Our research has revealed that as capacity and output from solar and windfarm projects increases in coming years, the “cannibalisation effect” is set to lower wholesale power prices to the extent that by the 2030s it could put at risk the viability of future renewables.
With the withdrawal of government subsidies such as the Feed-in Tariff (FiT) and Renewables Obligation (RO) the value earned from wholesale power is going to become increasingly important for renewables. However, a complicating factor will be price cannibalisation. This is the depressive influence on the wholesale electricity price at times of high output from intermittent, weather-driven generation such as solar, onshore and offshore wind.
The absence of fuel costs makes solar and wind competitive in wholesale markets when they operate, with high volumes of production “squeezing out” capacity from less efficient and higher cost conventional plant. This results in lower cost, more efficient thermal plant setting prices, and sometimes periods where no thermal plant is operating in the market at all. The effect is therefore low or sometimes negative wholesale power prices, correlated to high levels of output from one or more intermittent sources of renewable generation. The greater the fraction of output on the system to meet demand from intermittent generation at any given time, the greater this effect becomes.
Our modelling shows that for a representative 10MW onshore wind project, the combined effect of lower wholesale prices and declining capture rates is to reduce revenues from wholesale power revenues by 34% in 2031 compared to 2018.
Solar power is also significantly affected by cannibalisation. A representative 5MW standalone solar project will experience wholesale market revenues reducing 22% from 2018 by 2031.
More detail can be found in our Wholesale Power Price Cannibalisation paper, which can be downloaded here. The changing generation mix, and withdrawal of subsidies poses questions that need to be considered by policy makers, such as:
- Will intermittent renewables be financially viable without subsidy?
- How will projects be financed in the absence of subsidies or substitute revenues?
- What does the projected level of volatility mean for the point at which different sources of flexibility, particularly battery storage, become economically viable?
This paper is the first in a series on related topics on the future of market and policy arrangements for continued efforts to further decarbonise the sector, in which we will present analysis in response to these questions.