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.