A free-market energy blog
Random header image... Refresh for more!

Can Windpower Grow Without the PTC?

Wind proponents cite their industry as one of the fastest growing sectors of the American economy, having doubled U.S. nameplate capacity since 2008. But let’s be clear: that recent growth is largely due to the massive infusion of public cash lavished on big wind under the American Recovery and Reinvestment Act of 2009 (ARRA), which is anticipated to pay out $22.6 billion in direct grants with 85% claimed by wind.   

Expiration of Section 1603 cash grants, coupled with record-low natural gas prices, will likely collapse the stimulus-induced bubble and push installations back to mid-2000′s levels. Even if the production tax credit (PTC) is extended, offsetting above-market wholesale prices, recent growth will not be repeated.

Wind and State RPS Policies

In the last ten years, more than half of the states adopted renewable portfolio standards (RPS) that encouraged development of home-grown low-emission generation. State legislators voted in favor of the mandates after being convinced by proponents that more renewable resources in the energy mix, particularly those with no fuel cost, would replace fossil use, attract jobs and ultimately stabilize and reduce energy prices.

But the artificial no-compete power markets created by RPS policies for self-selected renewable resources [1] drove up electricity prices and forced ratepayers to pay for energy they didn’t need. In 2011 residential rates in states with mandates were 27% higher than those without mandates while industrial electricity prices were 23% higher.

Impediments to Price Parity with Gas

The rapid run-up in installed wind since 2008, together with flat and declining energy demand, has resulted in state mandates being met and fewer utilities obligated to purchase wind at prices substantially above that of more reliable forms of generation. Factor in abundant supplies of low-cost natural gas, and it’s unlikely wind energy will achieve price parity with coal or gas anytime soon, barring legislative actions that might raise the price of non-renewables.

The PTC offsets the high price of wind energy giving the false impression that wind is competitive with other resources, but at 2.2¢/kWh, the subsidy’s pre-tax value (3.5¢/kWh) equals, or exceeds the wholesale price of power in much of the country! Without the PTC, developers would need to substantially lower their capital costs and narrow the price gap with gas. However, cost reductions will carry the industry only so far.

The biggest impediment to wind achieving price parity with more reliable resources is the fuel source itself.

As long as wind farms operate at or under 30% capacity factors, there are too few hours of generation per year to spread the large upfront capital costs over. Energy sales alone are not sufficient to recoup capital costs or earn a profit. This fact is further compounded by two well known limitations of wind power.

First, since wind typically generates at a time of day and year when the energy is least needed, the market price for its energy is low. Second, wind projects must be sited at the fuel source, which, for onshore wind is typically long distances from load. Locational constraints further lower the market value of wind’s energy as well as drive up the cost of delivery (i.e. transmission).

Individual wind projects may still operate without the PTC or Section 1603 provided they’re sited in areas with excellent, steady winds and within close proximity to existing transmission. But nationwide, such sites are increasingly rare.

Technology Improvements

Two technologies, if available, might enhance wind’s value: forecasting and storage.

Efforts are underway to improve the predictability of wind energy through better forecasting tools. If grid-operators can more precisely anticipate when the wind will blow, how long it will blow, and at what speed and direction, it would aid in power dispatch schedules [2].

Improved storage technology can increase wind’s usefulness as a capacity resource, but large-scale storage is prohibitively expensive and the technology is not fully proven. A DOE loan guarantee for $117 million went up in ‘flames’ in August when First Wind’s ‘innovative battery system’ designed to flatten wide swings in wind output was destroyed by fire [3] releasing massive plumes of toxic smoke into the air. The industry predicts it’s at least 10+ years away from breakthrough technology that can store nighttime generation for dispatch during peak hours.

Conclusion

Despite a relentless, year-long campaign by the wind industry to get the PTC renewed, there is a growing realization that the subsidy has outlived its usefulness and may be harmful in its current form. This week, utility-giant Exelon declared “the PTC is no longer needed and distorts competitive wholesale energy markets causing financial harm to other, more reliable clean energy sources.”

If Congress let the PTC expire, the industry would respond quickly by finding ways to make up for the revenue shortfall. Turbine manufacturers, for example, would likely be pressured to lower prices by as much as 25-30% [4] of current levels.

