Renewable energies are getting cheaper every day


During 2016, record figures were achieved in photovoltaic energy auctions, even leaving behind wind energy. Renewable energies are getting cheaper every day. What are the main causes that have motivated this situation? Why does it surprise us?

In recent years, renewable energies have been the most expensive compared to coal or gas. This fact was due to the large initial investments for its start-up and the low performance they provided. However, it is still a long-term investment. 2016 has been the turning point that has revealed the first data on how these large investments in photovoltaic orchards, wind farms and R&D have borne fruit; the cost of energy produced by renewables is much cheaper and production capacity has increased.

Emerging countries lead this downward trend in prices, where in places like Chile, it has become half the price of coal. They are countries that need large energy capacity quickly, which makes renewables the best option. However, in more developed countries they still have to compete with large and traditional coal or gas companies.

We must bear in mind that the climatic conditions for renewable energies to flourish do not occur in all territories, so this model cannot be replicated anywhere in the world. In other words, in countries with little sun or wind, renewable energies will not be successful.

In addition to the health and environmental benefits, there are a number of additional benefits that impact profitability for renewables. For instance;

  • Its production system is exponential. In other words, the more units installed, the lower the cost for each of them.
  • Pollution taxes are increasing every day; This fact reduces the profitability of non-renewables.

It is not yet a generality, but it is a worldwide trend that will be consolidated in the next decade.

How is the price of energy set?

To understand this report well, it is necessary to know how the price of energy is established. The price of energy is set in the wholesale market, where the agents that supply and demand energy go daily and hourly:

  • Supply: The energy suppliers are the large energy producers, who indicate at what prices they are willing to sell. They constitute the aggregate supply (line OA)
  • Demand: The claimants are the large electricity demanding companies, distributors and marketers that then supply it to end consumers. This set indicates at what prices they are willing to buy. They constitute the aggregate demand (line DA)
  • Each demand is marrying in price with each offer. The point at which supply and demand coincide is the market equilibrium price at that moment (p *). That is, the price at which the purchase and sale of energy will be set and, therefore, its price.

Among the energy producers are the renewable and nuclear groups, which offer energy at a price of € 0 / MWh. This makes the aggregate supply of energy higher (the curve shifts to the right) and consequently, the equilibrium price in the market is lower.

This is the simple macroeconomic explanation of why renewable energy lowers prices. In this link you can see in detail the explanation given by the OMIE (Operator of the Iberian Energy Market - Spanish Pole) about the daily energy market.

There are complex situations that make the curves move to one side or the other, altering and making the final price more expensive. For example, there are companies that set a minimum income, if the price of the operation does not allow to reach that minimum, they withdraw their offer from the market. This fact reduces the aggregate supply (the OA curve shifts to the left), making the equilibrium price more expensive.

Why do renewable and nuclear energies offer energy at zero cost?

  • It is energy that has already been produced, it cannot be stored and if it is not used, it will be lost.
  • The cost of its production is fixed and only depends on the installation infrastructure. That is, in the medium term it will be amortized and its production cost at zero.
  • They position themselves as "accepting prices"; they accept the auction price. This means that, even if they offer energy at € 0 / MWh, it does not mean that they will not receive money for it. That is, if the equilibrium price between renewables and non-renewable remains at € 45 / MWh, all of them will sell at € 45 / MWh.

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