows costs of the panel odules themselves, not all costs of getting them installed (e.g. human labour, inverter etc). Looking at overall costs, costs per installed Watt went from $6 in 2007 to around $3 in 2014. 

By Delphi234 - Own work, CC0, https://commons.wikimedia.org/w/index.php?curid=33955173

Another cost figure is Dollar per kWh (usually measured as LCOE=costs divided by produced electricity over the full lifetime). Keith argues that unsubsidised, industrial-scale solar PV can be delivered at four cent per kWh in good (sunny) locations (here is an actual deal from 2014 with that price between FirstSolar and Warren Buffett’s Berkshire Hathaway Energy, but I'm not sure subsidies aren't part of this particular price).

Keith argues further that by 2020, in the best locations, we could see costs of two cents per kWh.

Compared to other new sources of supply, this would be the cheapest electricity on the planet.

Not sure how he classifies "new" here. Anyway, here is a more conservative view on cost developments per kWh from Europe (which has less suitable locations):

By S-kei - Own work Data source: EPIASolar Photovoltaics Competing in the Energy Sector—On the road to competitiveness, September 2011. PDF-format. See page 18, figure 8, European PV LCOE range projection 2010-2020 by segment., CC0, https://commons.wikimedia.org/w/index.php?curid=16702599

Keith sees a few consequences of falling costs of solar:

1. Wind seems to lose to solar if these trends are any indication for the next years (costs and efficiency for wind power have been quite flat)
2. Prices in power markets will reshape around the availability of cheap solar power (in effect, sunshine), making it hard for coal and nuclear to compete.

Next to location, the big variable in any equation involving solar is the intermittency of sunshine.

David Keith addresses consequences with regard to this, as well. He sees strong cases for gas turbine backup and long-distance electric transmission (from places with good sunshine to places with less). In addition, it might become worthwhile to move intensive electrical demand (e.g. aluminum production) to where power is cheap (where there is sunshine).

Btw, due to its low environmental impact, Keith still sees a role for nuclear power (as many others outside of Europe are recently stepping up to say).

Solar is not cheap enough

The intermittency problem is also appearing in another recent discussion about the costs of solar. People are discussing the "value deflation" effect of solar power (or renewables in general).

This effect simply states that the marginal value of a solar panel decreases with the amount of already existing solar power capacity. It's due to solar power being a price-taker - it accepts the price which the market pays at the very moment when sunlight is being converted into electricity. And if there are more price-takers, the price the market will pay in that sunny moment goes down.

Some studies show that increasing the share of overall solar power by 15% can decrease the money you can earn with them by 50%. A nonlinear deflation effect!

So - whereas today we have arrived at 3$ per installed Watt, which people like David Keith wouldn't have thought doable (within this time frame) and which is turning out to be quite cost-competitive, we might have to drive costs of solar down by much much more in the upcoming decades, should the share of solar increase significantly. A goal of .25$ per installed Watt (decreasing current costs by a factor of 12) would be safe, according to Varun Sivaram and  Shayle Kann, assuming batteries and demand response are not present.

Batteries and demand response might actually be developed further (I have been working on the latter), but they will hardly solve the value deflation problem completely. No one knows by how much, but not by more than 50% probably. And in some locations, there might never be a deployment of such additional technologies, or much less so than in developed countries. A target of .25$ per installed Watt was deliberately chosen by Sivaram and Kann to be a safe bet.

So is that an impossible goal? Certainly with the current technology. Swanson's law (see graph above) will probably run its course soon, unless a technology switch happens. I believe this is similar to semiconductors (see Moore's law), where several major innovations kept the law going longer than people had expected.

Nanotechnology seems to be ripe to deliver such innovations. One example are Perovskites which can lead to cheap, thin & transparent coatings which can deliver electricity from sunlight. They can also very soon be used in hybrid solar cells, providing a stepwise ladder to commmercialisation (and a building block to a smooth continuation of Swanson's law). Also, the human labour costs for installing panels might be reducable by automation (e.g. by advances in robotics).

