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The self-destructive force of unregulated solar power

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1 år sedan

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21 februari, 2024

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Bjarne Schieldrop, Chief analyst commodities at SEB — Bjarne Schieldrop, Chief analyst commodities, SEB

Solar and wind power production has increased rapidly over the latest years as LCOE costs have fallen sharply while government support schemes have given it an extra boost as well. Solar and wind power production is totally unregulated supply. They produce whenever they produce. Fossil power supply on the other hand is fully dispatchable to the degree that we tend to take it for granted. As such we have naturally tended to underestimate the consequences of not having dispatchability in solar and wind power.

When you start out with a large, fossil-based power system it is fairly easy to add unregulated power supply from solar and wind because it can piggyback on the dispatchability and flexibility of the fossil power system. But as the share of unregulated renewable energy rises to a larger and larger share of production, the flexibility in the fossil part of the system naturally gets smaller and smaller. This problem is accentuated further by the fact that solar power production has a very high concentration of production where 80% of production in a year is produced in only 20% of the hours in the year. Thus fossil flexibility and dispatchability is eroded much faster during these 20% hours.

Power prices typically collapse to zero or negative when demand is fully met or saturated by unregulated power supply. That again implies that solar power profitability collapse as well. And the result of that of course is that the exponential growth in solar power production which we now take for granted and which we expect will lead us all the way to zero emissions could come to a full stop as well.

This is already a rapidly increasing problem in California where more and more renewable energy is denied access to the grid because there simply isn’t enough demand for it just then or because the grid cannot handle it. But it is also becoming an increasing problem in Germany where the strong growth and high concentration of solar power increasingly is destroying the power prices just when they produce the most.

The need for biiiig, cheeeeap grid batteries are now becoming increasingly critical for the the exponential growth in solar and wind power to continue.

We fear that the self-destructive force on power prices, of exponential growth in unregulated solar power, is some kind of Solar-hara-kiri process with respect to its own profitability. And that it has the potential to develop along a curve of ”first gradually, then suddenly”. And when/if that happens the exponential growth in unregulated solar power production should naturally come to a screeching halt.

The resolution of the problem is of course the eventual arrival of biiiig, cheeeap grid batteries which then again will sett solar power production free to resume its exponential growth.

Feeding solar and wind power supply into a fossil system is easy to start with. Then very difficult. It is easy to build unregulated solar and wind power supply into a flexible fossil system. It is easy to infuse unregulated power supply (Solar and Wind) into a power system where there is lots and lots of fossil based power. Fossil supply can then back-off and make room for solar and wind power whenever the sun is shining or the wind is blowing and then ramp up again when it suddenly disappear. But when unregulated, renewable energy supply keeps growing it becomes harder and harder to infuse yet more of it into the system as the fossil flexibility is increasingly eroded. That’s when yet more supply of solar and wind is no longer pushing aside fossil supply but instead is starting to destroy their own prices.

Solar power produces 80% of its production during 20% of the hours in the year. Solar power has however a much more tightly focused production profile than wind. In Germany in 2023 some 80% of all solar power production was concentrated on only 20% of the hours of the year. For wind power the 80% share of production was spread out over 50% of the hours in the year. The reason is of course that the wind can blow both summer and winter and night and day. Solar power is instead focused during the day and during summer. It has a much higher concentration of production.

Power prices tend to collapse when demand is fully covered by unregulated power supply. When solar power production grows rapidly in a given power system then its high production concentration will eventually lead to full saturation during certain hours of the year. Demand during these hours will then be fully supplied and covered by unregulated power like solar, wind, run-of-river hydro and other unregulated supply. That is great as it means that the fossil share in these hours then are close to zero.

The problem is that power markets, more than any other commodity market in the world, are extremely sensitive to imbalances in supply and demand. A little bit too little supply and the power price can spike up to close to infinity. A little bit too much supply and the price crashes to zero or negative.

When unregulated power supply reaches full demand saturation during certain hours then power prices tend to collapse because it is so easy to get a little bit too much supply.

It is not a problem when power prices collapse for just a few hours per year. But the number of hours affected is growing rapidly many places. The US EIA highlighted in October 2023 (”Solar and wind power curtailments are rising in California”) that this is becoming a bigger and bigger problem in California. Since 2019 the power system operator there has been forced to curtail supply of unregulated power more and more. There simply isn’t enough demand in certain hours to meet the spikes in unregulated supply or the grid isn’t up to the task of distributing the unregulated supply in the system.