Developers will also turn to the states to recoup the rest of the funding via higher REC prices. Ultimately, however, costly government efforts to push rapid deployment of wind power, in spite of its inherent limitations, will falter and the industry will quietly shrink to a growth rate commensurate with the value of its energy.

________________________

[1] State RPS policies limit which renewable resources are eligible for meeting compliance.

[2] NREL found in Texas that total wind output could vary significantly in a short period, from almost 8,000 MW to near zero output. During periods of large variability, slight forecasting errors could have large consequences on system operations.

[3] This was the second fire involving the battery system since the project went online in March 2011.

[4] Assumes $1,200/kW pricing, a 30% capacity factor and half of the pre-tax value of the PTC ($35/mWh) recovered through reduced turbine prices.

5 comments

1 Power Engineer { 09.14.12 at 8:30 am }

Wind will still be built as many RPSs cap the RPS dollars and if the marketplace can’t provide the renewables at the capped price then the utility or a state agency buys the renewables, albeit a lesser quantity, with the funds collected. The same approach is used to build even more costly solar.

2 JavelinaTex { 09.14.12 at 11:32 am }

Can you explain how you get from a 2.2 cent tax credit equating to a 3.3 cent pre tax number? At a 35% corporate tax rate I would have come up with closer to 6.5 cents per kw-hr pre tax.

3 Lisa Linowes { 09.14.12 at 3:38 pm }

The 3.5 cent per kwh pre-tax value of the credit assumes a marginal tax rate of about 37% (includes some state tax). The equation is S = c/(1-t) where c is the credit (2.2 cents) and t is the marginal tax rate. Footnote 6 of this JCT report provides a good explanation: https://www.jct.gov/publications.html?func=startdown&id=1579 . If we assume a straight 35% marginal tax rate, the pre-tax value of the PTC is 3.4 cents.

4 archaeopteryx { 09.15.12 at 11:38 am }

Wind electricity “produced” is the electricity taken by the system, a number probably, by definition, around the “capacity factor”, 15-25%, slightly higher along, say a Jet Stream coast.

On the other hand, the key number is “% of conventional fuel substituted”. Or % of total electricity demand covered. I suspect, the former is slightly less than the second, but let’s look at some well known figures: (a) E.ON in 2005, estimated a 4-6% penetration, with the number dropping as more wind nameplate comes on line. (b) Germany, in 2011, announced 7% of total demand coverd by wind with a capacity or availablitiy factor in Germany in the mid to upper teens. I guess that actual fuel substitution was probably less than that 7%. (c) The tiny Falklands. They were advertizing 40% savings, which rapidly became around 13 or 15% of total elecricity needs, but actual diesel oil savings were 4-8%, depending on the season. Lastly, (d) Holland. A recent paper suggested fuel substitution of around 4%, with some assumptions. Ex these assumptions, the number is, I guess, of the order of 6%.

So we have two figures. Capacity or availability factor in the mid teens to mid twenties, and actual (measured, not imputed, fuel substitution around 6% (Try 4, or 8%, it does not make a difference). The sWINDlers get paid for availability, but WE, the ratepayers, or taxpayers benefit ONLY from fuel savings.

Wind energy cost us, what we pay, for what we get. What we get, is not “production” it is fule substitution. Methinks we are paying 20/6 or 3+ times per MWhr equivalent saved. That is FRAUD. They are playing with words, and we are falling for them. “PRODUCTION” is bogus, as while they are “PRODUCING”, backup gas generators, hum along, pretty much like a car at a red light, waiting to accelerate, before it brakes and stops at the next light. So called “PRODUCTION” is about 3 times actual fuel substitution. That, by the way, ties in nicely with various reports concluding that the wind contraptions do not reduce emmissions. How could they? Isn’t a car less efficient in city traffic?

And it probably gets worse. Last I checked, load following is best effected with open cycle gas turbines. They are around 30% efficiency, maybe 35%. Dual cycle turbines are around 45% efficient, but not good for load following.

I would love to find the error in my argument, but I think we are getting ripped off big time.

5 Can Windpower Grow Without the PTC? « avancerichs { 09.22.12 at 3:09 pm }

Leave a Comment