So Matt, I live in California, which has a substantial renewables portfolio of wind and solar. If renewables are supposed to pull down grid clearing RTO prices, why does California have the highest electricity prices per kWh in the U.S.?
That’s a good question, one I have been thinking about but haven’t looked into very much yet. I know that California had the highest retail rates long before there was any appreciable amount of renewables, so even if renewables have some role there are other causes as well. I suspect that much of the reason today lies not in the wholesale price of electricity charged by CAISO but rather in what gets added into retail rates, such as the costs the three investor owned utilities are entitled to recover in rates related to the damages they have paid for all of the fires. To the extent there are subsidies paid to renewables those also would show up in the retail rates. Stay tuned, I might write something about this in the future.
I just took a quick look at EIA data (it’s bed time for me here on the East Coast) and noticed that Texas has by far the highest renewable energy production but has retail rates below the average retail rates in the US. I will look into this more tomorrow.
Your insights are always interesting. But your points only hold in the short term. The variable cost of renewables and resultant price is very low even without subsidies. But this short term view belies their full cycle costs and the effective price to society. (i.e. Subsidies are a “price” paid by taxpayers More importantly, the longer term costs and resulting required prices for sustainable supply that are caused by all of the necessary redundancies (low capacity factors, back up caused by redundancies whether they be batteries which are idle investments when charging or hydrocarbon back up which is idle when renewables are producing). It may turn out that renewables ultimately are cheaper in the long run, but your argument about short term pricing that is largely if not completely related to variable costs is incomplete and short sighted. I’d like to see your full cycle analysis.
Every grid generation asset is idled for some amount of time. Non-baseload generators are idled every day when load levels are low and peakers can be idled for extensive amounts of time. Some run only a few hours a year. I think that the average capacity factors for coal plants these days are in the 30s. Baseload units spend time off line for maintenance, which can be lengthy. The key with renewables is to integrate them into the grid in a way that takes advantage of synergies as efficiently as possible, the same as is done today. I agree with you about subsidies.
Coal plant capacity factors are only that low because half cycle variable costs of renewables that belie full cost pushes coal out and are not reflective of the long run. They could run longer. Renewables’ redundancy requirements are physically driven.
Coal’s big problem is not renewables but natural gas. Low gas prices mean that coal is not competitive with gas. Renewables haven’t helped but gas is what is killing coal
That’s telling in itself - that natural gas and not renewables are coal’s problem. I’d renewables were the solution many claim them to be, they and not gas WOULD be completely coal’s problem.
Judith, I did leave out tax benefits to the fossil fuel industry. But I also left out the tax credits for renewable energy. My analysis was based solely on the relative costs of different types of generation without consideration of any subsidies. I did briefly mention the tax credits for renewables in explaining why RTO energy market prices can drop below zero, but any subsidies of fossil fuel companies are irrelevant to that analysis.
More generally, when I consider grid issues, I don't try to account for any subsidies other than those that involve a fixed payment for the production of electricity. Consideration of one-off tax effects is just too difficult and not really relevant to the issues I address. For example, I defy anyone to determine with any degree of confidence what natural gas prices would be without any of the tax credits, deductions, depletion allowances, and other tax benefits as well as royalties and taxes on production and other special taxes on the fossil fuel industry, taking into consideration the international and national market factors affecting prices. And even if you could make such a determination, you then would have to figure out how those prices would affect electricity prices and the mix of generation capacity. I suppose arguments over subsidies to different industries might be relevant to consideration of tax policy, but not to the important issues facing the grid
I think there are important interconnections. We can't just ignore the 5.3 trillion in "negative externalities" - i.e., actual societal costs - related to burning fossil fuels (https://www.eesi.org/papers/view/fact-sheet-fossil-fuel-subsidies-a-closer-look-at-tax-breaks-and-societal-costs). This 5.3 trillion was a 2015 calculation - climate change is far more severe now and inflation bears on that number. The societal costs of wind, solar and geothermal energy are tiny in comparison.