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So when producers of unregulated supply produces the most they increasingly are denied access to sell it into the grid or if they are allowed to sell it into the grid the price is close to zero or even negative.

US EIA: Solar and wind power curtailments are rising in California

Germany is increasingly affected as booming solar production is depressing prices more and more. This is now also a rapidly increasing problem in Germany where rapid growth in supply of solar and wind power together increasingly are forcing power prices lower just when they produce the most.

Average German power prices for hour 1 to 24 for certain periods and years. Highly concentrated supply of solar power during summer and during the day is increasingly forcing power prices towards zero during these periods

It is like ”Solar hara-kiri” when increasing supply of solar power is killing its own prices and profits. It was not a big problem economically when only a few hours are affected. But as more and more hours are affected it is becoming an increasing problem. It is like ”Solar hara-kiri” where rapidly rising supply of solar power is increasingly killing its own prices. With that it is killing its profits. And if profits are killed than new-build and growth in supply will typically slow down rapidly as well.

This is probably not a big problem globally yet as the global power system is still predominantly fueled by fossil fuels which can back off when renewable energy spikes up. But in certain pockets of the world where penetration of unregulated power supply has reached high levels it is becoming an increasing problem. Like in California and in Germany.

The volume weighted solar power price in September 2023 in Germany had a 38% discount to power prices during non-solar power hours. And the discount looks like it is rapidly getting bigger and bigger.

The monthly average volume weighted solar power price versus the average volume weighted non-solar power price weighted by the inverse profile. In Germany in September 2023 solar power producers only achieved 62% of the average price during hours of the day when the sun wasn’t shining.

Source: Source: SEB graph and calculations and graphs. Based on German 15 min solar power prod. extracted from Blbrg

First gradually, then suddenly. There is a clear risk here that this progresses along a process of ”first gradually, then suddenly”. This is already what we have seen over the past couple of years: The discount for what solar power earns when it produces power versus what the power price is when it is not producing is increasing rapidly as more and more unregulated power supply hits right into the ”demand ceiling”. The inflicted pain from this process so far has to a large degree been masked by incredibly high natural gas prices. So even if the profitability for solar power has been eroding, the average power price in the system has been much higher than usual due to high natural gas and CO2 prices.

Graphing all the individual hourly data for solar power and power demand in Germany in 2022 we see that solar power alone is not yet reaching full saturation versus demand.

Germany 2022: Hourly German power demand and solar power supply in 2022. A total of 8760 hours for each in consecutive order. Her showing only Demand and Solar power production

The unregulated power supply is increasingly hitting the ”demand ceiling”. If we now add all the other sources of unregulated power supply, predominantly offshore and onshore wind and run of river, then we get the following picture where we see that unregulated German power supply increasingly is hitting right up and into the ”demand ceiling”. In those instances there will be no, flexible fossil power supply left to back off and that is typically when power prices collapse or go negative.

Germany 2022: Hourly German power demand (blue dots) and unregulated supply (solar, wind, run of river,…) in orange dots. A total of 8760 hours for each in consecutive order.

High unregulated power supply saturation vs demand implied lower power prices in 2022. Sorting 8760 individual power prices in Germany from Y2022 from lowest to highest shows that power German power prices were strongly related to the penetration of unregulated power supply. In the following graph, we have sorted the data from the lowest price to the highest price in the year 2022. Prices were ireasingly depressed when unregulated power penetrated up and into the ”demand ceiling”. Natural gas prices were extreme in 2022 and overall power prices were exceptionally high for that reason as well. But the tendency of price destruction in relation to high levels of unregulated power vs demand is clear.

Germany 2022: Hourly German power demand (blue dots) and unregulated supply (solar, wind, run of river,…) in orange dots. A total of 8760 hours. Sorted according to how hourly power prices were from lowest to highest.

The unregulated power supply penetrating vs demand was even deeper in 2023. If we make the same graph for the year 2023 from 1 Jan to 20 Oct, we can see how the unregulated power is penetrating deeper and deeper into the power ”demand ceiling”. As a result the solar power discount vs. non-solar power hours from March to September in 2023 reached an even higher discount in 2023 than in 2022.

