Study documents impacts of large-scale entry of rooftop solar panels on competition
Researchers developed dynamic framework to measure market power in wholesale electricity markets
Carnegie Mellon University
Fossil-fuel plants are increasingly being forced to stop and start production in response to changes in output from renewables. In a new study, researchers developed a dynamic competitive benchmark that accounts for start-up costs and other unit-level operating constraints. They apply their framework to Western Australia, a setting where rooftop solar capacity more than doubled between 2014 to 2018 to world-leading rooftop solar penetration rates. The study found that the large-scale expansion of rooftop solar capacity can lead to increases in the collective profitability of fossil fuel plants because competition softens at sunset—plants displaced by solar during the day must incur start-up costs to compete in the evening.
The study, by researchers at Carnegie Mellon University and Monash University, is published in American Economic Review.
“We developed a framework to measure market power in wholesale electricity markets,” explains Akshaya Jha, associate professor of economics and public policy at Carnegie Mellon’s Heinz College, who co-authored the study. “This framework accounts for features of generating unit technology such as fixed start-up costs and ramping constraints that are becoming increasingly relevant in light of the global transition to intermittent wind and solar technologies.”
Firms that incur the fixed costs required to start production expect to recover these costs by earning revenues in excess of their variable costs in subsequent periods. This presents two challenges for studying competition: First, market power is usually measured based on the markup in prices above short-run marginal cost, but economists have long recognized that setting prices equal to short-run marginal cost ignores the requirement that prices must be sufficient for firms to recover their fixed costs. Second, fixed costs are a barrier to competition: Decisions on the extensive margin to incur the fixed costs necessary to produce affect the intensity of later competition.
Researchers applied their framework to Western Australia, a world leader in rooftop solar penetration rates. They measured market power by comparing observed plant output and market prices to their benchmark—a counterfactual time series of plant output and market prices—that accounts for the recovery of the fixed costs required for plants to start up.
Specifically, they extended static production function approaches by using high-frequency data on input gas use and output electricity to estimate unit-level cost functions with three components: variable costs, start-up costs, and the costs associated with running not tied to output levels. Then, their dynamic benchmark sets output levels to minimize the daily total costs of dispatching power plants to satisfy demand in each half hour of the day while setting prices that allow each plant to recover their fixed and variable costs.
Using this framework, they found that increases in rooftop solar penetration corresponded to sizable increases in the market power rents earned collectively by the fossil fuel fleet after the sun set. Since retail prices paid by electricity users were set via cost-of-service regulation, increases in market power rents largely constituted transfers from retail electricity consumers to producers.
Although rooftop solar penetration had a small effect on efficiency in the wholesale market, the external welfare gains associated with reductions in greenhouse gases are not captured within the wholesale electricity market. In Western Australia, increases in rooftop solar penetration corresponded to substantial declines in the carbon emissions that contribute to climate change, with sizable drops in gas-fired electricity output and thus daytime carbon emissions and only small increases in carbon emissions in the evening associated with solar-induced increases in starts by gas units.
“Our findings speak to the growing relevance of adopting several design features not present in most markets outside the United States,” says Gordon Leslie, senior lecturer in economics at Monash University, who coauthored the study. Among those features:
- Allowing suppliers to submit start-up bids in addition to energy supply curves can allow for co-optimization across hours. This can improve market efficiency, especially as more units stop and start production in response to output from intermittent wind and solar resources.
- Previous research has documented that the benefits of allowing financial participation in the day-ahead market are especially large in contexts where physical operating constraints are more likely to bind and market participants have significant market power. This study showed that increasing rooftop solar penetration rates can exacerbate unit-level start costs and physical operating constraints, resulting in suppliers having greater ability to exercise market power in the evening.
- Worldwide, most electricity users face retail prices that do not vary contemporaneously with wholesale prices and often not even by hour of day. Allowing retail prices to reflect hourly variation in wholesale prices will likely shift some demand from evening to day. As a result, fewer fossil fuel units will need to start up in the late afternoon to compete effectively at sunset. This can reduce firms’ ability to exercise market power during evening peak demand hours, leading to lower wholesale prices and declines in the retail prices paid by consumers.
Journal
American Economic Review
Article Title
Start-up Costs and Market Power: Lessons from the Renewable Energy Transition
Seven leading research universities collaborate to advance solar arrays over California’s canals
The California Solar Canal Initiative will engage the public and private sectors to identify optimal locations to generate renewable energy, save water and conserve land statewide.
University of Southern California
image:
Artist’s rendition of Project Nexus wide span site — the state’s first solar canal pilot — under construction in California’s Central Valley with Turlock Irrigation District. Credit: Solar AquaGrid
view moreCredit: Solar AquaGrid
A groundbreaking initiative led by faculty from seven top research universities — six of which are in California — aims to accelerate the deployment of solar arrays over the state’s extensive canal network.
According to a 2021 University of California, Merced, study published in Nature Sustainability, covering large sections of the state’s 4,000 miles of canals with arrays of solar panels could help conserve water, reduce air pollution, save land and generate clean energy using existing land and infrastructure.
