A Modest Proposal For Wholesale Electricity Pricing

A phenomenon often noted on this site is that the jurisdictions that get the highest proportion of their electricity from so-called "renewables" seem to have the highest consumer electricity prices.  But wait -- aren't the wind and the sun "free"?  Capture your electricity from these "free" sources, and it just seems obvious that your cost of electricity will plummet.  

And yet when you look for evidence of actual prices charged to consumers you find that the more electricity you get from the wind and the sun, the higher your retail costs of electricity will soar.  Here is a chart I have previously reproduced:


Germany and Denmark get their proportion of electricity from wind and sun up over 30%, and their reward is electricity rates to consumers in the range of about 30 cents per kWh -- about triple the U.S. average.  The other champion of electricity from wind and solar is the Australian state of South Australia.  According to the Australian site Constar Blue from January of this year, the average consumer electricity price in that state is some 43 Australian cents per kWh, equivalent to about 32 cents per American dollar.

Here is the official Manhattan Contrarian diagnosis of the problem: The geniuses who create markets for electricity have gotten everything wrong.  After a few decades of anti-fossil fuel hysteria, all the western countries have electricity markets that are set up to favor the renewables.  The basic rule is that if wind and/or solar are available, they get priority in "dispatch" onto the grid; that is, when available, wind and solar are purchased first.  But wind and solar are only available around 20% of the time, and you never know which 20% that will be (except that it is a safe bet that no solar power will be available at night).  You are left needing full backup from fossil fuel plants (coal, oil or natural gas), or maybe nuclear, but those plants must be cranked up and down at a moment's notice to give the priority to the favored "renewables."  Next thing you know those fossil fuel or nuclear plants become uneconomic.  But you can't get rid of them or you will have a blackout every time the wind stops blowing.  What now?

From down under, the Australian reports over the weekend that the governing coalition is ready to propose massive subsidies to facilitate the construction of new coal-fired power plants to make sure that industries will have power and the lights will not go out when the wind goes calm:

Malcolm Turnbull yesterday confirmed he would seriously consider the key recommendation of a report by the competition watchdog to underwrite and potentially subsidise new “firm” and cheap power generation for industrial and commercial users.  Signalling a possible end to the energy wars within the Coalition partyroom, the recommendation was immediately endorsed by Nationals MPs, who have interpreted it as a green light for government to intervene in supporting the future of coal generation.

Well, that's one way of doing it.  Here's another:  Scrap this ridiculous idea of grid priority for wind and solar.  Instead, the grid operator should seek only offers of power that are firm and reliable for some reasonable period, say 24 hours at a time.  If you want to sell wind power to the grid operator, it's then on you to also provide the mix of backup sources (could be fossil fuel power plants, could be batteries, could be whatever else you come up with) to make your offer reliable for the requisite period.  

A pricing mechanism in this form would force the additional costs of the intermittent renewables out into the open.  The cost of having the backup power at the ready is properly viewed as part of the cost of the renewables.

Suddenly the wind and the sun aren't quite so "free" any more.  It is unlikely that generation from these sources would survive to any significant degree under my proposed pricing mechanism.  But consumer electricity prices would likely fall dramatically in those jurisdictions that had previously embraced these unworkable sources.