The Impact of PV on the German Power Market

During the last months, the discussion on feed-in tariffs (FiT) for photovoltaic (PV) installations in Germany has gained new momentum. On the one hand, the issue of over-subsidisation due to the fact that module prices have been decreasing faster than feed-in tariffs was discussed. On the other hand, increasing costs to the consumers of power were put on the agenda after the unprecedented increase in new PV capacity in Germany in 2009. After the general election in September 2009 this discussion lead to different proposals for adjusting the FiT scheme. In summer 2010 a bill was passed amending the current FiT. Both, in the discussion and in the bill, an important aspect has been neglected so far: the impact of the massively increasing PV capacities on the economics of conventional power plants. The present study fills this gap. In the first part, it is qualitatively shown how the power price and the equilibrium quantity on the power exchange change with increasing PV capacities. These findings can be directly translated into shrinking revenues for operators of conventional power plants. In the second part, a quantitative analysis of the German power market is provided. The effects of different PV scenarios on the wholesale power price and the total revenues (i.e., price multiplied by quantity) of all conventional power plants are calculated. For an incumbent operator of a coal-fired power plant, the contribution margin may decrease by more than 25% and for a new, yet to build gas-fired combined cycle power plant it may drop by more than 30%. The study concludes that the PV support scheme can be understood as the accelerator pedal for the structural change in the German power sector. Implementing the changes in the feed-in tariffs as presented in the bill will require more and faster changes in the overall design of the power market to provide sufficient incentives for backup capacities when the sun is not shining. It would also be accompanied by additional acceleration costs. Absolute caps on the added capacity, rather than further cuts in the tariffs, could buy some time for a careful redesign of the market and may reduce resistance from incumbent operators.