The economics of overproducing renewable energy

Submitted by Awkward_moments t3_yg7zbt in Futurology

On this subreddit I see people talking about how wasting energy is a bad thing. People talk about how it's going to be unprofitable or bad for the energy market. Usually saying that it will prevent the rollout of 100% renewable grid or use it as an example of why nuclear must be used. I don't think it does these things and I want to throw my logic into the mix for anyone who cares to listen.

Caveat: I'm not in the energy market and I'm not an expert. I'm just a guy that knows a little about economics and spend too much time reading about renewables.

Let's just deal with solar and gas to make it easier.

Two things matter. Marginal cost and turning a profit on the lifetime of capital. Now what I think confuses people is they look at the whole market and not individuals in the market. Individuals acting rationally dictate the market and therefore you need to start there. If the marginal cost is too high the individual will leave the market. If the lifetime cost is too high the individual will leave the market. If they make profit they will grow.

Gas has a marginal cost of the price of fuel. Let's call this MC-G. Solar has a very small marginal cost so let's assume 0 to make it easy. If the price ever goes below MC-G no gas is used as it would lose the company money.

So how much solar do you install? Well profit is price times the amount sold. If this is high enough to pay off the initial invest more solar will be built. Important point: this is the total sold over the day. If you have gas running in the night making no money for solar and so much solar running in the middle of the day the price is 0, profit can still be made between these points. This is what is important if this is enough to pay for the panels more will be made, it doesn't always have to make money.

There are now three costs to the market.

Night time cost = MC-G + profit to cover capital costs of gas plants Middle of day costs = 0 Morning and afternoon costs = MC-G (just low enough to keep gas out of the market but makes solar money).

Solar stays in the market if morning and afternoon pay enough to cover costs and they will expand if they make money. The more they expand the more time of the day energy price =0

The growth of solar minimises the time the gas plants run so the price they charge needs to increased until they can pay off all their costs over an smaller and smaller part of the day.

This is where batteries can make their money if solar in the day creates energy cost of 0 and they can store it to collect a high price in the night this has two affects. In increases the price gas plants charge (as they run less) meaning it makes it more profitable to built batteries but it also increases the demand of solar futher increasing the growth of solar.

As such solar will create a huge over production of energy and there will be huge parts of the day where no one in the market is making any money. But the companies in the market will be making money.

This also applies to wind but wind is a lot more random than solar and harder to explain simply. I just wanted to point out that 0 cost in the day is a good thing for the expansion of renewables.

Additionally I do not see how nuclear can make any money. Because their marginal cost is low (but not 0) and their daily fixed costs and capital costs are so high.

I expected to go into a little more detail but I ended up writing a lot more than expected so I will leave it here.

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Southern-Trip-1102 t1_iuf54ak wrote

If we didn't need to worry about profit going full renewable + nuclear would have been so much easier. The government puts down the capital investment and does not need to worry about profit. High profits doesn't even necessarily mean cheap electricity. Profit is an objective which hurts our ability to get what we really want which is cheap renewable energy.

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Awkward_moments OP t1_iuft6px wrote

I disagree. Even if governments pay for nuclear then they are still spending money which has to come from taxes or borrowing. So that still costs the economy. That money could be better spend on other things like insulation, heat pumps, public transport etc. So I don't think getting the government to pay for nuclear has any benefits. Also roll out of renewables is faster than nuclear.

I didn't really explain how profits work in economic theory, that's my fault. In a competitive market (which is usually a market that is easy to enter) profits will cause more businesses and people to invest and also cause companies inside that market to expand. Solar and batteries seem incredibly competitive to me as even homeowners are even able to get into the market. Supply of the goods even seems highly competitive just based on how rapidly costs are decreasing.

In economic theory high profits in competitive markets just means growth. Eventually profits will get to a point where marginal costs =0. This means that the last solar farm or battery farm will turn no profit and if anyone entered the market they would actually lose money. So until people stop making money we are going to see a lot of people wanting to get in the game and make money.

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Southern-Trip-1102 t1_iufv3ec wrote

It would cost the economy that much is obvious. The reason using both nuclear and renewables is a good idea is because nuclear provides a good baseline of power which does not have dramatic swings.

What you just described is the issue, profit does not necessarily equal low costs, once marginal costs are low there isn't an incentive for it to be built. Nuclear isn't particularly profitable and has high capital costs so the private sector has little reason to invest in it even if it is very practical to use for our civilization.

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Awkward_moments OP t1_iufznku wrote

I really don't understand this nuclear arguement about baseline. Supply needs to match demand.

Having a stable baseline doesn't mean supply matches demand and nuclear isn't really variable. So how could it possibly improve anything? It's not like at peak demand you are going to tell people not to cook, heat their homes or watch TV because there is only baseline power available and baseline demand needs to keep running.

That's not the issue that's the beauty. Solar and wind are the cheapest forms of power. So they can be built profitability for a cheaper price than anything else. That's means we will have more energy and it will cost us less. Don't even need to get the government invovled. Nuclear is just expensive and gains us nothing. Sure the government could build it but why? Again there are better things to spend the money on.

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Phssthp0kThePak t1_iugdiwq wrote

France runs 70% on nuclear. Tell me how many hours storage and what overbuild you need to get to this level of decarbonization with wind and solar. Once you add in all these systems needed to make a reliable grid off of intermittent renewables, how does that cost compare to nuclear?

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Awkward_moments OP t1_iuhozez wrote

Well they balance the grid by using Europe. So that's not a fair comparison.

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Southern-Trip-1102 t1_iugc6b6 wrote

A stable baseline means that it is easier to meet demand. Wind and solar both do not provide 24 7 constant power, they fluctuate. Thus you need to cover the shortfall when they provide less than required. By having a baseline you do not need to worry as much about those fluctuations because a portion of your electricity production is guarantied. Also, it is possible to ramp up or down nuclear plants. As I said above its a baseline not the full load, renewables plus nuclear is the solution.

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Awkward_moments OP t1_iuhpb6h wrote

Peak demand is what? 80% higher than baseline load.

Whatever you are using to fill in near 50% of the total demand is not going to come from nuclear. You still got GW of power that are needed to be provided.

Nuclear doesn't solve the difference between supply and demand and it's the most expensive form of energy.

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