Negative prices and the high price of windpower

Last month, unity was shattered within the wind industry when energy-giant Exelon Corporation broke ranks with other renewable-energy developers and asked Congress to let the production tax credit (PTC) expire in December. Exelon rightfully argued that the subsidy was distorting competitive wholesale energy markets and causing financial harm to other, more reliable clean energy sources.

In a fit of fury, the American Wind Energy Association (AWEA) voted Exelon "off the island" for insubordination and dismissed their complaint as self-serving, aimed at protecting Exelon's fleet of Midwest nuclear power plants. AWEA insisted that wind was benefiting ratepayers by driving down consumer electricity prices in the face of "expensive, inflexible generation" like nuclear and coal.

As usual, AWEA position is easily rebutted. Yes, Exelon is concerned about (bizarre) wind pricing on the rates received by its nuclear power plants. But the impact of large quantities of wind generation on energy markets extends beyond nuclear power, and on the whole is placing upward pressure on electricity prices.

Zero, Negative Wholesale Prices

In a competitive wholesale energy market, generators ‘bid in' firm levels of production for each hour of the power day. Grid operators match available generation with hourly demand and schedule resources as needed. The most expensive generation dispatched in an hour sets the marginal price of supply. In turn, all generators receive the same price per megawatt hour of production.

During periods of low demand, particularly at night, the most efficient, least cost base load facilities are run, including nuclear power and coal. These facilities may bid in at zero- or near-zero to ensure they're dispatched regardless of market price.

Problems arise when wind, which generates largely at night, floods the system with energy well in excess of demand. When there is a surplus of electricity relative to demand and no opportunity to dump the excess energy, i.e. transmission that can channel the energy elsewhere, prices could go negative.

In instances of excess energy, negative prices are a powerful market signal for generators to voluntarily curtail operation if possible. Wind turbines are easily turned off; nuclear power plants are not. However, since wind project owners do not receive the PTC when they're not producing, they would rather produce at a loss than not produce at all. But the PTC tells only part of the story.

‘It's the Contracts, Stupid'

With natural gas selling at record lows and supplies expected to be abundant through this decade, wind developers are under pressure from investors to secure power purchase agreements (PPAs) with utilities. Most PPAs for onshore wind we've reviewed lock in purchases for 15+ years at roughly two-to-three times the wholesale price of fossil and nuclear resources within their respective regions.

In some cases the prices are fixed regardless the time of day the energy is delivered or number of years into the contract; others apply adjustments for on- and off-peak energy and may include annual escalators. In states where renewable portfolio standards have been adopted, utilities likely have no choice but to accept above market contract prices in order to ensure compliance with the mandates.

Within New England, wholesale pricing for onshore wind is between 9 and 11 cents per kilowatt hour. In the Midwest, contracts are around 6-7 cents per kilowatt hour and in regions with better wind regimes, gentler terrains and/or limited or no permit requirements the costs could run slightly lower. Wind agreements are negotiated after a project has taken full advantage of available federal incentives so the costs cited here would be even higher absent the PTC.

Adding large amounts of wind to a region can periodically reduce marginal electricity prices (even going negative) but the costs passed on to ratepayers are derived from the PPA's negotiated between utilities and wind plant owners. Regardless of when and at what price wind energy sells into the wholesale market, projects with power purchase agreements are assured a fixed price for their energy.

The wind industry insists long-term PPAs protect ratepayers from fuel price volatility. But the industry is ignoring our historical experience. The Public Utility Regulatory Policies Act (PURPA) proved decades ago that long-term fixed price contracts at above market prices do not lead to lower costs for ratepayers. In fact, with PPAs in place, it's wind developers that are shielded entirely from market price fluctuations.

Negative prices further aggravate the situation by threatening the financial viability of our lowest-cost, most reliable resources.

Purchase agreements shift all risk to the ratepayers who are on the hook to pay the delta between market price and contract price. There is no cost benefit to the ratepayer-nor will there be until the end of the PPA, which by that time the turbines will have reached the end of their useful life. Meanwhile, wind developers reap the benefit of the PTC in addition to their contract price at the expense of ratepayers and other reliable generation.

OCT 8 2012
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