2023 year to 20 October: Hourly German power demand (blue dots) and unregulated supply (solar, wind, run of river,…) in orange dots. A total of 8760 hours. Sorted according to how hourly power prices were from lowest to highest. German power demand was down 8.3% YoY in H1-2023 due to the European energy crisis and still very high power prices

Solar power hours and non-solar power hours is not given as a clear cut-off, but a gradual one. In the following graph given as average profiles of the year from hour 1 to hour 24. First calculated explicitly for solar power production and then the inverse is calculated from that one. These solar power profiles can then be calculated for each individual day in the year giving individual inverse-curves on a daily basis.

The daily ”solar power production profiles” and the ”non-solar power production profiles” typically looks like this graph but calculated individually per day as solar power production varies from day to day and through the seasons. The solar power production profile is explicitly given by the actual solar power production that day while the non-solar power profile is derived directly from this and the inverse of it on a daily basis.

The exponential growth in solar and wind power is likely to slow down in the years to come as grid constraints and lack of power cables is holding up growth in renewable energy with waiting times for access of 5-10 years:

”Offshore wind auction’s lack of bids must be ‘wake-up call’ for UK, says RWE chief”

FT: ”Gridlock: how a lack of power lines will delay the age of renewables”

FT: ”Will there be enough cables for the clean energy transition?”

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Bombs to ”ceasefire” in hours – Brent below $70

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24 juni, 2025

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A classic case of “buy the rumor, sell the news” played out in oil markets, as Brent crude has dropped sharply – down nearly USD 10 per barrel since yesterday evening – following Iran’s retaliatory strike on a U.S. air base in Qatar. The immediate reaction was: “That was it?” The strike followed a carefully calibrated, non-escalatory playbook, avoiding direct threats to energy infrastructure or disruption of shipping through the Strait of Hormuz – thus calming worst-case fears.

Ole R. Hvalbye, Analyst Commodities, SEB

After Monday morning’s sharp spike to USD 81.4 per barrel, triggered by the U.S. bombing of Iranian nuclear facilities, oil prices drifted sideways in anticipation of a potential Iranian response. That response came with advance warning and caused limited physical damage. Early this morning, both the U.S. President and Iranian state media announced a ceasefire, effectively placing a lid on the immediate conflict risk – at least for now.

As a result, Brent crude has now fallen by a total of USD 12 from Monday’s peak, currently trading around USD 69 per barrel.

Looking beyond geopolitics, the market will now shift its focus to the upcoming OPEC+ meeting in early July. Saudi Arabia’s decision to increase output earlier this year – despite falling prices – has drawn renewed attention considering recent developments. Some suggest this was a response to U.S. pressure to offset potential Iranian supply losses.

However, consensus is that the move was driven more by internal OPEC+ dynamics. After years of curbing production to support prices, Riyadh had grown frustrated with quota-busting by several members (notably Kazakhstan). With Saudi Arabia cutting up to 2 million barrels per day – roughly 2% of global supply – returns were diminishing, and the risk of losing market share was rising. The production increase is widely seen as an effort to reassert leadership and restore discipline within the group.

That said, the FT recently stated that, the Saudis remain wary of past missteps. In 2018, Riyadh ramped up output at Trump’s request ahead of Iran sanctions, only to see prices collapse when the U.S. granted broad waivers – triggering oversupply. Officials have reportedly made it clear they don’t intend to repeat that mistake.

The recent visit by President Trump to Saudi Arabia, which included agreements on AI, defense, and nuclear cooperation, suggests a broader strategic alignment. This has fueled speculation about a quiet “pump-for-politics” deal behind recent production moves.

Looking ahead, oil prices have now retraced the entire rally sparked by the June 13 Israel–Iran escalation. This retreat provides more political and policy space for both the U.S. and Saudi Arabia. Specifically, it makes it easier for Riyadh to scale back its three recent production hikes of 411,000 barrels each, potentially returning to more moderate increases of 137,000 barrels for August and September.

In short: with no major loss of Iranian supply to the market, OPEC+ – led by Saudi Arabia – no longer needs to compensate for a disruption that hasn’t materialized, especially not to please the U.S. at the cost of its own market strategy. As the Saudis themselves have signaled, they are unlikely to repeat previous mistakes.

