Solar Power's Straw Man

 | Sep 24, 2012 | 6:40 PM EDT  | Comments
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One of the most efficient sources of renewable energy is solar power. In deregulated markets, solar lowers wholesale power prices, cuts emissions and reduces the need to build new transmission lines. From the point of view of state and national policymakers, solar power is a clear winner. But independent power producers such as NRG Energy (NRG), GenOn Energy (GEN) and Calpine (CPN) may have a different view. That is because solar power facilities can hurt earnings by displacing more expensive forms of peak power.

Recently, Exelon (EXC) and PPL (PPL) have been complaining about wind power. Wind power, they charge, is lowering wholesale power prices and margins on their fleets of nuclear and coal power plants. Exelon has argued that wind facilities no longer need federal incentives, which should be eliminated. PPL announced that wind power was a factor behind its recent decision to retire the 44-year-old Corette coal-fired power plant.

But Exelon and PPL may be sending policymakers an unintended message. Their complaints about market prices suggest that government policies are working better than many understood. According to Exelon, wind power not only lowers greenhouse gases, it also lowers energy prices. Who knew?

As I pointed out in my Sept. 21 article, some of Exelon's arguments about wind power's impact on its earnings may be true. However, wind power is not the company's only challenge. Among the factors restraining the financial performance of coal and nuclear power plants are chronic transmission line constraints.

Another constraint is solar power, whose widespread use has had a bigger financial impact on coal and nuclear plants than wind power has had. This is because solar power produces electricity only during the day, which is also when peak periods of demand occur. When demand increases, costly peaking power plants are dispatched to meet it, and the price of electricity rises as well.

At least, this was how the market worked before solar power was introduced. It turns out that solar power facilities act as natural peaking plants, given their daytime operations. And with their extremely low production costs, they tend to displace higher-cost peaking plants.

In deregulated markets, production costs set prices -- that is, the highest-cost generator sets marginal prices. Thus, when high-cost peaking plants are displaced by low-cost solar plants, producers' marginal prices fall.

Peakers are both economically and environmentally inefficient. While they tend to have low capital costs, they have high heat rates -- that is, they are gas-guzzlers that use excessive quantities of fuel to produce small amounts of power. Thus they raise fuel consumption and pollution output disproportionately.

Solar power thus turns out to be a twofer: It lowers energy prices and while decreasing greenhouse gas emissions. What's not to like? From the perspective of policymakers, business consumers, residential consumers and solar power developers, it is a big win.

As noted, solar power is actually a bigger competitive threat than wind power for coal and nuclear power plant owners. But for all power producers, an even bigger threat looms: the growing use of demand-response programs.  

Under these programs, regional transmission organizations (RTOs) pay large power users for reducing their consumption during critical periods. The RTOs, or regional grids, are ramping up these programs as a new way to shave seasonal and daily peaks. But because those periods of peak use coincide with peak pricing, demand-response programs reduce the prices and higher margins that power producers would otherwise expect.

Demand-response programs are incredibly effective in lowering prices. Over time, with the expansion of smart grid and smart meter technologies, they will become more popular and more sophisticated.

Incredibly, one of the nation's leading companies providing access to demand-response services is Exelon. As its Web site notes, "A significant portion of the Exelon 2020 emissions reductions will come from helping our customers reduce their energy consumption, so Exelon is investing more than $324 million on a range of innovative energy efficiency and demand response programs."

Several other companies are beginning to offer access to these programs as well. One is EnerNOC (ENOC), a small Boston-based service firm that is currently struggling to earn a profit through this emerging technology. As smart grids evolve and this market expands, EnerNOC should see success.

Interestingly, in the Midwestern and Mid-Atlantic regions where Exelon owns nuclear facilities, EnerNOC's biggest competitor is none other than Exelon. Given that this business inherently weakens power producers' pricing, we can clearly identify the enemy of Exelon's nuclear profitability. It is Exelon.

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