No doubt that climate change is an important consideration. But my Substack is not about climate change. Rather I am trying to explain how the grid works, and the ways that use of different technologies affect grid reliability and costs.
In my view, as a practical matter a transition to a low carbon grid will be greatly slowed or even never happen if the transition imposes major blackouts or dramatic increases in the price of electricity. My Substack addresses issues as to how to keep the grid reliable and as cost efficient as possible during any transition
The lion’s share, by far, of subsidies for the fossil fuel industry that we read about are consumer, not producer subsidies. Read and understand the IMF report on energy subsidies or do the IMF’s course and you’ll understand. In terms of direct subsidies, in many countries, fossil fuels are the least subsidized energy sector and industry in general. They pay royalties as well as income taxes meaning that the government takes more and leaves them less net revenue than it does most other industries. Subsidies of fossil fuel companies pale compared with what was proposed for renewables in the IRA. And what was proposed for hydrogen and CCS. (Both lost causes.)
I love reading your articles. But let me dispute a couple of points that you made in this article. First, "There is some truth to this argument during periods of very low demand during the night, when RTO energy prices sometimes plunge down to, and even below, zero..."
But looking at the ISO-NE website, it appears that wholesale prices only go negative during the day, when solar production is high. I have never seen negative prices at night.
Second, "But it cannot be reasonably disputed that, at least in the short term, renewable generators can provide an outsized rate benefit in the RTO energy markets that extends far beyond the energy renewable generators produce themselves."
Texas and ERCOT had low electricity prices before renewables were a big part of the mix. So the addition of renewables did not cause Texas' low prices. Also, we never see countries with high renewable generation having low electricity prices. In fact, we see the opposite.
Thanks Tom. You are correct that I was sloppy in saying that negative prices happen only at night. They can happen any time when the demand is low enough that it can be mostly or entirely covered with baseload generators like nuclear reactors that shouldn’t be shut down for operational purposes. Those baseload generators offer at very low prices below variable costs to avoid being required to go offline. Prices go below zero when there is a lot of renewable energy because the tax credits make sales of renewable energy profitable even at negative prices which allows renewables to offer at negative prices when demand is low. I said this happens at night because that is when demand tends to at its lowest, but there is no reason it can’t happen in the day. I am surprised it happens in New England very often because it has relatively low amounts of renewables but I guess it does.
With respect to your point about whether renewables actually reduce prices, my analysis was limited to the effect on the RTO energy markets, and I think it is indisputable as a matter of math that this happens, and that I am correct that renewables can dampen the effect of high temperatures on energy prices. Many other factors go into total retail electric prices, however, and renewable can cause price increases. But I don’t think high renewable levels necessarily cause higher prices. A good example is Texas, which has by far the most renewable energy in the US, over twice as much as California, but has below average retail rates.
I don’t think you read all of Tom‘s response above. Looks like you missed his comment on Texas and his link to the X post from Bjorn Lumberg about green energy and prices.
The point is that all around the world, wherever there’s a high penetration of wind and solar, prices are higher. That’s what the chart shows.
And California prices have risen faster than the national average since 2008.
I didn't respond directly to those points, but my response did address the basic points. I think Tom agrees since he liked my reply. As for the claim of a relationship between renewable penetration and electricity prices, California is the only state that is in the top ten in both the production of renewable electricity and the retail price of electricity. All of the other 9 states with the most renewable energy are relatively less expensive. I am going to discuss this point in my next post or two. I haven't done any real analysis of the chart on X that Tom linked to, but I think there are more factors explaining the cost differential than just penetration of renewables
I just did research using Grok 3 and yes, you’re right about prices. Only California has a high price and high penetration of renewables.
Other states with a large percentage of renewals, such as Kansas, Iowa, Nevada, and Texas all have average prices. I also asked it about world prices, and there was more of a link with countries such as Denmark and Germany having both. I learn from Grok every day, it’s a very valuable tool.
