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WindEconomics: How outdated grids push down the value of wind

US research shows value of wind and solar output falls as renewables supply bigger share, but prices remain higher than generation costs

Network congestion and curtailment can push down the value of wind and solar generation (pic: Duke Energy/Roger Ball)
Network congestion and curtailment can push down the value of wind and solar generation (pic: Duke Energy/Roger Ball)

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An important contribution to the understanding of the economics of wind energy comes from a recent Lawrence Berkeley National Laboratory study in the US. This examined the value of wind and solar energy from around 2,100 utility-scale plants during 2019 in the zones covered by seven American network operators, with wind penetration levels up to 28% of the energy supply.

The results showed that the value of both wind and solar decline above about 10% penetration, mainly due to mismatches between the generation profile and the hourly market prices, congestion on networks and curtailments in the interests of stability.

A reference level of value was defined as the market value of a conceptual plant with a constant output. The report concludes that “despite a decline over time, the average market value of wind and solar in 2019 was still higher than the average generation costs”.

The study found that solar can have an enhanced value at low penetration levels in certain locations where there is a good match between the solar output profile and high market prices.

Although the results were derived from analyses in the US, similar principles apply elsewhere, albeit with some regional variations. Some northern European networks, for example, assign wind a higher capacity value as it is windier in the winter, when power prices are high. By contrast in southern Europe, high levels of solar generation in summer coincide with increased demand — and hence prices — on electricity networks due to air conditioning loads.

European and US price comparisons

The reference levels of the value in the study varied from region to region and were close to the wholesale prices. In several areas, these prices have been around $40/MWh recently - roughly the cost of gas-fired generation. (In late July 2021, natural gas futures were hovering around $13/MWh, according to the US Energy Information Administration. Allowing a margin for delivery to generators and an allowance for capital costs, this suggests the costs of gas-fired generation in the  US is around $40/MWh).

American wholesale electricity prices are among the cheapest in the world. European prices are about 50% higher, making it a less challenging proposition for wind to deliver more value than its cost. The pan-European average wholesale electricity price was $62.8/MWh, according to the European Commission’s Quarterly Report on European Electricity Markets for the first quarter of 2021 (the latest available).

If the US findings can be read across to Europe, and the relative value is 40% below the wholesale price in high-penetration regions, that equates to $38/MWh in Europe — within the range of current costs.

It may be noted that the lowest wholesale prices in Europe during the first quarter of 2021 were found in Sweden ($51/MWh) and the highest in the UK ($87/MWh). The latter was due to low wind availability, rising gas prices, robust demand, plant outages and a tightening balance on mainland Europe.

The future

Electricity prices fell worldwide during 2020, probably as a result of reduced electricity demand due to the pandemic, but have recently risen again, quite sharply in many places. Looking to the future, there has been some turmoil in both gas and electricity markets, with substantial price spikes during winter 2020/21. 

US gas prices, for example, doubled between July 2020 and July 2021. The fact that future fossil-fuel prices are difficult to predict further enhances the value of wind as, once built, the price is virtually fixed.

Estimates of how the relative values of wind and solar vary with increasing penetration levels. The highest level of solar (19%) was recorded by the California Independent System Operator (Caiso) and the highest wind energy level (26%) was in the South West Power Pool, which covers a region adjacent to that of the Caiso

At a glance — This month’s report conclusions

Solar and wind grid system value in the United States: the effect of transmision congestion, generation profiles, and curtailment. Joule 5, pp 1749-75, Millstein et al, July 2021 Detailed analysis of wind and solar values in seven zones over a year with data from 2,100 wind and solar plants.

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