The Coming Energy Glut


Renewable energy prices continue to plummet, with a recent solar contract in Mexico coming in well under $0.02 per kWh for power to be delivered to the grid starting in 2020. It's entirely possible that within the next few years we could see a renewable energy contract come in under a penny somewhere on the planet.

Even setting aside the headline-grabbing outliers, solar and wind power are now the cheapest ways to generate electricity in the United States, at least for new capacity.

This fact, plus the unique characteristics of solar and wind power, means that over the next few decades pure economic forces are likely to flip power markets upside down and lead to a glut of energy.

Solar and Wind Will Be Overbuilt

Solar and wind power are different from traditional sources of electricity because:

  1. Nearly all the cost is upfront capital expenditure, and there is no cost savings in curtailing overproduction (vs. coal or gas plants, where the cost of fuel is significant and reducing output when demand is low will save money).
  2. Power output is variable and can't be increased to match demand.
  3. The lifetime cost of power from a solar or wind facility is cheaper than any other power source, and solar and wind are getting cheaper over time.

This combination of factors means that when a power company needs to add generating capacity (whether because of demand growth or because older plants are being retired), it's generally going to be cheaper to build renewables rather than a coal, gas, or nuclear plant. And because of the low cost and variable output of solar and wind, it will be cheaper to overbuild renewable capacity by some percentage, to allow the low cost renewable power to displace more of the (relatively) expensive coal and gas power even when the renewables aren't producing full power.

Once the solar and wind generation capacity is in place, the direct cost of generating power from these sources is very close to zero. The most rational, profit-maximizing approach to building future power generation is one which will inevitably lead to times when more power is being produced than consumed, at zero marginal cost to the utility. If the utility can find any buyer for this power at any price larger than zero, it can make a profit.

In other words, a glut.

(On a side note, utilities overbuild their capacity in traditional power plants, too, so that there's enough power for peak demand or when a power plant goes offline. But this peaking and reserve generation capacity sits idle until it's actually needed, since the fuel costs money. Solar and wind are unique in that they don't cost anything to generate once the plant is built.)

There have already been a few times when wholesale electricity prices have dropped to zero in certain places because of the overproduction of renewable energy. The world is only just getting started in building out the 21st century renewable energy grid, and before we're done, excess power production will be a daily occurrence in many parts of the world.

Demand Response and New Uses

The idea of an energy glut is all very weird to me. I grew up in the 70's and 80's in the shadow of energy crises, high gas prices, and 55 MPH speed limits.

One likely change is that we'll see a lot power use shift to times when there's excess electricity. Even though electricity needs to be generated at the time it's used (unless someone stores it in a battery--which is getting cheaper, but will always be more expensive than using it when generated), it turns out that many uses for electricity don't have to happen at a particular time. Heating and cooling is probably the best example, since heat (or cool) is easy to store for a few hours and a significant fraction of electricity use goes to climate control.

It's easy to imagine a smart thermostat that notices when the price of electricity is low and cranks the thermostat a few degrees (warmer or cooler, depending on where you live) so it doesn't need to run as much the rest of the day. Or a smart water heater that takes advantage of cheap power to heat up some extra hot water in the tank.

The technical term for this is Demand Response, and it's already starting to become a thing. In a few years it's likely to become a really big thing, especially in commercial and industrial applications where user can shift large amounts of consumption and realize substantial cost savings.

It's also going to be interesting to see what new uses for electricity become important. At today's prices, for example, electric cars are more expensive than gasoline but cheaper to drive--over the lifetime of the vehicle, the electric car is still somewhat more expensive. But that might change if you could recharge your EV at one-tenth the retail price of electricity as long as you did it when there's a glut of electricity.

Seasonal Storage

The hard problem in renewable power has been and continues to be, seasonal storage. Batteries can store electricity for a few hours or weeks, but even the cheapest batteries are still many times the cost of generating the power when needed (though this is starting to change: in some electricity markets it is now cheaper to use large batteries to meet peak power demand than to use expensive "peaking" plants powered by natural gas).

In many places renewable power production varies considerably not just throughout the day, but over the course of the year. In Minnesota, on average, we get only around a tenth as much solar power in the darkest month of the year as in the sunniest. It's not uncommon for us to go weeks without seeing the sun in November and December. Batteries just don't have the ability to store electricity from June to use in November.

One exciting possibility for the coming energy glut is that it may enable solutions to the seasonal storage problem. If electricity is cheap enough and plentiful enough during the gluts, it may actually become economical to do things like synthesize liquid fuel using renewable energy. These ideas are being pursued in research labs, but in today's energy markets they are much too expensive to be worthwhile.

The World Is Changing

It seems almost inevitable that, if current trends continue (and there seems to be no obvious reason why they shouldn't), we will find ourselves with intermittent gluts of energy rather than shortages. This is going to be a very different world than the one we live in today, where the challenges will not be in finding enough energy, but in getting the energy to the times and places where it's needed.