The potential for an influx of US renewable projects, driven by new tax incentives, could cause power markets to break by driving electricity prices to negative levels, warns Wells Fargo. Alok Garg, head of renewables and asset finance at the bank, said at the Acore Finance Forum in New York that when building wind and solar farms becomes more about tax benefits than generating cash, electricity prices can fall to zero or lower. Garg added that regulators need to consider price risks between regions and how renewables are supplying the grid.
Recent years have seen a massive shift away from traditional energy sources in the United States, as renewable energy sources become increasingly cost competitive and environmentally friendly. However, this shift has created a potential problem: an influx of renewable energy projects could risk “breaking” markets.
This issue is a result of the fixed-cost nature of most energy sources. Coal, gas, and nuclear plants are largely built to meet average energy demand, meaning that they often cannot be rapidly increased or decreased in response to changes in the market. In contrast, renewable energy projects have little if any fixed costs, meaning that they can come online much more quickly in response to market signals.
The combination of these two factors has led to a fear that a “flood” of new renewable projects could lead to a significant oversupply of electricity, resulting in reduced energy prices. This in turn could lead to the bankruptcy of existing energy providers, resulting in inefficiencies and financial losses for the industry as a whole.
Fortunately, there are steps that can be taken to mitigate this risk. For example, the introduction of energy storage systems can help to ensure that renewable electricity generated during the peak sunlight hours can be stored and used during periods of higher demand in the evening. Additionally, many states are introducing policies to encourage the use of renewable energy while protecting existing providers.
While these steps can help to reduce the risk of an oversupply of renewable electricity, it is important that policy makers continue to monitor the situation in order to take appropriate action as needed. The increasing availability of renewable energy is certainly a positive for the planet, but these changes have to be managed in an intelligent and measured way in order to maximize the potential benefits.