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Germany: Wind and the Power Pool Savings Myth

Germany is a country that has been a leader in many aspects of “clean” energy development during the past decade.  They were among the leaders in establishing pricing mechanisms for wind and solar, phasing out nuclear power and granting incentives to biomass energy producers.  Germany has the highest proportion of wind in its generation mix, now around 20%, but is no longer the absolute installed capacity leader behind the U.S. and China.

With a vast investment in above-market generation resources some in Germany are channeling “Mad Man Muntz” of early US television history – “lose money on every sale but make it up with the volume.”  It did not work for Muntz TV and it will not work for Germany.

A New Fairy Tale, Starring Wind Energy Generators

Lately, a story has gone round with the following general points:

  • Assume that the marginal cost of wind is the lowest of all existing generation plant types;
  • Assume that power pools in NW Europe accept generator bids based strictly on the marginal energy cost (MEC)
  • Assume that wind can be the marginal generation resource during some peak periods
  • Assume further that this MEC sets the price on the pool for those time segments (30 minutes) where wind is the marginal producer, and therefore
  • Wind, by setting the MEC during some peak demand periods, will reduce the price of energy during such periods and save consumers money.

In other words, even though wind generators are more expensive to build and require above-market prices to sustain, somehow they are able to reduce prices across the power pool.

This would certainly be a neat trick if someone could do it.

How Do Power Pools Work – What Determines Plant Dispatch in a Pool?

Power pools represent organized arrangements among generators, buyers, system operators and others (often brokers and aggregators) to create a transparent, highly liquid supply of electricity.  Suppliers bid what they think will be necessary to put their generation plants in to dispatch order for a given time slice.  Plants that are the lowest bidders will be assured of dispatch, while those further up the price scale will be less certain.

At the top of the price scale for power plants is the occasionally-used combustion turbine.  These engines, ranging from 30-40% efficiency, generally use natural gas or middle distillate fuel to meet the peak demands for a few hundred hours per year.  When the combustion turbines are needed the MEC will be very high and lower cost generators will reap a windfall (the difference between the pool price as set by combustion turbines and the lower cost of, say coal or CCGT).

In the middle of the night, when demand is much lower the MEC in many systems in the US is determined by such low MEC power plants types as nuclear and coal.  More expensive CCGT and other fuel cycles are normally avoided for overnight service.  The same is true for power systems in Europe that use pool mechanisms.

How Does Wind Fit Into This?

Most power pools treat wind as a “must run” generation resource.  This means that regardless of the existing merit order of bids and plant dispatch the electrical energy from wind units will be used first.  If the wind is really roaring at some point during a given day and if the pool has no technological or market mechanisms to accommodate very high levels of production from the wind, then pool prices may collapse. 

Regardless of the MECs that might be created by wind output the wind generators will receive their feed-in-tariff for all kWh sold to the grid.  The feed-in-tariff is generally well-above market prices for all other generation resources.  If the feed-in-tariff (FIT) is generous enough, meaning an investor has a reasonable prospect of making profits given the expected plant factor of the wind units at the ruling FIT, then there will be a potential for overinvestment in wind generation, something that has now happened in both Germany and Denmark.

Price collapse has occurred in NW Europe and UK power pools where the plant mix includes far fewer flexible/cycling gas plants and relies instead on coal and nuclear for the preponderance of generation resources.  In Germany, such baseload power plants comprise 49% of generation capacity.  Wind is another 20% of generation capacity, leaving Germany with less than one third of its capacity that is in any meaningful way controllable in response to changes in wind output.

Most important to note, wind’s share of generation capacity is larger than either gas or hydro.  In other words, the two shadowing-backup technologies that could be used to moderate the impacts of wind on the NW Europe system would need to be significantly dedicated to that purpose in order to stabilize power markets there.

By contrast, in the United States coal and nuclear, though they generate 70% of kWh, comprise just 41% of generation capacity, and with wind just a bit over 45%.  More than 40% of the generating capacity in the US is natural gas (compared to 17% in Germany), giving the country far more ability to respond to transients in wind output than a country with less ability to cycle its power plants in response to wind transients (or changes in demand).

So when the wind roars in NW Europe what happens?  The wind must be accommodated into the grid first (must run status), and other power plants, if they are to receive any money from their power pool activities during that time slice, will bid low to keep in the dispatch merit order.  The coal and lignite plants keep running anyway, given the need to maintain boiler temperature and pressure and the long lags to ramp up such plants.  So net fuel savings are probably minimal or negative

Overall balancing for Germany, as well as Austria, Netherlands, UK, Switzerland, France and the Benelux countries is provided by the 47% of capacity in the Benelux that is comprised of natural gas.  A recent Dutch study showed that this balancing role for the Netherlands was unlikely to lead to net fuel or CO2 savings for that country’s investment in wind.  In the UK, wind generators may be paid during high wind periods even if their generators are removed from the grid for stability reasons.

