The microeconomic problem with renewable energy

Ryan Williams

Université Paris Dauphine – PSL, Paris, France & Enoda, Chief Economist, Edinburgh, UK

The growing penetration of intermittent renewable energy sources, such as wind and solar power, poses challenges to the reliable and secure operation of power systems. Although the marginal cost of a unit of renewable electricity is seemingly much lower than that of a unit produced by burning fossil fuel, the non-linearity of the supply curve and the unpredictability of renewables mean that in practice, renewables are often economically more expensive than fossil fuels. This ultimately comes from costs associated from the need to balance supply and demand in real-time and minimise the deviations between scheduled and actual generation.

These costs are collectively known as balancing costs. They are necessary to ensure grid stability and have increased dramatically with the rise in renewable electricity generation. Electricity balancing costs play a crucial role in the efficient operation of power systems and the integration of renewable energy sources. This paper explores the microeconomics of electricity balancing costs, focusing on the factors that contribute to these costs and their implications for market participants, system operators, and policymakers.

I show that the primary factors influencing electricity balancing costs include the variability and uncertainty of renewable energy generation, demand fluctuations, and the operational characteristics of power plants. The intermittency of renewable energy sources introduces a higher degree of uncertainty in forecasting electricity supply, which in turn requires more flexible and fast-responding resources for balancing purposes.

I next examine data on the time series of balancing costs in the UK and find that they have increased dramatically in the last 3 years. This is due to the various problems of uncertainty inherent to renewables noted above, coupled with the steep supply curve when Q is high.

In market-based power systems, electricity balancing costs are typically allocated to market participants through various mechanisms. Generators, retailers, and consumers may face penalties or receive incentives based on their imbalances between scheduled and actual electricity flows. These costs are an important consideration for market participants in their decision-making processes, such as determining the optimal mix of generation technologies and the deployment of energy storage systems. System operators play a critical role in managing electricity balancing costs. They employ advanced forecasting techniques to anticipate imbalances and utilize different resources for real-time balancing, including conventional power plants, energy storage systems, demand response programs, and interconnection capacities. The selection and dispatch of these resources are driven by their availability, cost-effectiveness, and technical characteristics. I exposure whether the current mechanisms used by system operators are fit for purpose for the grid of the future.

Finally, I consider a common policy solution and its expected impact on balancing costs. The deployment of flexible resources, such as energy storage systems and demand response programs, are commonly put forth as a solution meant to enhance the system’s ability to manage imbalances effectively. Furthermore, distributed energy resources, such as rooftop solar panels and electric vehicles, in balancing markets could potentially increase the pool of available resources for balancing purposes. Given the current grid technology, these resources are unlikely to make a significant contribution to balancing costs.

In conclusion, electricity balancing costs are a significant consideration in the operation and planning of power systems. The increasing integration of renewable energy sources and the need for grid flexibility pose significant challenges. With improvements in  but also provide opportunities for cost-effective balancing. Market participants, system operators, and policymakers should collaborate to develop innovative solutions that promote efficient and sustainable electricity balancing while ensuring grid reliability and affordability.