Solar Reduces Electricity Prices in Germany

A study done in Germany by a research institute had some interesting findings. The study found that photovoltaic electricity production reduced electricity prices by a significant amount, by supplying power during peak times.

Most electricity markets are governed by the merit order. Various suppliers provide bids to the system operators to supply electricity in a given hour, and the bids are organized in a stack, from lowest to highest price. The system operator then buys the power from all the generators required, beginning from the least price to the highest price that supplies the electricity required in that hour. All of the generators will be paid that highest price – the market clearing price. Generally, the price submitted by a generator is based on the fuel cost, so fossil generators tend to submit the highest bids. If their bid is too high, they are not dispatched.

Solar generates its electricity during the day. And no country has embraced solar energy like Germany – they have a lot of it. Solar basically supplies a large chunk of demand during the day, which means that the highest bids from generators are not accepted. This of course means that the market clearing price is lower, so all the generators receive a lower price, reducing the price of electricity.

Solar generated power has been under fire from some as “too expensive”. But in Germany, the study found that solar has reduced the average price by 10%, and the peak price by 40%. The difference between the base price, and the peak price has narrowed considerably. Average peak prices used to be 20-25% higher than base prices, but they are now only 12% higher. Overall, the existence of solar power is estimated to have reduced the cost of electricity by 520-840 million Euros.

When we assess the cost of solar electricity, we cannot consider it in isolation. The existence of solar has an effect on the need for other higher priced electricity. If we speak of solar as “too expensive”, but fail to make this link, we have done a shallow analysis that is wrong. Let’s make sure we do the right analysis.

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