With the withdrawal of government subsidies for new investment, such as the Feed-in Tariff (FiT) and Renewables Obligation (RO), and the limited spend remaining for the Contract for Difference (CfD) scheme, 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. Without fuel costs renewable plant can continue to receive revenue even where the wholesale price becomes negative, as subsidy is only paid where the stations are generating. 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.
Cornwall Insight modelling shows that for a representative 10MW onshore wind project, the combined effect of lower wholesale prices is to reduce revenues from the wholesale market 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.
The paper 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? and what does the projected level of volatility mean for the point at which different sources of flexibility, particularly battery storage, become economically viable?