(The opinions expressed here are those of the author, a columnist for Reuters.)
Europe's utilities generated a record 10.4% of electricity from solar sources in June, according to Ember, marking a more than doubling in solar's share of the generation mix since 2018 and a key milestone for the continent's energy transition efforts.
However, the rapid growth in solar supply capacity throughout Europe's electricity grids is already starting to erode producer profitability, as surplus power from solar sites depresses wholesale electricity prices and results in utilities earning shrinking revenues from renewables.
The phenomenon, known as the renewables cannibalization effect, is a result of a feature of Europe's electricity system which both prioritizes clean electricity supplies and sets the price of wholesale electricity off the most expensive source of electricity needed to fulfil system demand at any given time.
Natural gas has been the primary source of electricity in Europe for decades, and so the gas-fired price of electricity generation has historically been the main factor that determined electricity producer prices.
However, since Russia's invasion of Ukraine snarled Europe's gas markets in 2022, Europe's power generators have accelerated the build-out of renewable energy capacity while cutting back on electricity generation from fossil fuels.
This has tipped the balance of the continent's electricity price-setting markets away from natural gas toward solar and wind sources and resulted in cheap-to-produce renewable power having increasing sway over wholesale electricity pricing.
Wind and solar sites accounted for roughly 19% of total electricity generation over the first half of 2023, which is less than the 24.7% share from natural gas over the same period, data from think tank Ember shows.
However, wind and solar's combined share is up from 14% in 2021, while natural gas's share is down from nearly 26% in 2021.
This combination of increased renewables alongside diminished gas-fired generation has altered the load profile of Europe's electricity markets and allowed utilities to deploy maximum volumes of renewable power while conserving natural gas.
In turn, this has allowed utilities to boost revenues on electricity generation, as they have been able to scrimp on the volumes of high-priced natural gas needed to generate power, while allowing cheap-to-produce renewables to make up for any electricity shortfall.
However, those strong earnings may start to become harder to generate as additional volumes of solar capacity are brought online and compete with all other forms of generation to set wholesale electricity prices.
CAPTURE RATES & CAPTURE PRICES
Capture rates and prices are key factors that determine how much a power producer can earn from selling electricity over any given period.
The capture price is a weighted average price during which the generation asset produces electricity.
The capture rate is a measure of the capture price divided by market price available.
In the case of a natural gas plant that only produces power during peak demand periods, the typical capture rate can be 100%, as the plant can despatch maximum volumes to fulfil demand needs at peak prices, and then reduce or stop output when demand declines.
For renewables assets, the capture rate is typically less than 100% and may be substantially lower still for solar assets that only produce electricity when the sun shines and often hit peak output just when demand and prices may be near their lowest during a typical day.
Solar generation assets can be cheap to install and can nearly generate electricity for free when the sun shines, but they have their downsides when system capacity exceeds system demand.
This problem has been made famous by the California electricity market's "Duck Curve," wherein daily power prices have become shaped like a duck due to the impact that surplus solar generation has on prices during the middle of the day.
Power producers must accommodate increasingly cheap electricity prices when solar output is at its maximum - similar to a duck's down-sloping belly - but then must ramp up output from other sources once the sun sets, producing the duck's neck.
European solar power producers are not yet faced with anything like the problems seen in California, where solar can account for 40% of total electricity generation.
But as more solar supply capacity gets added to Europe's generation system, solar producers must expect the extra competition from other solar sources to drive electricity prices lower for all electricity generators.
In turn, this will shave each producer's capture rate, which in the case of solar producers in Europe's top solar producer, Germany, may decline from around 94% currently to less than 80% during peak production periods by 2026, and to under 50% during the summer by 2029, according to analysis by Refinitiv.
Most European utilities are still predominantly focused on trying to replace fossil fuel generation assets with renewables, so may not have dwelt much on the prospect of cannibalization.
But as solar capacity continues to climb at breakneck pace across the continent, utilities looking to secure financing for new generation assets must plan for the impact of cannibalization, or risk losing market share to competitors who do. (The opinions expressed here are those of the author, a columnist for Reuters.)
(Reporting by Gavin Maguire; Editing by Lisa Shumaker)