The California Solar Canal Initiative (CSCI) research project aims to accelerate the deployment of solar canals across the state by equipping government agencies, utilities, community members and other interested parties with data on optimal locations and identifying willing host communities.
Led by the University of Southern California (USC) Dornsife Public Exchange and independent advisory Solar AquaGrid, CSCI researchers will closely collaborate with the state agencies responsible for water, land and energy: California Department of Water Resources (DWR), California Natural Resources Agency (CNRA) and California Energy Commission (CEC).
“California is leading the way in exploring innovative solutions to tackle climate change and strengthen our water and energy resilience,” said CNRA Secretary Wade Crowfoot. “We are excited to see top research institutions come together to help deploy solar panels over water canals — a big idea with great potential. Science-driven collaborations like this one are critical to guide our path forward.”
CSCI researchers will evaluate solar canals’ potential to:
- Address the needs of a rapidly changing energy market;
- Through co-benefits, be competitive with other distributed-solar projects;
- Enhance current canal operations and maintenance procedures;
- Navigate existing water and land regulations; and
- Provide numerous benefits to communities where projects are developed.
USC Dornsife Public Exchange has assembled a multidisciplinary research team from faculty at seven universities: USC; UC Merced; University of California, Berkeley; University of California, Irvine; University of California College of the Law, San Francisco; San José State University; and University of Kansas.
The CSCI research is being guided by an advisory council of experts from government, academia and the private sector to ensure that its outcomes are actionable. The advisory council, chaired by Solar AquaGrid, includes members from DWR, CNRA, CEC, California Forward, New Energy Nexus, Environmental Policy Center and Stanford Water in the West.
The Potential of Solar Canals
While not all canals are suitable for solar installations, the UC Merced study estimated that covering all 4,000 miles of California’s exposed canals with solar panels could:
- Generate enough electricity to power about 2 million homes each year;
- Conserve enough water to meet the residential needs of up to 2 million people annually; and
- Reduce land use by up to 50,000 acres by placing solar arrays on existing infrastructure.
The study also indicated that covering significant portions of canals could provide benefits beyond power and water, including:
- Lowering maintenance costs by shading the canals, which reduces weed growth in the canals;
- Enhancing the efficiency of the solar panels due to the cooling effect of the water below; and
- Creating local jobs to install and maintain the systems.
Although California experienced multiple episodes of intense rainfall and flooding emergencies in the past two years, scientists predict the state will continue to swing between intense rainfall and prolonged droughts. Droughts have plagued the state for thousands of years, but they are worsened by climate change, emphasizing the continued need to conserve water and reduce greenhouse gas emissions while meeting the state’s increasing energy needs.
More information about CSCI — photos, a fact sheet, the names of faculty from each university and their areas of research — can be found at: https://publicexchange.usc.edu/csci-media-kit/.
Next Step in State’s Commitment to Renewable Energy and Land Conservation
CSCI represents a next step in the state’s commitment to exploring solar canal deployment to meet its 2045 clean energy goals and 30x30 conservation commitment. Those goals led to the creation of Project Nexus in 2023, the state’s first solar canal pilot project currently under construction in the Central Valley. The pilot is funded by the state of California and is a public-private-academic partnership between Turlock Irrigation District, Solar AquaGrid, UC Merced and the California Department of Water Resources.
About the Partners
Based at the University of Southern California, USC Dornsife Public Exchange connects a wide range of academic researchers with policy, industry and nonprofit partners that need their expertise to tackle complex challenges. The Public Exchange team is the project manager for CSCI. Its responsibilities include assembling and managing the faculty research team from the seven universities. The USC faculty associated with the project are from the USC Price School of Public Policy and the USC Viterbi School of Engineering[JB4] .
Solar AquaGrid is an independent advisory, envisioneering and advocacy firm committed to conserving water in an age of historic drought by addressing our water/energy nexus and covering our exposed canals with solar coverings to reduce evaporation, generate clean energy, save land and achieve numerous economic, environmental, and social advantages. The firm originated Project Nexus, the first solar canal pilot in California, after commissioning a UC Merced study in 2015 that revealed multiple potential benefits and is facilitating collaboration among public, private and academic partners to test different technologies and bring the solution to scale.
California Department of Water Resources (DWR) sustainably manages the water resources of California, in cooperation with other agencies, to benefit the state’s people and protect, restore and enhance the natural and human environments. This includes the State Water Project (SWP), the nation’s largest state-built water conveyance system. Sustainability is a priority as California strives to meet the water needs of today and those of the future while protecting and enhancing the environment. DWR is thus committed to exploring all efforts meant to advance the integration of renewable energy to provide clean energy to California.
California Natural Resources Agency (CNRA) works to restore, protect and manage California’s natural, historical and cultural resources for current and future generations using creative approaches and solutions based on science, collaboration and respect for all communities and interests involved. CNRA oversees and supports more than 26 distinct departments, conservancies and commissions, and over 21,000 Californians work within CNRA across the state.
California Energy Commission (CEC) is the state’s primary energy policy and planning agency. It has seven core responsibilities: advancing state energy policy, encouraging energy efficiency, certifying thermal power plants, investing in energy innovation, developing renewable energy, transforming transportation and preparing for energy emergencies.
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