Conclusion: With Brent now in the high USD 60s, buying oil looks fundamentally justified. The geopolitical premium has deflated, but tensions between Israel and Iran remain unresolved – and the risk of missteps and renewed escalation still lingers. In fact, even this morning, reports have emerged of renewed missile fire despite the declared “truce.” The path forward may be calmer – but it is far from stable.

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A muted price reaction. Market looks relaxed, but it is still on edge waiting for what Iran will do

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1 dag sedan

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23 juni, 2025

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Brent crossed the 80-line this morning but quickly fell back assigning limited probability for Iran choosing to close the Strait of Hormuz. Brent traded in a range of USD 70.56 – 79.04/b last week as the market fluctuated between ”Iran wants a deal” and ”US is about to attack Iran”. At the end of the week though, Donald Trump managed to convince markets (and probably also Iran) that he would make a decision within two weeks. I.e. no imminent attack. Previously when when he has talked about ”making a decision within two weeks” he has often ended up doing nothing in the end. The oil market relaxed as a result and the week ended at USD 77.01/b which is just USD 6/b above the year to date average of USD 71/b.

Bjarne Schieldrop, Chief analyst commodities, SEB

Brent jumped to USD 81.4/b this morning, the highest since mid-January, but then quickly fell back to a current price of USD 78.2/b which is only up 1.5% versus the close on Friday. As such the market is pricing a fairly low probability that Iran will actually close the Strait of Hormuz. Probably because it will hurt Iranian oil exports as well as the global oil market.

It was however all smoke and mirrors. Deception. The US attacked Iran on Saturday. The attack involved 125 warplanes, submarines and surface warships and 14 bunker buster bombs were dropped on Iranian nuclear sites including Fordow, Natanz and Isfahan. In response the Iranian Parliament voted in support of closing the Strait of Hormuz where some 17 mb of crude and products is transported to the global market every day plus significant volumes of LNG. This is however merely an advise to the Supreme leader Ayatollah Ali Khamenei and the Supreme National Security Council which sits with the final and actual decision.

No supply of oil is lost yet. It is about the risk of Iran closing the Strait of Hormuz or not. So far not a single drop of oil supply has been lost to the global market. The price at the moment is all about the assessed risk of loss of supply. Will Iran choose to choke of the Strait of Hormuz or not? That is the big question. It would be painful for US consumers, for Donald Trump’s voter base, for the global economy but also for Iran and its population which relies on oil exports and income from selling oil out of that Strait as well. As such it is not a no-brainer choice for Iran to close the Strait for oil exports. And looking at the il price this morning it is clear that the oil market doesn’t assign a very high probability of it happening. It is however probably well within the capability of Iran to close the Strait off with rockets, mines, air-drones and possibly sea-drones. Just look at how Ukraine has been able to control and damage the Russian Black Sea fleet.

What to do about the highly enriched uranium which has gone missing? While the US and Israel can celebrate their destruction of Iranian nuclear facilities they are also scratching their heads over what to do with the lost Iranian nuclear material. Iran had 408 kg of highly enriched uranium (IAEA). Almost weapons grade. Enough for some 10 nuclear warheads. It seems to have been transported out of Fordow before the attack this weekend.

The market is still on edge. USD 80-something/b seems sensible while we wait. The oil market reaction to this weekend’s events is very muted so far. The market is still on edge awaiting what Iran will do. Because Iran will do something. But what and when? An oil price of 80-something seems like a sensible level until something do happen.

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Very relaxed at USD 75/b. Risk barometer will likely fluctuate to higher levels with Brent into the 80ies or higher coming 2-3 weeks

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1 vecka sedan

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16 juni, 2025

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Brent rallied 12% last week. But closed the week below USD 75/b and it is still there. Very relaxed. Brent crude rallied 12% to USD 78.5/b in the early hours of Friday as Israel attacked Iran. The highest level since 27 January this year. The level didn’t hold and Brent closed the day at USD 74.23/b which was up 5.7% on the day and 11.7% on the week. On Friday it was still very unclear how extensive and lasting this war between Iran and Israel would be. Energy assets in Iran had still not been touched and Iran had not targeted other Middle East countries’ energy assets or US military bases in the region. As such, the Brent crude closed the week comfortably at around USD 75/b. Which one cannot argue is very much of a stressed price level.

