California’s ‘Solar Deflation’ Offers Lessons In Managing Solar Expansion

The Breakthrough Institute has released a report analyzing solar value deflation in California from 2014 to 2020, during which period the value of solar fell by around 37% relative to other sources of electricity. While on the face of it, this is great news, as it is a big reason why solar has gained, and continues to be touted as its biggest selling point on LCOE basis, it has started throwing up some challenges now.

Solar photovoltaics have been a remarkable clean energy success story, with prices falling by a factor of ten and world solar generation increasing 21-fold over the past decade.

However, the fact that solar generation is concentrated in a relatively short period of the day means that it is particularly susceptible to a phenomenon known as value deflation. As more solar generation is installed, the average wholesale price of electricity decreases during mid-day hours. This reduces the value of both new and existing solar compared to other electricity sources that are a better match to net load or have a different generation profile. In other words, renewable, despatchable power on demand.

In the report “Quantifying Solar Value Deflation”, author Zeke Hausfather — Director of Climate and Energy — analyzed six years of hourly generation and price data from the California Independent System Operator (CAISO).

California’s solar generation grew to around 20% of total electricity generated in 2019. As California has embraced solar generation more aggressively (it crossed 3 GW solar capacity this month), effects of value deflation are felt more acutely. Declines in midday power prices reduce the value of solar — particularly in the Spring and Fall months when solar generation is high, and the energy consumption is low.

California experiences the most significant amount of solar value deflation during the Spring months — roughly 50%. Solar energy production is higher during the Summer months, but so is the need for daytime energy, leading to limited deflation of 20%. High solar value deflation – if not properly addressed – risks increasing Californian’s electricity bills as the state moves away from fossil fuels.

The wholesale cost of utility-scale solar in California in 2020 was approximately $27 per megawatt-hour (MWh) sold, similar to the price paid to solar producers of $26 per MWh in power purchase agreements (PPAs). However, the actual levelized cost of energy (LCOE) generation from solar was around $45, which is about 40% higher than the PPA costs due to the combination of a federal investment tax credit (ITC), various state-level incentives, and indirect investor subsidies. California solar is currently subsidized by around $900 million per year, based on the difference between PPA and LCOA costs.

Not only California, but negative power prices have recently swept across much of Europe, especially in the first nine months of Covid-ravaged 2020, with excess power in the market resulting in consumers being paid rather than charged to use electricity.

According to a new study conducted by data analytics firm EnAppSys, from January to September 2020, European countries on average saw negative day ahead power prices almost 1% of the time (0.8% on average). These levels were typically more than twice those in 2019. With supply required to match demand, the day ahead price of power in markets increasingly fell below zero – meaning that generators were charged for the privilege of producing power and electricity consumers were paid to use power.

Markets with high wind and solar generation were particularly affected by negative pricing. The amount of overall energy demand covered by wind generation reached 49% in Denmark, 36% in Ireland, and 27% in Germany – the highest three rankings in Europe. Ireland saw negative prices for 4.2% of the time – well above the norm for Europe.

Germany experienced negative prices of -€83.94/MWh for eight hours on April 21. Within this eight-hour period, solar and wind generation covered around 88% of Germany’s demand.

Belgium has also seen particularly low prices as the combination of high nuclear and solar generation have at times oversupplied the market during periods of low demand, with prices dropping to -€115.31 Euro/MWh on April 13.

Three main factors are responsible for this drop in prices across Europe: lower fuel costs, the slump in electricity demand as a result of the pandemic, and the record amount of electricity generated from renewable sources.

Nevertheless, though the rates of value deflation are concerning, the effects can be mitigated by the falling costs of solar and the deployment of complementary technologies: grid-scale storage, long-distance HVDC transmission, and load shifting through efficiency and demand response. The use of clean firm generation (energy sources that are not reliant on weather conditions) can also help reduce costs of solar, reducing the solar capacity required to meet demand year-round due to seasonal differences in output.

Value deflation will likely prove more problematic in a first-mover like California than in other later solar adopters, given the already high levels of solar penetration and ambitious near-term expansion plants. California’s solar installation rate will only increase as Senate Bill 100 calls for full decarbonization of the power sector by 2045. Also, as newer solar installs outpace expensive solar installs till say, 2017, the difference shd even out over time, especially if the oldest capacity can be retired or upgraded.