Science merit order effect

Published on April 15th, 2013 | by Zachary Shahan

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Solar Reduces Everyone’s Electric Bill

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April 15th, 2013 by Zachary Shahan
 

Before we delve into the story of the day, let’s just remember that solar is cheap because the alternative to solar power is dishing a whole ton of natural disasters, disease, forced migration, and all around catastrophe on us through global warming and climate change (not to mention the health and quality of life costs from air and water pollution). Still, though, people are narrow minded, so if solar raises one’s electric bill much, some of them complain. The good news, however, is that solar power cuts the cost of electricity.

“Australia’s one million (and counting) solar powered households could be keeping everyone else’s power bills down, by suppressing wholesale electricity prices,” Beyond Zero Emissions writes.

“That conclusion is drawn from a peer-reviewed paper recently published in the Journal of Energy Policy. The paper is a result of a joint research effort between the Melbourne Energy Institute and climate solutions think-tank Beyond Zero Emissions.” (The full paper is available here.)

Frankly, this isn’t really news to me — I’ve been covering this same scenario in Germany (and Australia a bit) for a long time now.

Basically, here’s how this works: Electricity providers bid in order to sell their electricity on the electric grid. Because solar (and wind) don’t have fuel costs, the extra cost to supply electricity (when the sun is shining and the wind is blowing) is basically $0. With subsidies or feed-in tariffs, they can even sell for negative prices and make a profit. As a result of these clean energy sources’ $0 fuel costs, they can outbid every other energy source. And the overall effect from down-bidding everyone is that the wholesale price of electricity is lowered. (The hitch in all this is that utilities don’t necessarily have to pass the reduced costs on to ratepayers — they can just pocket bigger profits. But that’s another story.)

The fact that solar generation is greatest at peak demand (when electricity is most expensive), just makes that much larger of an effect.

solar prices

FraunhoferISE_2012-May

merit order effect

For more on the merit order system and “merit order effect,” in particular as it applies to Australia, here’s a bit more from Beyond Zero Emissions:

The merit order effect cost reduction occurs because Australia’s electricity market utilizes what is known as a “merit order” dispatch system. In this system, electricity generators bid to sell their power on the market, and bids are accepted by the market operator, from the lowest bid up to the highest needed at that time, to meet demand. The highest bid accepted sets the price for all bids accepted for that time period.

Household solar output is treated as reduced demand at the point of consumption. This means it acts as negative demand, often during times of peak demand such as hot summer afternoons. In these circumstances, solar can displace some of the most expensive bids at the other end of the merit order in these peak price times.

And here’s more info on what this latest study did and found:

The paper models the effect of up to five gigawatts (GW) of rooftop solar panels across the Eastern states’ electricity network. This is about double what is currently installed in Australia. The researchers calculated the effects of from zero to 5GW of extra rooftop solar panels on the electricity market, over the years 2009 and 2010, based on the real electricity market data from those years.

The researchers’ modelling suggests that the price suppression (merit order effect) resulting from 5GW of solar would have been worth $628 million in 2010, 8.6% of the total value traded that year. In 2009, the value could have been $1.2 billion, over 12% of the total value traded that year.

The lower electricity wholesale prices caused by the merit order effect should flow through to consumers in their electricity bills. This effect can offset the cost of support schemes and results in a wealth transfer from electricity generators to all consumers.

$1.2 billion — that’s a lot of money. That is news to me. While I realized solar drove down the price of wholesale electricity, I didn’t realize the effect was so large. One more reason to love solar!

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About the Author

is the director of CleanTechnica, the most popular cleantech-focused website in the world, and Planetsave, a world-leading green and science news site. He has been covering green news of various sorts since 2008, and he has been especially focused on solar energy, electric vehicles, and wind energy since 2009. Aside from his work on CleanTechnica and Planetsave, he's the founder and director of Solar Love, EV Obsession, and Bikocity. To connect with Zach on some of your favorite social networks, go to ZacharyShahan.com and click on the relevant buttons.



  • http://www.facebook.com/Afshin.Sol Afshin Sol

    Hi Zach, the piece I don’t understand here is that if the renewable get paid through subsidies or tariffs how are they allowed to bid into the system at zero. Shouldn’t they be bidding at the tariff or subsidy price they get paid at? Said in another way, if they are bidding in at zero, how and why do they get paid the tariff rats?

    • http://zacharyshahan.com/ Zachary Shahan

      I’m not really sure how to answer the question… the bidding is based on marginal cost (same for everyone). With basically $0 marginal costs, solar & wind can always bid lower than competitors.

      • http://zacharyshahan.com/ Zachary Shahan

        but just to be clear, they aren’t bidding in at $0 most of the time. they’re bidding in at just below the next cheapest options, i presume.

    • Ronald Brakels

      Everybody gets paid the same rate as the highest bidder whose electricity is actually used. So if a coal plant bids 3 cents a kilowatt-hour and a gas plant bids $10 a kilowatt-hour, if any of the gas plant’s electricity is used everybody gets paid $10 a kilowatt-hour for that time period. Wind is a price taker and so just takes the price set by the coal and gas generators. If wind power is sufficient to meed demand and no electricity from coal and gas generators is used then the price would drop to zero.

  • Bill Michaels

    I’m just wondering why everyone isn’t STILL going the solar panel way. What is the hold-off? Is there a fear of using this technology? If everyone says it is the way, then what’s keeping Australians (or even the world) from doing it? Are power plant owners doing something to stop people from buying solar panels and using them? I would like to know where we can get cheap wholesale solar panels australia wide. Even I am curious to get on the bandwagon.

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