The Impact of PV on the German Power Market

arrhenius Discussion Paper 3

Executive Summary

During the last months, the discussion on feed-in tariffs (FiT) for photovoltaic (PV) installations in Germany has gained new momentum. On the one hand, the issue of over-subsidisation due to the fact that module prices have been decreasing faster than feed-in tariffs was discussed. On the other hand, increasing costs to the consumers of power were put on the agenda after the unprecedented increase in new PV capacity in Germany in 2009. After the general election in September 2009, this discussion lead to different proposals for adjusting the FiT scheme. On March 23, 2010 the parliamentary groups of the governing parties CDU/CSU and FDP presented a new bill. In April, the top lobbying association of the PV industry in Germany addressed Chancellor Merkel, all parliamentarians and others in full page advertisements in major newspapers to reconsider their plans.

Both, in the discussion and in the draft bill, an important aspect has been neglected so far: the impact of the massively increasing PV capacities on the economics of conventional power plants. The regulatory impact assessment of the draft bill, for example, only considers costs for the public budget, for the business sector (device manufacturers and operators as well as industrial power consumers) and for the citizens (private households). Utilities and electricity companies are not mentioned.

The present study fills this gap. In the first part, it is qualitatively shown how the power price and the equilibrium quantity on the power exchange change with increasing PV capacities. These findings can be directly translated into shrinking revenues for operators of conven­­tional power plants. In the second part, a quantitative analysis of the German power mar­ket is provided. Based on a fundamental model analysing 8,760 hours per year with real plant data, the impact of six scenarios for the build-up of PV capacities, ranging from an immediate stop of new PV installations to an additional 50 GW of PV until 2020, are studied. The effects of different PV scenarios on the wholesale power price and the total re­ve­nues (i.e., price multiplied by quantity) of all conventional power plants are calculated. For an incumbent operator of a coal-fired power plant, the contribution margin may decrease by more than 25% and for a new, yet to build gas-fired combined cycle power plant it may drop by more than 30%. One reason for this massive impact is the fact that PV installations pro­duce power around noon when load and, thus, power prices as well as revenues are usually the highest in Germany. In this respect PV differs considerably from other renewable energies.

The study does not make specific recommendations for policy makers, but advocates paying more attention to the so far neglected impact on the power market. It concludes that the PV support scheme can be understood as the accelerator pedal for the structural change in the German power sector. Implementing the changes in the feed-in tariffs as presented in the draft bill would require more and faster changes in the overall design of the power market to provide sufficient incentives for backup capacities when the sun is not shining. It would also be accompanied by additional acceleration costs. Absolute caps on the added capacity, rather than further cuts in the tariffs, could buy some time for a careful redesign of the market and may reduce resistance from incumbent operators.

This is all the more true since PV build-up will not stop in 2020, the year analysed in this study, but will rather continue and amplify the effects described above.