Power market mechanisms will need to adapt to renewables growth

Electricity generated from renewable sources may far exceed demand in future summers, despite the expected growth in electricity needed to charge electric vehicles and for space heating, leading to power prices crashing in the warmer months.

So suggests new analysis from Aurora Energy Research, which questions whether current electricity market arrangements can continue in the long term.

The research explores what happens to the power market in a very high renewables world as Great Britain (GB) approaches a zero-carbon power system. The analysis considers a 2050 scenario with a combined total of 130 GW of wind, solar and nuclear capacity (up from 40 GW today). Power demand will grow by nearly two-thirds (relative to today), says Aurora, as it is assumed that all cars and 80% of residential heating is electrified.

The report says that such growth of renewables would fundamentally alter the workings of the power market, with an excess of renewables generation leading to electricity prices crashing during the summer months. This raises questions about whether the current wholesale market design can persist in the long term as we approach a zero-carbon system, or whether grid operators need to learn lessons from other zero marginal cost sectors (such as the internet) on how the power market might need to be restructured.

The future market described in the report is dramatically different to today. In summer, there is an excess of low carbon generation relative to demand – in part due to the significant amount of solar generation. In winter, the growth in renewables cannot entirely fulfil power demand – the balance will be made up by gas generation and storage.

Aurora’s research shows that a highly seasonal prices pattern emerges, with very low prices during the summer (more than three-quarters of hours see prices below £10/MWh), and much higher prices during the winter (average around £60/MWh) when thermal power stations still set the price. Battery storage also plays an increasingly important role, with more than 10 GW of grid-scale batteries deployed by 2050.

The findings have significant implications for existing power generation and the deployment of new assets, says Aurora. Existing gas power stations and renewables plants would be profitable, even though they would make almost all their revenues during the winter months. But new build-thermal assets would require a significant capacity payment outside the wholesale power market in order to be viable. Renewables such as wind and solar would need to see significant reductions in cost (of up to 85%) to be viable without government subsidies in such a scenario.

The report provides some pointers about what happens if the UK pushes even further in decarbonising the power system. The analysis shows that it is possible for the power system to be entirely free of greenhouse gas emissions if enough low carbon capacity is built, alongside large amounts of inter-seasonal storage. However, this would result in wholesale power market prices reaching a very low level – raising questions about how low carbon capacity and storage could be built economically under the current market structure.

The report also looks to the example of other sectors which are also based on zero-marginal cost technologies. This analysis suggests that the current model of pricing electricity on a half-hourly basis may become less relevant over time – with a move towards capacity contracts with the government or the system operator ‘procuring’ capacity.

The GB power market has already moved in this direction with the introduction of a Capacity Mechanism in 2014, but this model would need to evolve considerably, adds the company.