Only time will tell if such savings are possible. As David Keith's admission shows, it is not easy to get these predictions right.

As GermanyEnergyBlog reports, the German government has a green paper out, in which it states that something has to happen in the electricity market to better compensate flexible generation or consumptions (for which they use the term "capacity"). They consider two alternatives: Redesigning the existing market, or simply adding a second market for capacity. In the words of the green paper:

Do we want an optimised electricity market (electricity market 2.0) with a credible legal framework that investors can rely on and which allows electricity consumers to independently determine through their demand how much capacity is maintained – or do we want to set up a further market alongside the electricity market for the maintaining of reserve capacity (capacity market)?

Of course, I link to this discussion because it lies close to what my research has been concerned with the last few years. I favour to solve the issues of trading electricity and trading options on electricity within one market, if possible. This sounds more complex at first, but actually makes it much easier for market participants to be involved with both concepts. Even though my market design proposal ABEM is inspired by dynamic settings with smaller players (e.g. smart grids), the basic idea is applicable even in a larger market setting.

As it happens, an article summarising this proposal has just been accepted for publication in the Journal of Multiagent and Grid Systems.

Furthermore, GermanyEnergyBlog states that ultimately,

acceptance of price peaks in wholesale market is decisive. The key question is whether occasional price peaks in the power market will be accepted.

True, and probably the reason why the second market will come. Onto a world with much more complexity in participating in the electricity markets, where we explicitly pay several players (those with flexibility, or "capacity") for the feat of existing.

I have also looked into this question of peak price acceptance, from the standpoint of mechanism design in a complex setting. I have been interested in indicating whether price patterns are comprehensible and designing dynamic pricing strategies where a maximal price boundary is promised in advance.

Prof. Severin Borenstein from Berkeley University makes a very readable micro-economic case against peak-time rebates (PTR). When PTR are the method to incentivise demand to become more efficient w.r.t. to the supply and the grid in peak times, consumers are paid to use less then some pre-decided amount on energy-intensive days. I share many of these concerns and I think some of them also work as a good foundation for an argument for explicit valuations of flexibility in energy consumption (which has become a theme to much of the work I did over the last 4.5 years).

Prof.  Borenstein's arguments, in short, are as follows:

• Baseline consumption is set against past behaviour, which sets wrong incentives. "When my baseline for peak-time reduction is based on consumption during other high-demand days it undermines my incentive to conserve on those other days." It even lowers incentives to buy devices that use less energy in general.
• It is a very marginal payment. Just above the baseline, the incentive to use 1 kWh less is given, then just below the baseline it is gone. Only those consumers a little above the baseline will be interested, others will be too far above it to care. Not what you want as a mechanism designer.
• You'll also reward "free-riders", people who accidentally use less than the baseline. Wasted money.
• Consumers with stable consumption are hurt more than consumers with random and erratic behaviour, because you are not punished for going over, only reward for going under the baseline. He has a nice small example for this.

Borenstein, as well as the commentators on this article, agree that real-time pricing (RTP), which I mostly refer to as dynamic pricing in my work, is a far better option from an economist's point of view, but that domestic electricity consumers will probably not willingly accept it (even if RTP saves cpnsumers money overall, compared to PTR), as it is quite complex to use and there is a danger of suffering unforeseen price peaks.

Besides providing good arguments for RTP, this article also provides some support to the notion I use to define how we can/should identify tradable flexibility in energy systems. Especially the lack of a natural baseline against which to measure the contribution (of using less energy at a specific time) resonates with me. I argue that without a reference point, the economic valuation of flexibility becomes very questionable.

To trade flexibility explicitly, both parties should first agree on a reference point and possible deviations. Then, one deviation can be chosen. One could put a value on offering all the possible deviations or only put a value on the one realised deviation. I'd like to see market/pricing mechanisms that do it in this explicit way, which is mostly done in some sort of two-settlement procedure (one example is ABEM).