Israel is targeting Iran’s domestic energy infrastructure. Not its energy export facilities. For now. Over the weekend Israel has widened its targets to include fuel depots in Tehran, refineries supplying Iran domestically and also a processing plant at Iran’s South Pars gas field – the world’s largest. So far it appears that Israel has refrained from hurting Iranian oil and gas export facilities. Maybe adhering to Trump’s whish of low oil prices. Trump has been begging for a lower oil price. Would be very frustrating for him if Israel started to blow up Iran’s export facilities. Focus instead looks to be on Iran’s domestic energy supply and infrastructure. To weaken and disable the operations of Iran as a country while leaving Iran’s energy export facilities intact for now at least. That is probably why Brent crude this morning is only trading at USD 74.9/b with little change from Friday. An incredible relaxed price level given what is going on in the Middle East.

Israel seems to try to do to Iran what Israel recently did to Lebanon. Israel now seems to have close to total control of the Iranian air space. So called ”Air Supremacy” something which is rarely achieved according to Phillips P. O’Brian (see comment on this below with link). This is giving Israel close to total freedom in the airspace over Iran. Israel now seems to try to do to Iran what Israel recently did to Lebanon. Take out military and political commanders. Take out the air defenses. Then grind the rest of its defensive capacities to the ground over some time.

Continuous pressure. No rest. No letting up for several weeks seems likely. The current situation is a very rare opportunity for Israel to attack Iran with full force. Hamas in Gaza, Hezbollah in Lebanon, Iranian strongholds in Syria, are all severely weakened or disabled. And now also Air Supremacy of the airspace over Iran. It is natural to assume that Israel will not let this opportunity pass. As such it will likely continue with full force over several weeks to come, at least, with Israel grinding down the rest of Iran’s defensive capabilities and domestic energy supply facilities as far as possible. Continuous pressure. No rest. No letting up.

What to do with Fordow? Will Iran jump to weapons grade uranium? The big question is of course Iran’s nuclear facilities. Natanz with 16,000 enrichment centrifuges was destroyed by Israel on Friday. It was only maximum 20 meters below ground. It was where Iran had mass enrichment to low enrichment levels. Fordow is a completely different thing. It is 500 meters deep under a mountain. It is where enrichment towards weapons grade Uranium takes place. Iran today has 408 kg of highly enriched uranium (IAEA) which can be enriched to weapons grade. It is assumed that Iran will only need 2-3 days to make 25 kg of weapons grade uranium and three weeks to make enough for 9 nuclear warheads. How Israel decides to deal with Fordow is the big question. Ground forces? Help from the US?

Also, if Iran is pushed to the end of the line, then it might decide to enrich to weapons grade which again will lead to a cascade of consequences.

Brent is extremely relaxed at USD 75/b. But at times over coming 2-3 weeks the risk barometer will likely move higher with Brent moving into the 80ies or higher. The oil price today is extremely relaxed with the whole thing. Lots of OPEC+ spare capacity allows loss of Iranian oil exports. Israeli focus on Iran’s domestic energy systems rather than on its exports facilities is also soothing the market. But at times over the coming two, three weeks the risk barometer will likely move significantly higher as it might seem like the situation in the Middle East may move out of control. So Brent into the 80ies or higher seems highly likely in the weeks to come. At times at least. And if it all falls apart, the oil price will of course move well above 100.

Phillips P. OBrien on ”Air Supremacy” (embedded link): Air power historian Philip Meilinger: ”Air Superiority is defined as being able to conduct air operations “without prohibitive interference by the opposing force.” Air Supremacy goes further, wherein the opposing air force is incapable of effective interference.”

Thus, air supremacy is an entirely different beast from air superiority. It occurs when one power basically controls the skies over an enemy, and can operate practically anywhere/time that it wants without much fear of enemy interference in its operations.

The US had Air Supremacy over Germany in the second World War, but only at the very end when it was close to over. It only had Air Superiority in the Vietnam war, but not Supremacy. During Desert Storm in 1990-1991 however it did have Supremacy with devastating consequences for the enemy. (last paragraph is a condensed summary).

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