I looked at the source statistics published by EIA which Grok apparently provided to you. I have nothing against AI for doing this kind of work, but I like to go straight to the source because I often find data that I did not originally intend to look at that gives me insights that I would not have gotten if provided only with the exact data I originally wanted. I am in the middle of doing a deeper dive on the cost of electricity that I hope to turn into a post which will include the EIA data that Grok gathered for you.
As for world prices, it is one thing to observe that countries with lots of renewables have high prices, but that doesn't necessarily mean that renewables cause high prices. There are many factors relevant to the retail cost of electricity and although renewables can influence prices, other factors frequently are more important. I haven't done any real analysis, but suspect that a big reason for high electricity prices in Germany, Denmark, and other European countries is the high natural gas prices that resulted from Russia's invasion of Ukraine.
No natural gas does not contribute a significant percentage of those two countries electricity. Just ask Groc the right question, you get exactly what you’re looking for, and it even references previous discussions, which I think is fantastic.
Based on the most recent data for 2024, here are the percentages of electricity generation from natural gas in Denmark and Germany:
• Denmark: Natural gas provided approximately 3% of electricity generation in 2024. This is a slight increase from 2.9% in 2022, as reported by Wikipedia, reflecting Denmark’s minimal reliance on natural gas due to its high renewable energy share (88.4%, mostly wind and solar).
• Germany: Natural gas contributed 13.2% of electricity generation in 2024, according to SMARD data, up from 9.5% in 2023 due to lower gas prices and the nuclear phase-out. Total natural gas generation was 56.9 TWh out of 431.7 TWh total electricity production.
So Matt, I live in California, which has a substantial renewables portfolio of wind and solar. If renewables are supposed to pull down grid clearing RTO prices, why does California have the highest electricity prices per kWh in the U.S.?
That’s a good question, one I have been thinking about but haven’t looked into very much yet. I know that California had the highest retail rates long before there was any appreciable amount of renewables, so even if renewables have some role there are other causes as well. I suspect that much of the reason today lies not in the wholesale price of electricity charged by CAISO but rather in what gets added into retail rates, such as the costs the three investor owned utilities are entitled to recover in rates related to the damages they have paid for all of the fires. To the extent there are subsidies paid to renewables those also would show up in the retail rates. Stay tuned, I might write something about this in the future.
I just took a quick look at EIA data (it’s bed time for me here on the East Coast) and noticed that Texas has by far the highest renewable energy production but has retail rates below the average retail rates in the US. I will look into this more tomorrow.
Thanks! This should be a very interesting subject to explore.
Your insights are always interesting. But your points only hold in the short term. The variable cost of renewables and resultant price is very low even without subsidies. But this short term view belies their full cycle costs and the effective price to society. (i.e. Subsidies are a “price” paid by taxpayers More importantly, the longer term costs and resulting required prices for sustainable supply that are caused by all of the necessary redundancies (low capacity factors, back up caused by redundancies whether they be batteries which are idle investments when charging or hydrocarbon back up which is idle when renewables are producing). It may turn out that renewables ultimately are cheaper in the long run, but your argument about short term pricing that is largely if not completely related to variable costs is incomplete and short sighted. I’d like to see your full cycle analysis.
Every grid generation asset is idled for some amount of time. Non-baseload generators are idled every day when load levels are low and peakers can be idled for extensive amounts of time. Some run only a few hours a year. I think that the average capacity factors for coal plants these days are in the 30s. Baseload units spend time off line for maintenance, which can be lengthy. The key with renewables is to integrate them into the grid in a way that takes advantage of synergies as efficiently as possible, the same as is done today. I agree with you about subsidies.
Coal plant capacity factors are only that low because half cycle variable costs of renewables that belie full cost pushes coal out and are not reflective of the long run. They could run longer. Renewables’ redundancy requirements are physically driven.