RTP, on the other hand, can bring flexibility into the trading of energy, but more implicitly. I cannot provide a full-fledged economist argument here, but the sketch would probably go like this: Let's assume that we can separate your normal behaviour (mostly independent from prices) from your possible flexible behaviour. The equilibrium in the RTP market which would be realised without your flexible persona implicitly serves as the reference point for the flexibility you can offer. The residual demand or supply curve for your flexible persona starts from there, and when you can buy or offer electricity on that curve, your flexibility is useful to the market, and in turn to you. In this way, market prices serve as a signal that brings out the necessary flexibility.

However, we know that equilibria are only a helping hand in imagining economic settings, and are almost never observed in the real world. Thus, this idea of a reference point is very implicit indeed. I believe that mechanisms, which can make the reference point for flexibility explicit, are actually easier to use in the end.



 

Recently, the operators of power exchanges in North-Western European countries (in cooperation with the transmission grid operators) have begun to couple their day-ahead trade using one majestic algorithm. Also, roughly the same set of players just signed an agreement to integrate their intraday trade with each other in a similar manner. I have some comments about the level of dynamics going into this process and how little we will be able to understand single effects.

First of all, this development is in line with the rough guideline which the European Commission set out in their recent multi-year plans. The goal is to reduce price differences between regions. Specifically, local markets will keep running, so nothing much seems to change for bidders, but the markets run "implicit auctions" between each other to determine how to make best use of available cross-border transmission capacity. In general, the efficiency of a market increases if there is more buyers and more sellers and the number of possibilities to make agreements increases (i.e. regularly-held auctions find agreements and new prices for them much more often than long-term service and import/export contracts). This is especially important if the good is perishable (storing electricity is not the best economical option) and the local conditions are different (i.e. different countries have different generation portfolios and different weather conditions). Several cross-country connections have already been installed in recent years, so the physical means to interchange exist.

Besides such general economic considerations, I wouldn't be too sure that all citizens in Europe will be better off, short- or medium-term. But I won't go into this discussion here. I have a deal with the complexity involved. European Commisioner Guenther Oettinger says that this will happen:

"Fragmented European energy markets will soon be history."

But the local markets will exist for the foreseeable future. And they are all quite different in their way of working. The bid formats are different, e.g. constant price/quantity blocks, piecewise linear functions, or non-linear functions. Not to speak of the many different ways to specify reserve capacity. The method of clearing bids also differs of course, even if the bid formats are comparable. The timing of bidding and clearing is very often different.

I have talked to someone who was told first-hand about the making of the algorithm. It finds price-coupling solutions for the integration of these electricity markets. The problem it has to solve and the way it goes about doing it boggle the mind. I won't go into much details here. Suffice it to say, the number of constraints that have to be satisfied is high, such that normal solvers of linear programs will not suffice (prices for the day-ahead case are supposed to be computable within 10 minutes). Very modern computer science techniques are used to approximate a solution, in order to be fairly sure that the solution is close enough to the optimum.

I believe the people involved did a decent job figuring this out. But I cannot take their word that we have a good idea of what happens under the hood here.

We're not completely sure how this coupling algorithm performs. We can have a rough idea, but if there is a weird effect, we probably will find, more often than not, that we have no means of finding out what caused it. Because, let this be said, the local markets which are coupled together here, are not very well understood themselves. I concur that they are fairly well-understood. Debacles like the electricity crisis in California 2001still might happen, but most markets run in a stable manner. Probably this mega-market will also run mostly stable. However, for markets on the country level, debates are still ongoing which market clearing rules and bid formats are better and why that would be. No real agreement between economists so far, as I learned in my literature reviews. Mostly markets are set up to see if they will do well, and are analysed later.

Thus, we are having a hard time in these local markets to explain weird effects. Plus, there are very difficult novel problems only on the local level, like the interplay between day-ahead and intraday activity.

