Variable Pricing and the Cost of Renewable Energy

From UHERO, May 14, 2018 (with accurate info inserted in parenthesis)

On a levelized-cost basis, solar and wind power generation are now competitive with fossil fuels (Competitive must mean 244% higher--22pkwh wind on Maui vs 9pkwh coal on Oahu), and still falling (until tariffs on subsidized Chinese solar panels). But supply of these renewable resources is variable and intermittent, unlike traditional power plants. As a result, the cost of using flat retail pricing instead of dynamic, marginal-cost pricing--long advocated by economists--will grow.  (Dynamic pricing = 'Voluntary' rolling blackouts or brownouts.  You agree to use at certain hours and not at others.)

We evaluate the potential gains from dynamic pricing in high-renewable systems using a novel model of power supply and demand in Hawai'i. The model breaks new ground in integrating investment in generation and storage capacity (battery bucks for Elon Musk) with chronological operation of the system, including an account of reserves, a demand system with different interhour elasticities for different uses, and substitution between power and other goods and services. The model is open source and fully adaptable to other settings.

Consistent with earlier studies, we find that dynamic pricing provides little social benefit in fossil-fuel-dominated power systems, only 2.6 to 4.6 percent of baseline annual expenditure.  But dynamic pricing leads to a much greater social benefit of 8.5 to 23.4 percent in a 100 percent renewable power system with otherwise similar assumptions.   (Translation: LNG generation doesn't need you to rearrange your life to suit their profit needs.  Solar and wind do.) 

High renewable systems, including 100 percent renewable, are remarkably affordable. (Laughter.) The welfare maximizing unconstrained generation portfolio under the utility's projected 2045 technology and pessimistic interhour demand flexibility uses 79 percent renewable energy, without even accounting for pollution externalities.  (Just don't pay attention to all those biodiesel plants which have been quietly converted to regular diesel.)

If overall demand for electricity is more elastic than our baseline (0.1), renewable energy is even cheaper and variable pricing can improve welfare by as much as 47 percent of baseline expenditure.  (More blackouts for you = more profits for us.)

PDF: WORKING PAPER  

UHERO May 15, 2018: A Pocket Full of PIMs