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The Cannibalization Effect of Wind and Solar in the California Wholesale Electricity Market Javier Lpez Prol*, Karl W. Steininger, David Zilberman *DK Climate Change Wegener Center for Climate and Global Change, University of Graz,

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The Cannibalization Effect of Wind and Solar in the California Wholesale Electricity Market

Javier López Prol*ˆ, Karl W. Steiningerˆ, David Zilberman’

*DK Climate Change ˆWegener Center for Climate and Global Change, University of Graz, Austria ’Agricultural and Resource Economics, University of California Berkeley, USA

September 2017

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SLIDE 2

Outline

◮ The rise of variable renewables ◮ The merit order and the cannibalization effect ◮ Absolute and relative cannibalization effect ◮ Conclusions ◮ Further research: demand and supply side cannibalization effect

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SLIDE 3

The rise of variable renewables in California

5 10 15 2013 2014 2015 2016 2017

date Penetration (%) source

solar_sh_fct wind_sh_fct

Figure 1: Smoothed daily solar and wind penetration

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SLIDE 4

The merit-order effect

◮ Renewable energies pressure down electricity prices

Figure 2: The merit order effect. Source: CLEW 2016

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SLIDE 5

The cannibalization effect

The higher solar/wind electricity penetration, the lower its value

◮ Absolute cannibalization: (solar) daily unit revenues (ps d):

ps

d =

24 t=1 ptqs t

24 t=1 qs t ◮ Relative cannibalization: value factor (VF):

unit revenue (ps

d) divided by daily avg. wholesale price (pd)

VF s

d = ps d

pd =

24

t=1 ptqs t

24

t=1 qs t

24

t=1 pt

24

p = price; q = quantity;

s : solar; t : time(hour); d : day

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SLIDE 6

Unit revenue and value factor visualized

VFd > 1 ⇔ ps

d > pd

VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35 VF = 1.35

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Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Hourly electricity price Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation Normalized solar generation

30 60 90 00 02 04 06 08 10 12 14 16 18 20 22 00

hour $/MWh

2013−06−30

VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5 VF = 0.5

10 20 30 40 50 00 02 04 06 08 10 12 14 16 18 20 22 00

hour $/MWh

2016−03−29 Figure 3: Calculation of daily value factors from hourly data

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SLIDE 7

Modeling the cannibalization effect

◮ Absolute:

ps

d = α + β1qs d + β2qw d + β3pg d + β4dd + γ′Dd + ǫd ◮ Relative:

VF s

d = α + β1(qs d/dd) + β2(qw d /dd) + β3pg d + γ′Dd + ǫd

q = quantity; d = demand; p = price; D = vector of time dummies

s : solar; w : wind; g : gas

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SLIDE 8

Absolute cannibalization: Unit Revenues

solar wind 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 20 40 60

date Unit revenues ($/MWh) source

solar wind

Figure 4: Daily solar and wind unit revenues

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SLIDE 9

Electricity prices

20 40 60 2013 2014 2015 2016 2017

date Electricity price ($/MWh)

Figure 5: Daily electricity prices

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SLIDE 10

Relative cannibalization: Value Factors

−0.5 0.0 0.5 1.0 1.5 2013 2014 2015 2016 2017

factor(year) VF source

solar wind

Figure 6: Wind and solar Value Factors descriptive statistics over time

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SLIDE 11

Relative cannibalization: Value Factors

solar wind 5 10 15 5 10 15 0.0 0.5 1.0 1.5

penetration VF source

solar wind

Figure 7: Solar and wind cannibalization effect

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SLIDE 12

Implications for PV competitiveness

Value-adjusted PV LCOE = LCOE/VF

Figure 8: PV cannibalization and competitiveness

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SLIDE 13

Conclusions

◮ Increasing generation tends to lower the unit revenues of both

solar and wind

◮ Increasing penetration rapidly undermines the value of solar ◮ Increasing penetration increases the variability of the solar

value factor

◮ The value factor of wind, however, seems to be insensitive to

its penetration

◮ The cannibalization effect could jeopardize PV competitiveness.

Mitigation?

◮ Market structure ◮ Storage options ◮ Interconnections 13 / 22

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Further research: supply vs. demand-side cannibalization

How to disentangle demand-side (distributed self-consumption PV) from supply-side (centralized utility-scale) cannibalization?

◮ Estimate demand-side generation from installed capacity ◮ And then re-estimate the model as

VF s

d = α+β1[(qss d + qsd d )/(dd + qsd d )]+

β2[qw

d /(dd + qsd d )] + β3pg d + γ′Dd + ǫd

qsd

d : daily quantity solar demand-side (distributed)

qss

d : daily quantity solar supply-side (centralized)

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SLIDE 15

Figure 9: that’s me

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SLIDE 16

US electricity system

Figure 10: US interconnections

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SLIDE 17

US electricity system

Figure 11: US electricity markets. Source: FERC

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SLIDE 18

Appendix Solar power in California

Figure 12: PV penetration. Source: IEA

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SLIDE 19

Appendix Solar power in California

Figure 13: Installed capacity. Source: SEIA and EIA

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SLIDE 20

Appendix: California electricity mix

Figure 14: California electriciy mix, 2011 - 2016. Source: IEA

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SLIDE 21

Appendix: Actual vs. forecasted demand

20000 30000 40000 20000 30000 40000

demand_act demand_fct

Figure 15: Demand forecast error

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SLIDE 22

Appendix: Actual vs. forecasted generation

2500 5000 7500 10000 2500 5000 7500 10000

vre_act vre_fct

Figure 16: Generation forecast error

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