Shifting Market Dynamics from Increasing Renewable Penetration

Renewable penetration is growing across the country – so what does that mean for energy prices?

Electricity generated from renewables is inherently cheaper than electricity generated from thermal processes - energy from the sun and wind is free, while fuel for a thermal process (natural gas, coal, etc.) is expensive in comparison. If renewables generate electricity more cheaply, why are markets with increased renewables penetration beginning to see more volatility in prices?

The key lies in the distinction between intermittent and dispatchable generation. While renewables generate electricity at much lower cost than thermal generation, grid operators are unable to fully control when these assets generate, since they can't control when and how much the sun shines or the wind blows. Therefore, in markets with growing renewable penetration, it will still be necessary for the foreseeable future to rely heavily on dispatchable thermal generation - where grid operators can choose when and how much electricity needs to be generated to meet grid demand.

As reported by EIA, renewable generation growth is not expected to slow down any time soon. Expected growth in battery storage technology is encouraging, since this solution allows power generated from intermittent renewable assets to be stored and dispatched later when it is needed. However, until utility-scale storage can be utilized at a wider scale, the grid will continue to rely on thermal generation to meet grid demand, especially at times of peak demand or when renewables are not generating resulting in system operators paying more to incentivize the higher-cost thermal generation to be fired up.

This scenario was demonstrated during recent heat waves in ERCOT, where poor wind generation performance on peak demand days drove real-time prices to the $5,000/MWh price cap to incentivize enough thermal generation to come online to meet the high demand conditions. While strong renewable performance can have the opposite effect on real-time prices, the risk and unpredictability of increased reliance on renewable output represents a shift in power market dynamics where significant renewable capacity exists.

While the transition to clean energy is an exciting time for the energy industry, it also creates significant risk of additional price volatility given the shift from dispatchable to intermittent generating assets. Organizations that are large consumers of energy or have a large national footprint should take stock of these shifting dynamics and make sure their energy purchasing strategy is aligned accordingly.

This is the fourth edition in a series of “Energy Transformation Journey” newsletters dedicated to helping energy transformation executives identify obstacles and clear the path on their journey to energy transformation. In ensuing editions, we’ll continue to unpack each step of the journey in detail and provide insights to overcome obstacles you may encounter.

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