Only in Norway and Denmark, where Denmark’s wind can be shadowed by Norway’s hydro and Denmark’s gas, is any reasonable fuel reduction even plausible.  However, even Denmark must export excess wind output to Germany during periods of high wind, further imbalancing the German system.

Who Benefits from This Arrangement?

A recent study in Germany concluded that German electricity consumers saved €5 billion as a result of the wind crashing spot electricity markets.  That is kind of like saying that just because some other country has rocks in its harbors and seems to do ok, we should then put rocks in our harbors as well.  The facts are that the wind generators do very well in such conditions: they still receive the above-market feed-in-tariff (now € /MWh in Germany) even though their electrical energy is worth far less on the spot market.  It is like being paid to vandalize something, in this case the German power grid.

In fact, the “savings” from excess wind generation, mostly at night or early AM hours, are chimerical.  What actually happens is that customers are provided with price cuts to increase load at such times, in order to prevent a system collapse.  In other words, in some bizarre world, we can prevent supply-demand imbalances by running microwaves, dryers, flat screen TVs and electric resistance heater – all things we do not need at 3 AM.

Generation companies in Germany, looking at the periodic wind-wrought instability of their system, have reacted in a number of perfectly predictable (unlike wind energy output) ways:

They focus more on bilateral supply contracts that smooth out spot market transients;

They install more gas generation units;

They increase links with the Benelux system; and eventually

They pay people to consume and wind generators to disconnect.

None of this provides net benefits to the environment or to consumers or taxpayers.  The magnitude of the costs imposed by wind on German consumers will be explored in a forthcoming post by me here at Master Resource.

12 comments

1 Donald Hertzmark { 09.03.10 at 8:18 am }

Errata – The German feed-in-tariff for wind is E0.099/kWh (~12 cents) for onshore wind and E0.16/kWh (~21 cents) for offshore wind.

2 Jon Boone { 09.03.10 at 8:51 am }

A suburb article that should serve as a cautionary tale for all energy policy makers. It should be the basis of an independent inquiry about whether wind actually “saves” any fossil fuel in the production of electricity, something that should rather easily be checked one year after another by examining fuel mix histories. When I looked at this issue last year in the wake of the Frondel wind impact report http://www.instituteforenergyresearch.org/germany/Germany_Study_-_FINAL.pdf), I could find no evidence that wind had reduced fossil fuel consumption in Germany, while there were some reasons to conclude that wind was responsible for increasing fossil fuel consumption.

3 John Droz { 09.03.10 at 8:58 am }

I’m not a utility economics expert, but there is a related subtly here.

From what I understand, there is almost always a discrepancy between what wind projects BID to supply electricity, and what they are actually PAID to supply electricity.

The wind suppliers know, going in, (due to the amount of electricity being bid on plus the supply available from other sources) that their BID will not be actually used as the basis for a payment — as there will almost always be higher bidders.

As such, there is no penalty for them to submit an artificially low bid!

The benefit to do this, is that they can then refer to their artificially low “bid” price as an indication of how “inexpensive” wind is — when they are actually being paid more than that.

Since these parties are experts at playing the system from top to bottom, this is no surprise.

4 Jerry Graf { 09.04.10 at 10:22 pm }

I was recently provided an article entitled “Wind Energy – The Facts Part II: Grid Integration” (http://www.wind-energy-the-facts.org/documents/download/Chapter2.pdf) by a wind energy proponent, Dr Lorry Wagner, of Lake Erie Energy Development Corp. The purpose of the article was to extol the virtues of how the European system is integrating wind energy generation into their grid.

Upon reading the article, however, I could not help but notice several points/admissions that could not be disguised:
? Wind generation is variable and must be balanced with a reliable and controllable source at all times.
? “Wind power development will have little or no influence on the amount of primary reserves required.”
? Conventional reserve generation must be kept and maintained, not displaced.
? Investments, beyond the huge investments for the wind turbines themselves, must be made to alter the transmission systems.
? Costs will be incurred, and it is a matter of significant debate as to how much these costs will be.
? The article credits wind for providing benefit as a local source at the local distribution level, and in the next breath indicates that we must consider wind generation over a wide geographic area to mitigate variability.
? The article admits that storage is not an option.
? The article speaks of disturbing things such as “socialization of costs” and “demand side management”. I’m not clear on what these mean, but I sense they have to do with someone’s nose in my business and hand in my pocket.
? The article refers to the European electricity users as “fickle consumers with unpredictable behavior every second of every hour of every day.” Apparently life would be grand for the people in charge if the all these peon customers would just line up and act like they’re told.
? The article refers to the need for investment into infrastructure (grid) development including new grid management concepts. It then goes on to describe some of these new grid management concepts like operating existing lines at higher than currently accepted capacity and instituting temperature monitoring to avoid thermal overloads. What could possibly go wrong??

