Renewables are driving down energy prices

The rise of renewable energy sources, such as wind and solar power, is revolutionizing the energy sector by offering cleaner, sustainable alternatives to traditional fossil fuels. One of their most significant impacts is the downward pressure they exert on electricity prices. This is primarily due to the merit order effect, a principle that determines how electricity is supplied in wholesale markets.

In these markets, power plants are dispatched in order of their marginal costs—the cost of producing one additional unit of electricity. Renewable energy sources like wind and solar, with their near-zero marginal costs, are prioritized in this system, displacing more expensive power plants fueled by coal or gas. By pushing costly fossil fuel plants further down the order or even out of the market during periods of high renewable generation, renewables significantly reduce the overall cost of electricity. Once installed, solar panels and wind turbines generate electricity almost for free, leading to lower operational costs and reduced wholesale prices. This effect is particularly pronounced during sunny days or windy periods, when renewables can supply a substantial portion of demand, ensuring not only cleaner energy but also more affordable electricity for consumers.

The challenges of price volatility

While renewables reduce electricity costs, their inherent variability introduces both opportunities and challenges. During periods of high renewable generation – such as on sunny and windy days – an abundance of low-cost electricity often drives prices down in wholesale markets. In some cases, prices can even turn negative, meaning producers effectively pay consumers to take excess power off the grid.

Negative prices, while beneficial to consumers in the short term, can have unintended consequences. Oversupply can overload the grid, forcing operators to curtail renewable generation to maintain grid stability. This not only wastes valuable clean energy but can also discourage further investments in renewables if producers struggle to remain profitable.

Conversely, when renewable generation decreases – at night, on cloudy days or during calm weather – electricity prices can spike as fossil fuel plants are ramped up to meet demand. This price volatility highlights the critical need for complementary technologies like Battery Energy Storage Systems (BESS).

How BESS brings stability

BESS offers a transformative solution to the challenges posed by renewable energy variability. By storing surplus energy when production exceeds demand and releasing it during periods of low generation or high demand, BESS smooths out electricity price fluctuations. This ability to balance supply and demand ensures a more stable grid while maximizing the use of renewable energy.

While BESS is highly flexible and can be deployed virtually anywhere, alternative energy storage systems also contribute to stabilizing the grid. Pumped hydro storage, for instance, provides large-scale, long-duration energy storage but is limited by geographical requirements. Compressed air energy storage (CAES) offers scalability for long-duration needs but operates with lower efficiency and similar location constraints. Thermal energy storage efficiently supports concentrated solar power plants but lacks the rapid-response versatility of BESS.

BESS stands out for its modularity, rapid response times, and adaptability, making it a cornerstone technology for integrating renewables into the grid. It not only prevents price spikes but also reduces reliance on fossil fuel backups, solidifying renewable energy as a reliable and dominant player in the energy market.  

A sustainable and affordable future The synergy between renewable energy and BESS is paving the way for a cleaner, more dynamic energy system. As these technologies become increasingly widespread and cost-effective, they promise not only environmental benefits but also a future of more affordable and stable electricity prices for consumers worldwide. Together, renewables and BESS are redefining the way we produce, store, and consume energy, ensuring sustainability and resilience for generations to come.

References:

1. Understanding power markets: Merit order and marginal pricing - Squeaky
2. Transmission capacities for cross-zonal trade of electricity and congestion management in the EU - ACER 2024 MMR (europa.eu)
3. Energy-Storage-Targets-2030-and-2050-Full-Report.pdf
4. China’s Batteries Are Now Cheap Enough to Power Huge Shifts - Bloomberg