Wind_Turbines_and_Power_Lines,_East_Sussex,_England_-_April_2009Wind and solar capacity have grown significantly in the last decade, and many believe that significant reductions in carbon emissions require continued expansion of their capacity (see for example recent papers by Jim Williams et al and Jimmy Nelson et al[1]). With the declining cost of wind and solar, the economic case for increasing production from sources whose fuel is free is getting better.

But getting these energy sources on to the grid is not without its engineering and economic challenges. Wind and solar production is both variable and uncertain, and grid system operators need to make sure they have enough reserves to balance them. That variability can lead to increased cycling of dispatchable, fossil-fuel-fired generators, which burns more fuel and increases mechanical wear on those machines. Sometimes those cycling costs are significant enough that energy prices go negative when there is an excess of wind. This is because it’s more cost effective to pay someone to take your surplus capacity than to shut down a generation source.

Tools such as California’s new “flexiramp” market product, energy storage products, and Demand Response (DR) programs can mitigate the problems of integrating renewables onto the grid. However, the absence of paths to capture all the economic value created by these solutions means their true worth is often not reflected in current markets. This presents a significant barrier to private investments in deregulated power regions that rely on free markets. Even for grid systems with regulated vertically integrated monopolies that have a relatively simple path to investing in those solutions, doing so would likely come at a significant premium.

Moving forward, a best-case scenario to decarbonize the grid is probably a world with a complex portfolio of market products. However, investors may not have the stomach for the resulting volatility, and increasing market complexity could lead to unintended consequences.

Q: How should the electric power industry be organized to achieve very deep penetrations of wind and solar generation? Would the cost of doing it with regulated monopolies be too high? Would free markets be too complex?

[1] Note, you need a subscription to these journals to read these papers