The Baseload Fallacy

In the last century, a typical electricity system had three types of generators. So-called baseload generators, often pulverized coal or nuclear power plants, cover the minimum demand of a daily profile. These are systems that are basically running all the time. Because they are expensive to build, they require a high capacity factor to run economically, and most nuclear power plants don’t modulate well. The second class of generators, so called mid-merit generators, are often open cycle or combined cycle gas turbines. They are cheaper to build than baseload generators but have higher fuel costs and don’t require the same capacity factor to run economically. Lastly, for a few hundred hours per year, peak generators such as gas motors or turbines cover peak demand.

The meteoric rise of renewables has completely disrupted this traditional model. According to IRENA’s “Renewable power generation costs in 2021”, almost two-thirds – or 163 GW – of newly installed renewable power in 2021 had lower costs than the world’s cheapest coal-fired options in the G20. The global weighted average LCOE of new utility-scale solar PV and hydropower was 11% lower than the cheapest new fossil fuel-fired power generation option in 2021, and 39% lower for onshore wind. According to the IEA, the share of renewables in global electricity generation jumped to 29% in 2020, up from 27% in 2019, and this trend is accelerating.

Because there are no fuel costs, renewables rank highest in the merit order. All the cost are capex - sunshine, wind, and water are free - hence the marginal production costs are close to zero. This has had a profound impact on fossil fuel generation. According to “End of the Load for Coal and Gas?”, the average capacity factor of coal plants worldwide has decreased from 65% in 2007 to 59% in 2013. The average capacity factors of all gas plants declined 4% from 2007 to 2013 and the authors of the report estimate that the global average capacity of coal and gas plants in 2014 was 57% and 37%, respectively. These values are much lower than capacity factors commonly used in economic models, often resulting in painful write-offs further down the line.

So, more than one third of electricity is now being produced by renewables, the majority of which is variable. And although renewables are cheap, the wind doesn’t always blow, the sun never shines at night and there are differences over seasons. There are a few ways to manage this and keep the lights on: interconnection with another grid, demand side management, dispatchable supply, and energy storage. Interconnection with another grid is very cost-effective but not always possible. Demand side management is also very cost-effective, requires novel business models and should be done more. Dispatchable supply is often the first answer of traditional utility thinkers. However, this is often an expensive option because capacity factors are low and very difficult to predict, especially over time. Counterintuitively, with increasing penetration of renewables and good interconnection, the demand for back-up generation is reduced, because there is always some wind somewhere and cloud covers are not universal over larger areas. Lastly, like renewables, storage is growing exponentially. Storage technologies can be deployed extremely fast and are versatile, support the grid where there are constraints, provide a multitude of grid services and are natural extensions of renewable generation. In addition to batteries, that are growing exponentially because of scale economics in electric mobility, there is a range of long duration energy storage solutions based on electrochemical, chemical, mechanical or thermal principles that can cost-effectively store energy overnight, for days and weeks and even over an entire season. The Long Duration Energy Storage Council is a global industry-led think tank that covers a wide range of technologies, whose members span a spectrum of innovation. The Council works to advance knowledge and create greater awareness on how these technologies can supplement low-cost renewables to create a clean, reliable and cost-effective energy system of the future.

Renewable energy will soon generate the bulk of our electricity demand and because their marginal costs are zero, their status is “must-run”, much like the baseload generators of the last century. I often hear pundits say, most of whom grew up in the 20th century, that “we need baseload generation”, when discussing the variability of renewables in a system that always needs to meet demand. The reality is that renewables are the new baseload, and we need to manage the variability of that. What we need is flexibility, and there is a growing universe of interconnection, demand side management and foremost storage solutions that can do that. The last thing we need is old-fashioned baseload, must-run generators on top of renewable electricity that we have already paid for.