The Impacts of Sustained Cost Declines in High-Capex Technologies on Wholesale Electricity Markets
(Room Garuda 8, 1st Floor)
19 Sep 18
4:30 PM
-
6:00 PM
Tracks:
TRACK A - Trends, Projects and Strategies
Rapid cost declines in renewable energy technologies have shocked power markets in recent years, and there is little sign that these will slow down in the years to come, particularly for solar and battery technologies. When modelling the effects of such declines in capital costs on wholesale electricity markets, certain phenomena arise that have interesting and important implications for much of the sector, particularly investors and regulators. This presentation will explore these phenomena by modelling the Philippine WESM, using The Lantau Group’s proprietary in-house electricity market cost-minimization model (“QUAFU”). Solar plus Battery will be modelled as a baseload technology under multiple scenarios of capital cost declines, leading to some inflection point after which this solution becomes cheaper than the prevailing form of baseload generation. We have found that in such scenarios, total system costs are minimized by shifting substantial economic new build from the years prior to this inflection point to those that follow. This means that beforehand, as the market tightens, more expensive generation sources are dispatched. This functions to push up prices over this preceding period, which subsequently drop significantly in the years afterwards when substantial new, cheap baseload capacity comes online. This dynamic can have important implications for investors, in that it provides an incentive to capture prices in the years leading up to the inflection point, while significantly reducing market prices thereafter. Furthermore, it poses a dilemma for regulators in charge of approving bilateral contracts, who have to decide on whether to allow for a period of market ‘tightness’ leading up to the inflection year, thereby reducing the total cost incurred by the system in the long-term. This presentation will discuss the effects of various scenarios on modelled market outcomes, and the implications thereof for different stakeholders.