By sitting around and watching opportunities pass by
Warren Buffet, the legendary investor who has been at the helm of Berkshire Hathaway and made a fortune for himself and his shareholders, was once asked how to make a million. His answer: Buy an airline for a billion and watch your investment shrink to a million. Mr. Buffet, of course, was making fun of the notoriously dismal record of major airlines.
An article in the 12 Oct issue of The Economist asks how to lose half a trillion Euros – an even more challenging task. The article describes a breezy, sunny Sunday when renewable generation in Germany topped 50% when demand was low. Between 2-3 pm on 16 June 2013, renewable capacity feeding the German grid reached 28.9 GW. Despite the network operators’ best attempts to turn down all thermal units to as low a level as they could go, they were faced with 51 GW of capacity and barely 45 GW of demand. To keep the network from collapsing, wholesale prices plunged to minus €100/MWhr – paying customers, traders or whoever a hefty reward for taking the unwanted capacity.
Had there been millions of electric vehicles (EVs) or other storage devices, the excess capacity could have been easily absorbed, but today’s networks in Germany and elsewhere are not yet ready for such episodes. And such episodes are becoming more common, not just in Germany but also in Texas, in California and a number of other places where renewables are a growing share of total generation.
The reverse problem, when renewable production falls off suddenly and/or unpredictably, such as when prevailing winds die down unexpectedly or when cloud cover reduces solar output, requires thermal generators to quickly make up the difference. This is becoming an issue since many thermal plants are not dispatched frequently enough and/or for long enough hours to remain viable, especially when wholesale prices remain depressed, as they have been in Europe, the US and Australia, to name a few.
The Economist reckons that Europe’s top 20 utilities have lost roughly half their value, around half a trillion Euros, since 2008. Declining wholesale prices, notably in Germany, get most of the blame. As the share of renewables grows to 35% by 2020 and 80% by 2050, the problem will only get worse. Germany’s renewables accounted for 23.5% of generation in 2012, up from 15% in 2007.
The rapid growth of solar PVs, now at grid parity, is adding to utilities’ woes. As a growing number of consumers become prosumers, they will contribute little to utility coffers while relying on the critical services provided by the grid to balance their variable consumption and distributed generation. As The Economist notes,
“In such a world, the old fashioned utilities play two vital roles. They will be the electricity generator of last resort, ensuring the lights stay on when wind and solar generators run out of puff. And they will be providers of investment to help build the grand new grid. It is not clear that utilities are in good enough shape to do either of these things.”
As pointed out in the preceding article, the plight of European utilities, especially in Germany, has reached a critical junction where fundamental resetting of the renewable energy policies, market rules and utility pricing and business strategies may be needed – and preferably sooner rather than later. The loss of half trillion Euros hopefully is sufficient to get the politicians’ attention.
