02.02.2012
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Cost of solar

Merit order effect of PV in Germany

Probably no other country in the world has so much PV installed relative to its summer peak demand as Germany does. Now, a research institute has published the results of its investigation into the merit order effect. The findings show what the future holds for other countries.

 - From 2007 to 2011, the price of electricity on the power exchange has fallen considerably around the time of peak consumption in the early afternoon, largely because of the impact of PV production. Source: IZES
From 2007 to 2011, the price of electricity on the power exchange has fallen considerably around the time of peak consumption in the early afternoon, largely because of the impact of PV production. Source: IZES

According to a recent study (PDF) published by Germany's Institute for Future Energy Systems (IZES) on behalf of of the German Solar Industry Association (BSW-Solar), solar power has reduced the price of electricity on the EPEX exchange by 10 percent on the average, with reduction speaking at up to 40 percent in the early afternoon when the most solar power is generated, thereby offsetting the most expensive power plants that are only switched on as need be. Called the "merit-order effect," this price reduction is based on the cost of the most expensive type of electricity that does not have to be purchased.

As Uwe Leprich, research director at IZES, explains, "We compared the base prices with the prices on the power exchange between 8 AM and 8 PM over a long time frame." The study found that the price of power was still rising considerably in 2007 between 10 AM and 1 PM as demand skyrocketed. But in the last two years, the sudden price increase no longer took place even though demand remained largely unchanged. "In addition, the differences between the base price and the peak price reduced considerably in 2010 and 2011," he adds. "These are the two years in which the most photovoltaics was installed. At the same time, power demand did not change. We can therefore assume that photovoltaics is the reason why the base and the peak price have approached each other."The base and peak prices used to be 20 to 25 percent apart, but that difference has shrunk to around 12 percent.

 - This chart shows (gray line) the average daily power consumption for the last two quarters of 2011 compared to average PV power production in the first half of the year. Power consumption peaks at around 65 gigawatts at noontime (figures on the left), whereas solar power production that peaked at around 10 gigawatts shortly thereafter. In other words, PV already peaked at nearly a sixth of peak power demand last May on the average – on some days, peak demand will have been lower and solar power production considerably higher. Source: IZES
This chart shows (gray line) the average daily power consumption for the last two quarters of 2011 compared to average PV power production in the first half of the year. Power consumption peaks at around 65 gigawatts at noontime (figures on the left), whereas solar power production that peaked at around 10 gigawatts shortly thereafter. In other words, PV already peaked at nearly a sixth of peak power demand last May on the average – on some days, peak demand will have been lower and solar power production considerably higher. Source: IZES

Overall, the price of electricity has been reduced on the power exchange by 520 to 840 million euros. Leprich argues that this merit-order effect has to be taken into account when discussing the cost of photovoltaics. "Of course, the effect is greater in the summer than in the winter, but it is there all year. After all, solar power is still generated in the winter – just not as much." Nonetheless, the retail rate in Germany continues to increase because industry benefits from lower prices on the power exchange more than households. Leprich says that "energy-intensive industrial firms are the ones who buy power on the spot market, thereby directly benefiting from the price reductions brought about by photovoltaics. And power providers do not pass on the savings to consumers."

At the same time, a large section of energy-intensive industry representing roughly 50 percent of total industrial power consumption is also largely exempt from the surcharge for renewable power. Leprich points out the irony: "I'm always surprised to hear industrial associations arguing that they are paying for the switch to renewables. The exact opposite holds true." Not only are private households covering a disproportionate share of the burden, but the way the surcharge for feed-in tariffs is designed in Germany means that the surcharge increases as prices on the power exchange drop; feed-in tariffs are partly financed by revenue from the power exchange. If prices on the exchange drop, so does the revenue, so the amount reported as the surcharge increases. It is estimated that the retail rate would drop by around 0.15 cents per kilowatt-hour if these price reductions on the exchange were passed on.

Going forward, however, it remains to be seen whether these cost savings will continue. Photovoltaics has already offset a lot of the most expensive power plants in Germany and will increasingly be cutting into the inexpensive base load. Furthermore, if the PV market continues to grow as it did in 2010 and 2011 in Germany, the country will not even be able to use all of its solar power, though the power will have to be paid for anyway. On the other hand, solar is expected to become competitive with onshore wind power by the end of this decade. (Sven Ullrich / Craig Morris)

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