PV Integration and the Merit Order Effect (Webinar Transcript)
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PV Integration and the Merit Order Effect —Transcript of a webinar offered by the Clean Energy Solutions Center on 26 September 2019— For more information, see the clean energy policy trainings offered by the Solutions Center. Webinar Presenter David Jacobs International Energy Transition This Transcript Because this transcript was created using transcription software, the content it contains might not precisely represent the audio content of the webinar. If you have questions about the content of the transcript, please contact us or refer to the actual webinar recording. David Jacobs Hello around the world, and welcome to the next session of the International Solar Alliance Expert Training Course. I am Dr. David Jacobs speaking here from Berlin. I'm very pleased to discuss with you today Session 28, which deals with PV Integration and the Merit Order Effect. So we're going to have a closer look at the impact of solar PV in wholesale electricity markets, which is a very interesting topic, and I'm very glad that you joined this webinar. As you probably know, this is a webinar in cooperation of the International Solar Alliance and the Clean Energy Solutions Center. So thank you very much for providing this platform, and for teaching experts about solar policies and solar regulation. I am David Jacobs, founder and director of the consulting firm IET—International Energy Transition. Working for almost 15 years now in the renewable energy policy sector. Working in a lot of countries around the world, and having dealt with solar PV integration in a lot of cases. I'm very glad to discuss this topic with you today. As you probably also know, this is part of a larger webinar series. We have a total of eight modules dealing with policies for distributed PV for largescale solar PV, technical integration, market integration, off-grid solar, and so on. This is part of module five, which deals with market integration. We have a total of four sessions on this topic. And if you're interested in additional information on these topics, related information, please also make sure you look at webinar 15, which deals with subsidy-free solar pathways forward. So what actually happens once you reach cost competitiveness of solar PV, either in wholesale electricity markets, or behind the grid, behind the meter. And please also make sure you check out the previous and next webinar, which is 27, system integration of solar PV, and 29, dealing with a duck curve, where we take a closer look at the Californian electricity market, and how they deal with best practice strategies for integrating increasing amounts of solar PV. And, last but not least, there's two more sessions on storage, and also another one on power to X, so solar PV to transport, or solar PV to heating and cooling, which might also be of great interest to you if you're interested in PV system integration. So here is an overview of this training session. First of all, we will discuss learning objectives, then go to the core part of the webinar—that is understanding the effects of increasing shares of solar PV in wholesale electricity markets, effects that they have on prices in these markets. Then, as always, we have some further reading, and, in the end, we have a very short multiple-choice knowledge check to see whether you actually captured the major takeaways of this webinar. So let's start by looking at the learning objective. So after this one-hour webinar, it would be great if you would understand first of all the basic functioning of wholesale electricity markets, of competitive wholesale electricity markets. So you need to understand first of all what the merit order is, in order to then understand in the second step what the merit order effect is—that means the impact of solar PV or other renewable energy technologies on the price level in the wholesale electricity markets. We're also going to have a short session on some case studies, where we look at some countries which have already built up a significant amount of solar PV, where you can analyze the impact that this has on wholesale electricity prices. And, last but not least, and from my point of view this is the most interesting part, we want to discuss as well with you some parameters that policymakers can apply in order to counterbalance this merit order effect. So, in other words, to stabilize _____ electricity markets once you move into markets which are more and more decarbonized, where more and more solar PV, wind energy, and other decarbonized technologies are integrated, how can you manage that _____ prices will not collapse, and there's still enough revenues to be earned for these power producers in the longer-term future. So, let's first discuss the merit order in competitive wholesale electricity markets. So here on one slide I have summarized for you the last 40 years of electricity regulatory tradition in just a few bullet points. You have to understand that this is from a historic point of view a relatively new development. Until the 1970s, we had highly irregulated markets, mostly monopolistic markets, where power producers were all paid according to the different cost of their technologies. So we called this regulation the cost-plus regulation, because you were looking at the overall cost, including operation costs, but also finance costs, and also fixed cost—that's just building the coal- pipe power plant, building the gas turbine. And on top of this, you'd get a certain profit margin so you could actually also earn some money with your power generation project. This has changed then in the late 1970s, where first of all in the United States marginal cost pricing was introduced. And this is what we now call wholesale electricity markets 101. Most of the liberalized electricity markets are now moving or have moved already towards this pricing, _____ _____, and it 2 takes a little bit of time to understand this. So I want to make this very clear, at the start of this webinar, because otherwise you don't have any chance to understand the merit order effect. So how does it work in a wholesale electricity market today? So you have buyers of electricity, and you have sellers of electricity. So the buyers of electricity are people like you and me who want to consume electricity at their home. Of course, I'm not bidding anything on the electricity market, but my supplier is doing that for me. So my supply company is going to the electricity market and indicating how much electricity is going to be needed, and what price they're willing to pay for that. Normally, this happens in day-ahead markets—that means for instance if it's noon, today, I'll have to submit my bids for the following day for each and every hour of each and every half hour of the following day, where I say I need this amount of electricity, and I'm willing to pay for that this amount of money. And this is an aggregated—and by aggregating it you get an aggregated demand curve. Then you have the sellers of electricity. That is the power producers. And they are supposed to bid, to also submit bids on these competitive markets where they say okay, tomorrow from 2:00 to 3:00 in the afternoon, I have this amount of electricity to sell, and I want to get this price for this. And they are theoretically always offering their marginal costs. And this is now very important to understand—the marginal cost really just means the fuel cost that they have, or, to put it in a more theoretical framing, it means the cost that each power producer has for producing an additional unit of electricity. And producing an additional unit of electricity for gas-fired power producers, does not mean how much did I pay for my gas-fired power plant, it only means how much gas do I actually need to operate my power plant an additional hour, and how much money do I need for that? So these marginal costs are then offered by each bidder, and then they are also stacked up in a supply curve. As you probably know, the marginal cost of different power plants differ from one _____ technology to the next. But I will show you this in more detail in the next couple of slides. Now, what is very important is the last power plant that is needed to meet the demand is actually setting the market price. So it's not that every power producer gets the price they offer. It is actually only the very last power plant that is needed in order to match demand, sets the price for all other power plants. So maybe we move to the next slide, where I've visualized this for you, and where hopefully it gets a lot clearer. So let's look at this again. We have here already the aggregated demand curve. As you can see here, the power consumers have said I don't really care about the price of the electricity. This is why this red line is straight, and is not—doesn't have an angle to it, as you can see in some of the following slides. Meaning that I really need this electricity, and I don't care what it costs, five cents per kilowatt hour, 50 cents per kilowatt hour, I really need it, and I'm willing to pay any price for this.