Coal’s big problem is not renewables but natural gas. Low gas prices mean that coal is not competitive with gas. Renewables haven’t helped but gas is what is killing coal
That’s telling in itself - that natural gas and not renewables are coal’s problem. I’d renewables were the solution many claim them to be, they and not gas WOULD be completely coal’s problem.
Are you leaving out the large subsidies afforded by taxpayers to the fossil fuel industry?
Judith, I did leave out tax benefits to the fossil fuel industry. But I also left out the tax credits for renewable energy. My analysis was based solely on the relative costs of different types of generation without consideration of any subsidies. I did briefly mention the tax credits for renewables in explaining why RTO energy market prices can drop below zero, but any subsidies of fossil fuel companies are irrelevant to that analysis.
More generally, when I consider grid issues, I don't try to account for any subsidies other than those that involve a fixed payment for the production of electricity. Consideration of one-off tax effects is just too difficult and not really relevant to the issues I address. For example, I defy anyone to determine with any degree of confidence what natural gas prices would be without any of the tax credits, deductions, depletion allowances, and other tax benefits as well as royalties and taxes on production and other special taxes on the fossil fuel industry, taking into consideration the international and national market factors affecting prices. And even if you could make such a determination, you then would have to figure out how those prices would affect electricity prices and the mix of generation capacity. I suppose arguments over subsidies to different industries might be relevant to consideration of tax policy, but not to the important issues facing the grid
I appreciate your point of view.
Thanks Judith. It’s not so much a point of view as it is the focus of my Substack.
I think there are important interconnections. We can't just ignore the 5.3 trillion in "negative externalities" - i.e., actual societal costs - related to burning fossil fuels (https://www.eesi.org/papers/view/fact-sheet-fossil-fuel-subsidies-a-closer-look-at-tax-breaks-and-societal-costs). This 5.3 trillion was a 2015 calculation - climate change is far more severe now and inflation bears on that number. The societal costs of wind, solar and geothermal energy are tiny in comparison.
No doubt that climate change is an important consideration. But my Substack is not about climate change. Rather I am trying to explain how the grid works, and the ways that use of different technologies affect grid reliability and costs.
In my view, as a practical matter a transition to a low carbon grid will be greatly slowed or even never happen if the transition imposes major blackouts or dramatic increases in the price of electricity. My Substack addresses issues as to how to keep the grid reliable and as cost efficient as possible during any transition
The lion’s share, by far, of subsidies for the fossil fuel industry that we read about are consumer, not producer subsidies. Read and understand the IMF report on energy subsidies or do the IMF’s course and you’ll understand. In terms of direct subsidies, in many countries, fossil fuels are the least subsidized energy sector and industry in general. They pay royalties as well as income taxes meaning that the government takes more and leaves them less net revenue than it does most other industries. Subsidies of fossil fuel companies pale compared with what was proposed for renewables in the IRA. And what was proposed for hydrogen and CCS. (Both lost causes.)
Thanks for your larger perspective.
Regardless, an assessment purely based on short term variable cost and associated pricing doesn’t tell the full story.
Agreed but this is an important but little understood piece.
I love reading your articles. But let me dispute a couple of points that you made in this article. First, "There is some truth to this argument during periods of very low demand during the night, when RTO energy prices sometimes plunge down to, and even below, zero..."
But looking at the ISO-NE website, it appears that wholesale prices only go negative during the day, when solar production is high. I have never seen negative prices at night.
Second, "But it cannot be reasonably disputed that, at least in the short term, renewable generators can provide an outsized rate benefit in the RTO energy markets that extends far beyond the energy renewable generators produce themselves."
Texas and ERCOT had low electricity prices before renewables were a big part of the mix. So the addition of renewables did not cause Texas' low prices. Also, we never see countries with high renewable generation having low electricity prices. In fact, we see the opposite.