These are things I noticed in one quick read. I would be interested in evaluation of this article from the folks at MasterResource

5 GM { 09.05.10 at 3:22 am }

I have a question for everyone here because this is puzzling to me and I simply can’t explain it. So can someone explain to me why costs in money dominate the conversation when we talk about energy?

6 Jerry Graf { 09.05.10 at 7:52 am }

This is a reasonable question, and one that has a reasonable and straight forward answer, in my view.

Money is how we establish value and set priorities for the countless detailed decisions each one of us (330 million Americans, 6.5 billion humans) must make everyday of our lives. How else would we do this?

Money is what feeds and clothes my children, and provides a roof over their heads. Money takes my time, effort, and energy to earn; therefore what takes my money takes a piece of my life. I think you can understand why I would be defensive about things that threaten to take and waste my money.

In ancient times, before the modern concept of money, food and other resources were traded directly; but the concept was the same. Things that are needed more are valued higher. Things that require more time, effort, and energy to produce or secure are valued higher. To extend the analogy of our ancient cave dwelling ancestors to the energy issue; imagine a caveman who has a supply of bad firewood. He will need to spend more hours per day tending his fire, leaving fewer hours per day for finding food and maintaining his shelter. The very survival of his family is jeopardized.

Back to the current energy situation: If we waste money and resources on wind turbines that can not produce enough reliable energy for our needs, we may not have enough money and resources left to devote to development and improvement of nuclear fission, clean coal, and natural gas generation. Also, we may not have the money needed for improvements to the efficiency and reliability of our energy distribution systems (the grid) and the long term possibility of nuclear fusion generation. These things, I would argue, are all far more important and valuable to a good energy strategy.

We can argue the facts regarding how money is spent, how we account for it, what costs are to be considered, and if wind turbines are or are not a waste of money; but it is perfectly reasonable to use money as the measure of effectiveness.

7 Jon Boone { 09.05.10 at 12:06 pm }

Nice comments, Jerry. Thanks. And you didn’t even cover the labor theory of value….

What is clear to me about electricity is that, all other things being equal, it may be the single greatest contributer to the building of a substantial middle class around the world. Built out to a scale that makes it, in our country and throughout much of Europe, affordable to all, it is one of the least regressive of our our luxuries, making it affordable to all. Anything that makes it more regressive subverts its value as a class leveler.

There are too many places in the world where electricity is mainly power for the wealthy and for autarchy. Those who can’t afford it continue to lead lives that are short brutish and nasty.

Since wind provides no capacity, I cannot understand why it belongs in any “powerpools,” for its poor power quality is not even remotely on a par with high capacity power. Although wind is, in my view, the dumbest modern power idea imaginable, what seems even sillier is the way government has twisted the tail of energy markets to make wind into a “viable” contender when it is so demonstrably a lemon.

8 GM { 09.05.10 at 4:33 pm }

Jerry Graf @ 6:

If you think money provides food and roof for you and your family you are completely disconnected from reality. Energy is what does those things, and money could only serve as useful measure of effectiveness if it was in absolute correlation with energy and if all the long-term consequences of decision we take today were accounted for. Which it is not the case today. We have been decoupling money from real wealth (energy and natural resources) for decades to the point where the correlation has become very weak and on top of that, our markets only see a few months to a few years at most (and that’s in very rare cases) in the future. So listening to the markets and looking at the $ cost of things in the presents is a recipe for disaster if long-term planning is required. It is absolutely the most stupid thing one could do in fact (and you an appropriate adjective applies to the people who think this way).

When you look at energy options, several things have to be considered:

1. The most important is what is you net energy return (how much energy you get back on unit energy invested). Biofuels and tar sands make absolutely no sense because of this, wind and solar, however, do.

2. What the availability of the resource is. It makes no sense to bank everything on fossil fuels because we will very soon experience serious shortages of them. In fact in Europe, which is the subject of the article, this has been the case for a long time. In the same time, solar and wind clearly can’t provide what fossil fuels have provided historically, but this doesn’t mean that fossil fuel will somehow magically materialize in the needed quantities, it means that we need to scale back our use of energy to what is available.

3. What the long-term consequences of the use of an energy source. If it causes global warming (fossil fuels), ruins soils (biofuels), etc., it makes no sense to use that energy source.

None of those things is determined or accurately reflected by what a given energy source costs in $ signs at present. Which is a very big problem because it means that decision-making will be misguided at best and going full ahead in the opposite to the right direction in the worst case.

