Renewable Energy Leverage

California recently hit 95% renewable energy sources for its electrical power generation.

Great news! Enthusiasts will want to bang the drum, but skeptics will observe that this record comes with a number of conditions. “High water marks” like this happen at particular times of day during particular times of year. At this point in the calendar, the daylight hours are abundant and temperatures are still moderate enough to keep demand relatively low. A calm, hot day in the summer will look very different. And the picture changes dramatically as we leave California. The total nationwide contribution of solar to electricity production, for example, is still less than 3%. Wind is less than 10%.

Despite these relatively low percentages, I want to show how much leverage renewables (coupled with batteries) can have on the market even when their relative contributions are quite small. One dramatic example of this is from a hot summer day in Australia back in 2019. In the last few years, Australia has installed some of the world’s largest grid-connected batteries. Nevertheless, in terms of the overall electrical market, they are tiny. And they’re quite expensive. So how can they turn a profit? Watch this.

December 19th of 2019 was extraordinarily hot, so electrical demand for cooling was high. As the sun set, solar power generation dropped away. As luck would have it, winds were calm. This led to a shortfall in power generation as natural gas and diesel assets were ramping up. This, in turn, caused the spot price for electricity to jump briefly to $14,700/MWh. And who was in a position to claim that price? The big batteries at Hornsdale and Lake Bonney. In just two days, these batteries earned $1 million.

The picture tells the story. You can see that the thin sliver of battery capacity captured most of the attractive profits before the fossil-fuel generators could cough to life. The key is speed. Batteries can instantaneously discharge their power in response to market conditions. They are the nimble mammals dodging between the legs of the lumbering dinosaurs. In the first four months of operation, the Hornsdale battery with 2 per cent of the capacity in South Australia claimed 55 per cent of the revenues in South Australia.

This is terrible news for natural gas and diesel peaker plants. One of the reasons peaker plants exist is because they can capture this very profit. Someone needs to pay for all that idle time when they sit around playing cards, waiting for a call from grid manager. From the point of view of fossil fuels, renewable plus battery is a brutal one-two punch. Solar pushes down your prices all day long while the sun is smiling, and then, just when you can taste those delicious sunset profits, a zippy little battery swoops in and gobbles them up. So even in their current diminutive form, renewables cast a long shadow over the future of fossil-fuel power generation. Building a new gas plant is so expensive that you need to count on consistent profits for many years. With the growth of cheap renewables, the capital needed to build a fossil-fuel plant gets more and more expensive. Bankers, it turns out, just hate loaning money that might never get paid back.

The bottom line is that renewables are already having an outsized effect on the overall market. They punch above their weight, and they are continually trending up. I’m looking forward to more “high water mark” days.