This is a two-part series on the future prospects of renewables. Read Part 1 here

In our last post, we offered a survey of the progress made so far in wind and solar deployment at the grid-wide scale throughout the world. An accurate and honest accounting of variable renewable energy (VRE) is essential to our goal of building zero-carbon power systems on a high-energy planet. In this follow-up post, we’ll consider what we can glean from VRE performance and modeling about scaling wind and solar further this century.

As our journey through the world’s variable renewable energy leaders illustrates, while wind and solar have come a long way, they have only recently reached double-digit penetration at the grid-wide level in a couple of places (namely Texas, Iberia, and Ireland).

But is it only a matter of time before wind and solar dominate power systems worldwide?

We think there are clear reasons to expect the share of VRE in system-wide electricity mixes to be constrained. Indeed, we offer a rough rule of thumb that is supported by a growing body of power systems research: it is increasingly difficult for the market share of variable renewable energy sources at the system-wide level to exceed the capacity factor of the energy source.

Capacity factor is the ratio of the average output of a wind or solar plant to its maximum rated capacity. For wind power, this typically ranges between 20 and 40 percent, while for solar it runs between 10 and 25 percent, depending on the quality of the renewable resource.

Why is the share of wind and solar in the grid likely constrained to a share equal to their capacity factors?

While much ink has been spilled about the challenges of “integrating” variable renewables into the grid — ie, the increased system flexibility needed to handle the wider variations in power system output necessitated by fluctuating wind and solar output — we actually have a couple more fundamental dynamics in mind. These integration costs are real, but power systems can be remarkably flexible. Natural gas combined-cycle and combustion turbines ramp rapidly, and even coal and nuclear power plants can contribute to system flexibility needs. While accurately accounting for system integration costs is important, we don’t believe these costs will be a showstopper.

Instead, the fundamental economics of supply and demand is likely to put the brakes on VRE penetration.

First, as a growing body of scholarship concludes, the marginal value of variable renewable energy to the grid declines as the penetration rises.

Indeed, where renewable energy earns its keep in the energy market — and is not supported outside the market by feed-in tariffs — the revenues wind or solar earn in electricity markets decline steadily as their market share grows. Here’s why.

Why wind and solar eat their own lunch

Wind and solar produce electricity at roughly zero marginal cost. In effect, whenever they are generating, they shift the supply curve of power plants to the right, or the so-called “net demand” curve (demand minus wind/solar output) to the left. Like any market, more supply and equal demand means lower prices. In the electricity market, this is known as the “merit-order effect.”

As wind or solar energy production increases, the “net demand” (demand minus wind/solar) declines, reducing the electricity market clearing price (eg, from P1 to P2).

In other words, wind and solar depress the market price at exactly the times of day these VREs are generating the most power. The revenues earned by wind and solar for each unit of generation thus falls as the share of renewables rises.

This isn’t a hypothetical. The following graphic illustrates the decline in midday wholesale electricity prices already caused by the rise of solar in Germany from 2006 to 2012.

Source: Lion Hirth, “The market value of variable renewables: The effect of solar wind power variability on their relative price,” Energy Economics (2013), reprinted in the MIT Future of Solar study (2015).

While market prices and thus revenues fall for all generators, the impact is particularly acute for VRE generators, whose output is concentrated in the hours of greatest wind or solar resources, which also tend to be correlated across fairly large areas. The following graphic from MIT’s Future of Solar study illustrates the decline in revenues for a solar farm owner relative to the decline in average wholesale market prices, as solar penetration rises in a Texas-like power system.

Source: MIT Future of Solar study, Chapter 8.

A 2013 Energy Economics paper by Lion Hirth illustrates, the same dynamic as the market share of wind power rises as well. The figure below depicts the decline in the “value factor” or the ratio between the market prices earned by wind generation and the average market price (effectively the ratio between the blue and red lines in the MIT figure above) as wind penetration grows (the rightmost graphic also includes solar).

Source: Lion Hirth, “The market value of variable renewables: The effect of solar wind power variability on their relative price,” Energy Economics (2013).

In short, wind and solar eat their own lunch!

If renewable energy is ever to become truly subsidy independent and earn its keep in electricity markets, that means there is a natural stopping point at which a marginal increment of wind or solar will become unprofitable. The market revenues earned by these VREs will eventually fall far enough that it’s no longer worth deploying more.