See https://x.com/BjornLomborg/status/1919044309015466127
Thanks Tom. You are correct that I was sloppy in saying that negative prices happen only at night. They can happen any time when the demand is low enough that it can be mostly or entirely covered with baseload generators like nuclear reactors that shouldn’t be shut down for operational purposes. Those baseload generators offer at very low prices below variable costs to avoid being required to go offline. Prices go below zero when there is a lot of renewable energy because the tax credits make sales of renewable energy profitable even at negative prices which allows renewables to offer at negative prices when demand is low. I said this happens at night because that is when demand tends to at its lowest, but there is no reason it can’t happen in the day. I am surprised it happens in New England very often because it has relatively low amounts of renewables but I guess it does.
With respect to your point about whether renewables actually reduce prices, my analysis was limited to the effect on the RTO energy markets, and I think it is indisputable as a matter of math that this happens, and that I am correct that renewables can dampen the effect of high temperatures on energy prices. Many other factors go into total retail electric prices, however, and renewable can cause price increases. But I don’t think high renewable levels necessarily cause higher prices. A good example is Texas, which has by far the most renewable energy in the US, over twice as much as California, but has below average retail rates.
Matt
I don’t think you read all of Tom‘s response above. Looks like you missed his comment on Texas and his link to the X post from Bjorn Lumberg about green energy and prices.
The point is that all around the world, wherever there’s a high penetration of wind and solar, prices are higher. That’s what the chart shows.
And California prices have risen faster than the national average since 2008.
I didn't respond directly to those points, but my response did address the basic points. I think Tom agrees since he liked my reply. As for the claim of a relationship between renewable penetration and electricity prices, California is the only state that is in the top ten in both the production of renewable electricity and the retail price of electricity. All of the other 9 states with the most renewable energy are relatively less expensive. I am going to discuss this point in my next post or two. I haven't done any real analysis of the chart on X that Tom linked to, but I think there are more factors explaining the cost differential than just penetration of renewables
I just did research using Grok 3 and yes, you’re right about prices. Only California has a high price and high penetration of renewables.
Other states with a large percentage of renewals, such as Kansas, Iowa, Nevada, and Texas all have average prices. I also asked it about world prices, and there was more of a link with countries such as Denmark and Germany having both. I learn from Grok every day, it’s a very valuable tool.
I looked at the source statistics published by EIA which Grok apparently provided to you. I have nothing against AI for doing this kind of work, but I like to go straight to the source because I often find data that I did not originally intend to look at that gives me insights that I would not have gotten if provided only with the exact data I originally wanted. I am in the middle of doing a deeper dive on the cost of electricity that I hope to turn into a post which will include the EIA data that Grok gathered for you.
As for world prices, it is one thing to observe that countries with lots of renewables have high prices, but that doesn't necessarily mean that renewables cause high prices. There are many factors relevant to the retail cost of electricity and although renewables can influence prices, other factors frequently are more important. I haven't done any real analysis, but suspect that a big reason for high electricity prices in Germany, Denmark, and other European countries is the high natural gas prices that resulted from Russia's invasion of Ukraine.
No natural gas does not contribute a significant percentage of those two countries electricity. Just ask Groc the right question, you get exactly what you’re looking for, and it even references previous discussions, which I think is fantastic.
Based on the most recent data for 2024, here are the percentages of electricity generation from natural gas in Denmark and Germany:
• Denmark: Natural gas provided approximately 3% of electricity generation in 2024. This is a slight increase from 2.9% in 2022, as reported by Wikipedia, reflecting Denmark’s minimal reliance on natural gas due to its high renewable energy share (88.4%, mostly wind and solar).
• Germany: Natural gas contributed 13.2% of electricity generation in 2024, according to SMARD data, up from 9.5% in 2023 due to lower gas prices and the nuclear phase-out. Total natural gas generation was 56.9 TWh out of 431.7 TWh total electricity production.
Very clear and helpful graphics which assist in comprehension of your posting.