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Renewables Rising. Impact Evolving.

September 12, 2017

As renewable generation continues to grow, many electricity customers naturally want to know what the impact of this trend will be – particularly on the price they’ll pay for electricity.

Like most real-world issues, the answer depends on a number of factors. Specifically, these are the main elements to think about when it comes to conditions that affect the price of electricity in a competitive market like ERCOT:

1. What’s going on with RENEWABLES
2. What’s going on with NATURAL GAS
3. What’s going on with ELECTRIC DEMAND GROWTH
4. What’s going on with GENERATION SUPPLY STACK

As you can see, renewable generation is just one of four key factors. But let’s examine it by itself to gain a better understanding on how its rise impacts prices in the ERCOT market. We’ll start by showing the growth of the two main renewable sources – wind and solar.

The Growth of Wind

Source: ERCOT.com

As the chart above shows, the amount of wind installations by year is steadily increasing. More wind means a more diverse energy mix. A second aspect of the wind story is how it’s been embraced in Texas. The chart below illustrates how the state currently leads the way in wind generation capacity and goes a long way in explaining Texas’ position as the nation’s leader in overall renewable energy production. Within the state, wind represented an 11.7% energy source in 2016. As the cost of wind turbines declines and with the extension of the federal wind-energy production tax credit (PTC), that percentage should continue to climb. The PTC, along with the Investment Tax Credit (ITC) are both meant to keep wind energy attractive for investors who finance new wind farms as demand for clean energy rises.

Source: cbsnews.com

Part two of the renewable story belongs to solar. Different energy source, same dynamic – a steadily growing energy output with an accelerated level of growth anticipated over the next few years as shown in the chart below. While growing, solar still represents a small portion of the overall generation mix in Texas and nationwide. It’s value, though, is enhanced by it’s tendency to match up well with the overall peak energy curve in ERCOT and other markets. In other words, when energy demand heats up, so does solar generation. In 2016, overall solar capacity nearly doubled in Texas – moving it from ninth to sixth in national state-by-state ranking. The largest segment of growth came from large utility-scale solar farms. As with wind, ITC tax credits helped spur the growth, with SEIA successfully advocating for a multi-year extension of the credit to provide an additional measure of business certainty to project developers and investors. Looking ahead, SEIA forecasts that installations will dip in 2017 before increasing again over the next three years as residential projects increase with lower prices.

The Growth of Solar

Source: ERCOT.com

So what does this mean for price? In general, more sources is a good thing. In any market, the price for power is set by the marginal (highest cost) generator needed to provide power to the grid. In a market with no renewables, that means fewer sources figuring into the pricing equation and a greater likelihood of a higher-cost source impacting price.

Now, consider a market with renewables – and more sources of energy coming onto the grid. In the case of wind and solar, these represent a free resource and when counted on as a provider of power, they reduce the likelihood of higher-cost resources needing to be utilized. Going one step further, the reduction in need for higher-cost resources lowers the power price.

Remember that in any pricing discussion there are many considerations – not just a renewables-in or renewables-out dynamic. Other factors are affecting other generation sources at the same time. Consider natural gas, for example, where the market looks to be entering a period of oversupply, meaning gas prices will likely be low for an extended time.

Beyond the mix of generation sources, the demand for electricity also has an impact. Looking ahead, very strong demand, the lack of new builds in terms of traditional generation facilities and the potential for older plant retirements may lead to market tightness, creating upward pressure on prices.
Overall, the rise of renewable generation should be considered a good thing. Historically, renewables have represented a voluntary commitment of forward-thinking utilities looking to sustainably hedge against volatility. Today, that story has evolved, with renewables now setting the price floor for which traditional generators must compete. This is partly based on cost and partly on functionality. As more wind and solar power come online, such conditions will begin to penetrate periods of higher demand during the day and continue to drive down wholesale prices.

If you’re interested in learning more about renewables, let’s continue the discussion. Send an email to: nrgbusiness@nrg.com