With this stochastic algorithm added on top of this bundle of markets, where does this leave us in terms of ability to go down the layers of abstractions, should we need to do that, and find out what is causing effects? Will we need to pay expensive consultants to tell us what they believe happened, without ever being sure?

As we do in other corners of our civilisation, we are creating massively complex systems. Here, the inability to understand what is going on is clearly built into the approach, as we build the next layer.

The group is called Advanced Energy Management Alliance (AEMA). They have former Federal Energy Regulatory Commission Chair Jon Wellinghoff on the advisory board, so they will not behave like greenhorns. Founding members include Comverge, EnerNOC, IPKeys, Johnson Controls, Landis+Gyr, which are all providing technology around demand response technology. Only Wal-Mart represents actual consumers. I hope this disproportional representation changes soon, otherwise one can be excused for assuming that the group exists to sell gadgets.

via greentechmedia.com

Dutch electricity network companies told the government that they want the functionality to shut off devices remotely removed from the specifiation for smart meters. And, as Energeia.nl reports, the Dutch government agrees.

As I wrote earlier, I and many observers agree this functionality would do more harm than good (think: security nightmares of malicious hackers shutting thousands of houses off). Now, several experts (DNV Kema, TNO and Radboud University) officially agreed, which tipped the opinion of the ministry of economic affairs.

The main point is that providing the necessary cyber security for this functionality over the whole lifetime of the meters (>30 years) would be too expensive. In addition, experts advised network companies (who agreed) that they would probably not use this functionality to balance out supply and demand anyway, so a possible benefit broke away, as well. A non-economical point would be that no-one wants to live in a house with a shut-off button someone else controls.

The only main functionality of smart meters that remains in the specification now is the ability to transmit current usage information to retailers and/or network companies. The Dutch plan is to make network companies offer a smart meter to every household until 2020. Reportedly, only 3% of households rejected one in trials, so a ratio of 80% among all households until 2020 is in principle possible.

This is only a development in the small Netherlands, but as the reasons were formulated in economic terms and discussions have started in other countries (e.g. the UK, as reported in my earlier article I linked above), we can be hopeful that one of the potentially worst technological ideas in a long time will not be implemented after all.

RWE, one of the big and established companies in the European energy generation sector, was among the signees of the recent petition claiming that power producers in Europe can't make enough profit anymore. Though there might be some truth in that, the whiny tone in that message clearly  marked this as pure lobbyism in my eyes.

Now we hear something more substantial. RWE wants to reposition itself proactively, in order to generate the profits they think they should generate:

http://www.energypost.eu/exclusive-rwe-sheds-old-business-model-embraces-energy-transition/

Now they want to “push Europe’s energy transition”. In their strategy paper, they talk about moving away from pure generation volumes or market percentages of generated electricity, towards “creating value”: “we will position ourselves as a project enabler, operator and system integrator of renewables.” So they want to sell expertise (consultants?) and make money by governing systems (e.g. be responsible for balancing), as they expect a “significantly higher level of regulation and administrative intervention” for the future.

So they have accepted that in one way or another, the energy world of tomorrow will be different. Everyone should appreciate that, as RWE sat there with their old business model like a giant turtle, blocking everyone's view.

The (to me) most interesting bit is their view on developments in market mechanisms. As I quoted above, they believe that there will be nessecarily more regulation (which is a direct consequence of renewables, one might say, as balancing becomes more tricky). They also believe that the current market mechanisms are going to be replaced soon:

“Last but not least: Currently, backup capacity is needed but not adequately remunerated. This is the result of an ultimate and irreversible distortion of the present market design. This situation will end at the end of this decade at the latest.”

Probably true. They don't say how they'd like to be paid for backup capacity (upfront or on delivery, which I find a highly interesting question). However, they have one reactive and one proactive answer to this observation:

1. Less traditional generation capacity. RWE will be “scaling down and restructuring our portfolio to maximise its flexibility and efficiency.”
2. Lobbying. RWE will “fight for the most reasonable market design” and “offer its expertise in order to contribute to the political opinion forming process”.