The European energy transition is facing a thorny problem that although the LCOE of renewable is declining and its proportion in the grid is increasing, the average price in the wholesale electricity market has increased. According to Eurostat, from Q4 of 2015 to Q4 of 2018, the proportion of renewable in the total electricity consumption of the whole EU power market increased from 28.8% to 32.1%; in the same period, the quarterly average wholesale electricity price of the electricity market increased by nearly 20 euro / MWh.
There are several reasons to consider. Renewables still account for a relatively small proportion of electricity generation in Europe as a whole; the LCOE decline of the latest solar and wind projects has not exceeded the cost of existing clean energy plants subsidized by support mechanisms such as feed in tariffs.
Another explanation is that the variable output of wind and solar power plants must be balanced by frequent and rapid fluctuations of fossil fuel generators, which increases the cost of electricity and carbon emissions. However, although low-cost renewable offsets part of the grid demand, fossil fuel power plants still need to set marginal costs in the electricity market.
Some experts believe that as the proportion of renewable energy generated by zero marginal cost power generation in the grid increases, the cost of wholesale market shall decline. While some believe that the growth of renewable energy will not lead to the decline of average wholesale prices in the electricity market. This is because the shift from fossil fuels to renewable energy means a stronger and smarter grid to transmit electricity, which will put pressure on wholesale prices for the foreseeable future.
Transmission infrastructure construction is often several years behind the deployment of renewable energy, which has brought issues for Germany, Europe’s largest energy market.
Compared with traditional power plants, the capacity factors of wind and solar energy are relatively low due to intermittency, so more transmission capacity is needed to manage the resulting power supply fluctuations. Therefore, with the emergence of renewable energy, transmission and distribution costs are rising, so the price of electricity market will not drop significantly.