This is also why the idea of reaching “grid parity,” or a levelized cost equal to the prevailing market price, is pretty meaningless. As soon as wind or solar penetration grows, the goal posts move further away due to this merit-order or market price effect. Wind and solar costs will have to keep falling to secure greater penetration levels and remain profitable at the ever lower and lower market prices caused by increasing VRE penetration.

Alternatively, if wind and solar are to remain subsidized, the amount of public subsidy per unit of energy supplied will have to keep growing in order to push VRE shares higher and higher. The total subsidy cost could rise sharply, as the price per MWh required increases alongside the quantity of electricity generated from these sources.

Economic and security-related curtailment

While the ‘merit-order’ or market price suppression effect could limit the maximum wind and solar penetration all on its own, there’s a second, even more challenging effect which kicks in right around the point where wind or solar reach a market share equal to their capacity factor.

In effect, once the market share of wind or solar equals its capacity factor, output from this resource will regularly vary between 0 and 100 percent of total electricity demand.

At that point, wind or solar output will have to be regularly curtailed or spilled as VRE supply will begin to routinely exceed demand.

We can illustrate this dynamic by considering the case of Germany. In 2013, 4.5 percent of Germany’s total electricity generation came from solar PV. But on certain sunny days in the summer, solar power supplied half of midday electricity demand.

Simple math suggests what will happen when German solar approaches just 10 percent of total annual generation: at certain times, solar panels will be generating more than 100 percent of demand.

In the short-term, Germany can solve this problem by exporting excess solar output to its neighbors, just as Denmark sends excess wind production to its Nordic friends. Yet if variable renewables are to contribute this kind of share to the whole power system, and not just isolated pieces of the grid, export is not an option.

Indeed, it will be both economical and necessary to curtail wind or solar output long before they reach 100 percent of system-wide electricity demand at any given hour.

To keep the power system stable, a certain amount of flexible and controllable generation (“dispatchable generation” in industry parlance) must remain online and “spinning” to provide the “operating reserves” needed to meet unexpected fluctuations in either demand or VRE output or the failure of a thermal power plant or transmission line. These generators have minimum technical output levels, so in order to keep enough flexible capacity running, wind and solar will not be able to supply 100 percent of demand in any given hour. System security requirements will require curtailment of VRE before this point.

Indeed, according to a major new study of the challenges of integrating wind and solar in the Western Interconnection of North America, the maximum production of variable renewables at any instant can’t exceed about 55-60 percent of total demand without risking system stability.

In Ireland, which, as we saw in part 1 is the world leader in variable renewable penetration, system operators currently limit variable renewable production to 50 percent of demand at any given time, although operators are working to increase this limit.

In short, the capacity factor threshold may actually be generous: if the instantaneous penetration of wind and solar can’t exceed half or two-thirds of power system demand in any given moment, system security concerns will begin to bind before the penetration of variable renewables reaches their capacity factor.

In addition, it is often economic to curtail wind or solar even if it is not strictly necessary for system security. Big coal, gas, or nuclear-fueled power stations can’t switch on or off on a minute’s notice and have to remain offline for several hours before they can restart. If wind or solar generation is expected to peak for only an hour or two, as is common, it doesn’t make economic sense to turn these lower-cost baseload power plants off to make room for a short-term surge of wind or solar. That would require relying on costlier combustion turbines or other quick-acting power stations when the wind or solar output inevitably died back until the baseload plants can be turned back on again. It is thus cheaper for consumers to ramp the baseload power plants down to their technical minimum output, but then curtail any wind or solar beyond that point. And if those baseload plants are emissions-free nuclear stations, this strategy is both less costly and just as good for the climate.

The following figure, again from the MIT Future of Solar study, illustrates how both economic and system security related curtailment rises rapidly as solar penetration reaches its capacity factor in a Texas-like power system.

Source: MIT Future of Solar study, Chapter 8.

As the figure illustrates, security related curtailment picks up precisely as solar’s share equals its capacity factor—about 18 percent in Texas—while economic curtailment begins well before that point. The same dynamic holds for wind power as well, although it tends to have a higher capacity factor and less “peaky” production profile (which may reduce the amount of economic curtailment compared to solar).

This all matters because even a small percentage of curtailment can quickly ruin the economics of a solar or wind project.