9 Jerry Graf { 09.05.10 at 7:30 pm }

GM,

To your numbered points:

1. Obviously you don’t like to talk about money, but if wind generation sources are as effective as you indicate in terms of energy units returned per energy units invested, then why do wind turbines cost so much ($2MM per rated MW on land and much more on water)? My conclusion is that someone is investing a lot of energy and resources in producing them. Also, as others on this site will point out, the real output of useful electrical energy from the wind turbines is even dramatically less than the rated power capacities suggest, further diluting their effectiveness. I think you are incorrect with regard to the rational for investing in wind turbines.

2. Where did you get the idea that I was suggesting we “bank everything on fossil fuels”? While I did make mention of improvements to clean coal as a suggested investment; I also very clearly suggested that nuclear fission and natural gas were viable avenues for short term (maybe hundreds of years), and that improvements to the distribution system to increase efficiency (reduce wasted consumption) were necessary investments; while we develop nuclear fusion. These are the avenues that can provide energy in the concentrations necessary, unlike wind turbines.

3. As I indicated previously, we can argue the facts regarding how money is spent, how we account for it, what costs are to be considered. If you have future costs and long term consequences/costs to add to the argument, those could be legitimate points. With regard to environmental effects, as Jon points out above, it is highly questionable if use of wind energy would reduce emissions of pollutants at all, and wasting resources and time on wind turbines could be detrimental to other avenues that would reduce pollution. With regard to global warming and concerns regarding CO2, I don’t buy-in to this; but even if CO2 emission is a concern, wind turbines are not the answer to resolve it.

I still contend that to ignore cost and press ahead wasting effort and resources on wind turbines that can not provide the return necessary is not advisable; and I think I have just completed my reply without implying you were stupid or disconnected from reality.

10 John Philby { 11.19.10 at 10:42 am }

I am afraid there are several of your theses that don´t match real world figures:
- In the WEO 2010 the IEA says clearly that globally in 2009 fossil fuels received 312 Billion USD in subsidies compared to 52 Billion USD that new renewables got in order to compete with conventional energy forms. These subsidies do not cover the environmental and health impact that fossil fuels have (these costs are simply externalized to society that have to pay with public money for the damage that fossil fuels cause). So you could probably add a few hundred billion USD to the indirect subsidies that fossil fuels receive. For how many years have fossil fuels and nuclear energy been subsidized, a hundred years and fifty years respectively? And you are trying to say that renewables are not competitive? Come on, check up history and statistics and then come back to say what is cheap and what is expensive! What is sure is that in the next 50 years fossil fuels can only become more expensive while renewables will increase their cost less because they don´t depend on any fuel. (yes, their cost will increase because raw materials and the price of energy will increase, something that will affect all types of energy installations)
On the costs of wind turbines please check the thorough LCA made by Vestas that is in their website: the energy that is used in manufacturing a turbine is generated by the turbine in less than one year in location with an average wind potential. If you check available literature you will find that The Energy Return on Investment for wind power is about the same as nuclear power.
On the issue of wind power not reducing CO2 please check statistics from the Spanish power sector: thanks to renewables in five years it has reduced it´s CO2 emissions by 50%. The trick with wind power is that if you know 24 hours in advance how much wind there is going to be you don´t need huge amounts of spinning reserves (in Spain the average deviation for wind is 10% so in theory you would need about 20% of the predicted amount of wind as spinning reserve in order to be on the safe side, but if you have good hydro reserves you could need even less. Which is another point about renewables: if you integrate them (wind, hydro, solar and biomass) and are able to predict accurately their contribution you might not need any spinning reserve at all.
And from a logical point of view: why do you think that most european countries are betting on wind and gas as main generating technologies, as do many other countries around the world? Have politicians and multinational power companies been abducted by a wind power conspiracy?
Please…

11 caspar wiik { 02.27.12 at 1:12 pm }

A friendly hello to everyone reading these comments and answering.
If this article is right, I really ask myself, why all of the German big players in electricity-producing-business are greatly investing in wind-farms, on- and off-shore. And this was even true for the year 2011, … so one year after the electrical grid in Germany is supposed (following the thought of this article) to become more instable by the day. I am very interested in the reason for that, since I am one of the people paying the electrical bill in Germany, therefor paying the wind. Help me with some answers, since the least costing system, with the least environmental impact is the best (I would say).
Thank you for your help.

12 Donald Hertzmark { 02.27.12 at 2:17 pm }

Mr. Wiik,
Investors respond to incentives. In Germany, until very recently a wind farm was a no-lose proposition. The feed-in tariff was sufficient to pay all of the investment cost rather quickly. As to the system instability impacts, fortunately, Germany’s wind is not really needed right now given the slow rate of economic growth. Also, the grid operators are rather good at managing these problem children these days.

However, the real costs of paying back the wind investors remains for Germany, and it shows up in the electricity bill. Your rates are surcharged at about 3% to pay for the wind. The current excess payment through the feed in tariff is about 3.5 cents/kWh (euro).

There is simply no way that a pool can pay for excess costs and not have that cost be reflected in bills to consumers.

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