Dive Brief:

• Increasing renewable energy generation appears to be responsible for the majority of price declines in California's wholesale power market over the last five years, according to a new report from the Energy Institute at Haas.

• The report, which in part examined the effect of increased utility-scale solar capacity on the market, also finds higher levels of solar penetration do not uniformly lower power prices, but makes them lower during the day and higher during non-daylight hours.

• That uneven price distribution disproportionately affects baseload generation, such as coal, nuclear and even highly efficient combined-cycle gas turbines, making those resources less economic while bolstering less efficient and higher cost flexible gas turbines. 

Dive Insight:

Studies examining power markets in the eastern U.S. have shown that baseload resources are retiring because of low natural gas prices, not an influx of renewable generation.

But the authors of the Haas report, James Bushnell and Kevin Novan, studied the California market and found that renewable investment has had a significant impact on power prices and appears to be responsible for the majority of price declines. And, to the extent that California's renewable energy growth is replicated across the country, "we can expect that their impact on wholesale prices will be substantial," they wrote in their report.

The prospect that lower wholesale prices could force more inflexible generation out of the market has raised alarms in some industry circles that increasing renewable energy penetrations could threaten grid reliability. Contrary to that view, however, the authors of the report say that wholesale power markets are accurately reflecting "facts on the ground" and are rewarding flexible generation that is needed to stabilize the output of wind and solar resources.

The authors said their finding that higher marginal cost combustion turbines are much less negatively affected by renewable expansion than other sources of generation indicates that the market is rewarding the technologies that are providing value based on the amount of renewable energy entering the system.

That, they said, "implies that short-term power markets are responding to the renewable expansion in a fashion that could sustain more flexible conventional generation, while seriously undermining the economic viability of traditional baseload generation technologies." And further, this "suggests that there will be a long-run shift towards a stock of less fuel-efficient, and thus dirtier, conventional generators."

In addition, the report notes that current environmental policies will provide little incentive for continued investment in resources that are already producing a glut of low cost energy. As many environmental economists have already noted, rising levels of solar power undercut continued investment because they lower prices and investment returns.

"What we are seeing in California is the limits of a blunt, simple tool for acquiring renewable energy," Bushnell told Utility Dive.

A more effective approach, Bushnell said, would be one preferred by many environmental economists. Rather than subsidizing the production of green power, place a non-trivial price on greenhouse gas emissions. That would reward renewable energy and raise energy prices in periods where fossil generation is still marginal. It would also allow clean energy sources to be rewarded during periods of high demand rather than during periods when there is already a glut of clean energy.

The best approach, said Bushnell is to "allow markets to work and layer carbon price on top of that. A carbon price would allow power to be valued on both its environmental attributes and its economic value in one bundle."