Can’t energy storage help avoid curtailment and keep VRE shares growing? Yes, but only somewhat.

Storage isn’t free after all, and storage owners will make their money on the spread between the price they buy power at and the price they sell at later in the day. They can’t afford to pay a premium for excess VRE output, nor will they have to: with wind or solar output flooding the market at zero variable cost, these VRE generators will be willing to sell at close to nothing to avoid losing all revenues to curtailment.

So storage can help, particularly at reducing the prevalence of economic curtailment, but it’s no a panacea.

The capacity factor threshold: new rule of thumb

If we look at both the market price suppression effect and the growing levels of curtailment as VRE penetration rises, its clear that the “capacity factor threshold” introduced above could be considered a (fairly generous) rule of thumb for power system planning.

We believe this concept — that it is increasingly difficult for the market share of variable renewable energy sources at the system-wide level to exceed the capacity factor of the energy source — should become a much more significant part of power systems discussions now that wind and solar power have left their infancy and are becoming integral parts of power systems worldwide.

This capacity factor threshold is a rough rule of thumb, one that is useful in guiding our thinking about the eventual role of mature wind and solar sectors in various electricity grids.

So far, the insights behind this capacity factor threshold are primarily drawn from modeling the impact of VRE on the grid, but as wind and solar shares grow in a variety of real-world power systems, these dynamics will soon become realities.

Where does this leave us? Wind and solar’s role in decarbonized power systems

The capacity factor threshold implies that wind may eventually be able to provide on the order of 25-35 percent of a power systems’ electricity, while solar may top out at 10-20 percent in most regions.

Achieving those penetration levels would be a remarkable accomplishment for any energy source.

A wind sector at that scale would supply more electricity than nuclear power currently does in the United States or Europe and would rival natural gas for market share. Solar would generate two to three times more electricity than hydropower in the United States today and could even match nuclear’s share in very sunny regions.

Indeed, no single energy source today supplies more than 40 percent of US electricity, so wind and solar could become major contributors to electricity supplies before running afoul of the capacity factor threshold.

No surprise then that the US wind energy industry and the Department of Energy’sambitious “vision” calls for wind to provide 20 percent of America’s electricity by 2030 and 35 percent by 2050. That would make wind one of the most important energy sources in the country.

Yet even at that scale, it’s clear that wind and solar alone will come far short of decarbonizing the electricity system, let alone the full energy sector.

That’s where the capacity factor threshold is most important: in considering the contribution of wind and solar to a fully decarbonized power system, which is an essential component of any credible plan to confront climate change.

At the upper end, this threshold indicates that wind and solar may be able to supply anywhere from a third to a half of all electricity needs. Whether you’re a glass-half-empty or half-full kind of person, that still leaves the job at most half done.

This is precisely why we both laud the growth of wind and solar, but are very concerned when conversations about decarbonizing the power system become overly focused on a “renewables-only” path forward. Wind and solar will be important contributors to a high-energy, low-carbon planet. But they can’t do the job alone — far from it.

Other nonvariable renewable power technologies like biomass and geothermal face different, but potentially even greater obstacles in the form of resource availability in the case of geothermal and land footprint in the case and bioenergy. Nonrenewable zero-carbon technologies like nuclear power and carbon capture, likewise, have their own challenges. An honest conversation about decarbonization necessitates we ask tough questions about how these technologies fit together (and of course it requires making clean energy cheap!).

We are quite doubtful that a renewables-only path is the most technically or economically feasible or desirable path to a high-energy, low-carbon planet. It’s well past time for a much more nuanced discussion about the role wind and solar will play in global power systems.

A systems-level perspective is critical for that conversation, as we hope this article has illustrated.

Wind and solar power are becoming mature, important contributors to power grids worldwide. It’s time for an equally mature conversation about the role of variable renewable energy sources in the decarbonized power systems of the future.

The series:

Part 1: A Look at How Far Wind and Solar Have Come

Part 2: Is There An Upper Limit to Variable Renewables?

Jesse Jenkins is a PhD student and researcher at MIT and a freelance writer and consultant. He pens the Full Spectrum column at TheEnergyCollective.com. He previously directed the Energy and Climate Program at the Breakthrough Institute from 2008 to 2012.

Alex Trembath is a senior energy analyst at the Breakthrough Institute, where he authors the Energetics column.