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The chart projects the future profitability of investing in solar, wind and natural gas plants in California (CC = combined cycle and CT = combustion turbine).

Solar is hands-down the most profitable investment, but not necessarily for the reasons you would think. Yes, the cost of solar is declining, but that is only a small part of the story. Solar is capturing revenues that would have accrued to natural gas generators. “The more solar you build, the less attractive natural gas becomes,” said Ghosh. “This is not a forecast. It is already happening in California.”

The trouble is that solar is eating into the revenue of natural gas plants while only partially displacing them. Even with seven gigawatts of installed solar capacity, California’s electric system still needs gas-fired generators to provide a backstop for when solar is unavailable.

To understand why this matters, consider the second chart included below shows how. It is known in California as the “duck curve” or the “duck of doom.”

Duck Curve

Historically, the wholesale price of electricity has tracked total system demand, which is also called “load” in the power industry. When lots of solar power capacity is installed, wholesale power prices follow the effective load, which is the load at a given hour minus solar (and wind) generation. The size of the duck’s belly is the generation no longer supplied by fossil fuel plants.

“The bigger the duck’s belly becomes, the worse it gets for fossil fuels,” said Ghosh. “There is a circular logic: the more solar you build, the worse you make fossil fuels. Adding more solar will ultimately hurt solar too, but it hurts gas more.”

A generator’s revenues is the price multiplied by the quantity of power they sell. A gas plant that would have run for 500 hours every year without high levels of installed solar capacity may run only 100 hours every year with high levels of installed solar capacity.

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“Solar reduces both the price and the quantity of power sold by gas generators,” said Ghosh. “So it has a double whammy effect on fossil fuel plants.”

In my view, the duck curve shows why the future predicted in the first chart is not likely to materialize. If gas generators become too unprofitable, the electric system will collapse.

“The risk is that gas plants – once they become uneconomic – will not be there as a backstop,” said Ghosh.

That risk is not likely to be tolerated for very long if at all. Most people remember what happened to former Governor Gray Davis when inadequate generating capacity caused rolling blackouts in California in 2001. Something will need to give.

“Keeping backup capacity on the grid becomes increasingly difficult as solar energy lowers power prices and worsens the economics of other technologies,” writes Wood MacKenzie. “Should solar market saturation rapidly increase, today’s market . . . compensation mechanisms will need to evolve to maintain reliability.”