A few lonely academics warn years that solar energy faces a fundamental challenge that could halt the rapid growth of the industry. Simply put: the more solar you add the network becomes less valuable.
The problem is that solar panels produce a lot of electricity in the middle of sunny days, often more than necessary, which lowers prices – sometimes even in negative territory.
Unlike natural gas-fired power plants, solar power plant operators cannot easily dampen electricity up or down as needed, nor generate space during the day, night, and dark winter. It is available when it is available, and that is when the sun is shining. And then all other solar power plants also turn off the electricity at maximum levels.
A new report reveals that California, which produces one of the largest shares of solar energy in the world, is already acutely experiencing this phenomenon, known as solar value deflation.
Average state solar wholesale prices have fallen 37% from average electricity prices for other sources since 2014, according to an analysis by the Breakthrough Institute, which will be released on July 14. In other words, utility companies are increasingly paying for solar power plants less than other sources overall, due to their volatile generation patterns.
Wholesale prices are basically the amount that utilities pay to power plants for the electricity they supply to households and businesses. They change during the day and year, making reserves for solar operators during the morning, afternoon and other times when there is no excess supply. But as more solar plants appear online, periods of oversupply that reduce those costs will become more frequent and pronounced.
Lower prices may sound great to consumers. But this presents worrying implications for the world’s hopes of rapidly expanding solar capacity and meeting climate goals.
It could become difficult to persuade developers and investors to continue building more and more solar plants if they manage to make less money or even lose it. In fact, California construction has been flat since 2018, the study notes. But the state will need industry to significantly accelerate development if it hopes to achieve its ambitious clean energy goals.
This could soon become a wider problem.
“California is a small covert peak of what is being prepared for the rest of the world as we dramatically increase solar volume,” says Zeke Hausfather, director of climate and energy at the Breakthrough Institute and author of the report.
This is because while solar energy makes up about 19% of the electricity California produces, other regions are also rapidly installing photovoltaic panels. For example, in Nevada and Hawaii, the share of solar production was about 13% in 2019, research has shown. Levels in Italy, Greece and Germany were 8.6%, 7.9% and 7.8%, respectively.
So far, large solar subsidies and sharply declining solar energy costs have offset the decline in solar value in California. As long as the construction and operation of solar power plants is getting cheaper, value deflation is less of a problem.
But it will probably be harder and harder to perform that trick, as the state’s share of solar production continues to climb. If the cost of building and installing solar panels decreases, California solar deflation could retreat in the race against falling costs as early as 2022 and climb up from there, the report said. Then the wholesale prices would be below the subsidized solar energy costs in California, which would undermine the pure economic justification for building more plants, Hausfather notes.
State SB 100 the law, adopted in 2018requires that all California electricity come from “renewable and carbon-free sources” by 2045. By that time, about 60% of the state’s electricity could come from solar energy, based on California Energy Commission model.
The breakthrough study estimates that the value of the sun – or the wholesale average price relative to other sources – will fall by 85% at that point, decimating the solar farm economy, at least as there is a California network today.
How to fix it?
There are various ways to mitigate this effect, although probably no one is a panacea.
The solar sector may still be trying to find ways to reduce solar costs, but some researchers argue it may be necessary to switch to new materials and technologies in order to reach the level of cheap dirt needed to exceed the value of deflation.
Network operators can add more energy storage – although this approach becomes extremely expensive when renewables provide the vast majority of the electricity in the network, study after study finds. States or states may also increase subsidies for solar energy; add more transmission lines so that regions can replace clean electricity as needed; or encourage customers to shift energy to a time of day that better matches periods of high production.
The good news is that each of them will help make the transition to clean sources of electricity easier and in other ways, but it will also take a lot of time and money for everyone to get started.
The California sun market reminds us that the climate clock is ticking.