An Economic Barrier to Renewables Growth: The Paradox of Clean Energy Pricing

by Anandita Ketkar 

The aim of increasing the proportion of electricity originating from renewables is desirable, yet some challenges remain. In particular, the pricing paradox means that the wholesale price of electricity would fall to zero in a case where renewables produce 100% of energy. This would hinder all new investment in renewables that is not subsidised. Without appropriate policy responses in the fossil-fuel energy sector, this poses a challenge for proliferation of renewable energy sources. 

Intermittent and low-margin production

Wind and solar energy, unlike coal-fired and nuclear electricity generation, are intermittent in their supply.  This is due to the lack of operating energy storages such as batteries, water pump plants and hydrogen technologies installed at present. Especially in Europe, non-renewables constitute a disproportionate share of the electric grid’s stability [1]. As the levelised cost per unit of electricity from onshore wind and photovoltaic solar power has dropped by 70% and 90% respectively, which has resulted in a higher variable cost than marginal cost for renewable energy. [4].

Likewise, the Wind Levelized Cost of Energy for offshore wind fell by 28-49% from 2014 to 2019 [5]. As marginal costs are the key determinant of energy prices in competitive markets, variable renewable energy lowers wholesale power prices [2]. This is because the marginal costs of renewable energy are low. As a result, renewables must co-exist with fossil fuel technologies in order to grow their market share. The operating company for a renewable power plant cannot earn a return on their investment unless fossil fuel prices are higher than renewable prices because, as fossil fuel prices provide the minimum price in the market  [3]. 

Potential solutions 

This phenomenon is occurring based on the model of a liberalised energy market: under the scenario of centrally planned systems which occurred before the 1980s and 1990s, vertically integrated companies as natural monopolies composed the electricity markets. This means the supply chain of the company, from production to distribution, is managed by one company. According to this structure, the utilities model would distribute costs within the overall rate structure [3]. Another solution would be to guarantee a fixed price for renewables production, thereby guaranteeing a minimum price for investors in renewables. A mandate to increase electricity production from renewable sources may also be an ameliorative measure, such as the Renewable Portfolio Standard [1]. 

References: 

[1] Europe needs to tackle security of supply, Financial Times, John Dizard, https://www.ft.com/content/1e0d2d1f-0f6a-4f50-ba89-d55ae9fa206a , accessed 190721 
[2] A world turned upside down, The Economist,  https://www.economist.com/briefing/2017/02/25/a-world-turned-upside-down , accessed 200721 
[3] Jorge Blazquez, Rolando Fuentes-Bracamontes, Carlo Andrea Bollino, Nora Nezamuddin, The renewable energy policy Paradox, Renewable and Sustainable Energy Reviews, Volume 82, Part 1, 2018, Pages 1-5, ISSN 1364-0321, https://doi.org/10.1016/j.rser.2017.09.002 
[4] The paradox of declining renewable costs and rising energy prices, Forbes, Brian Murray, https://www.forbes.com/sites/brianmurray1/2019/06/17/the-paradox-of-declining-renewable-costs-and-rising-electricity-prices/ , accessed 190721 
[5] Wiser, R., Rand, J., Seel, J. et al. Expert elicitation survey predicts 37% to 49% declines in wind energy costs by 2050. Nat Energy 6, 555–565, 2021 https://doi.org/10.1038/s41560-021-00810-z