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

Texas Wind Power: New Record, Bad Economics (and capacity inhibiter for future reliability)

“Renewable energy subsidies harm the reliability of Texas electricity markets by resulting in artificially low sales prices, victimizing conventional energy generators and investors. Why build a new gas-fired plant when spot prices might be below production cost because wind receives a $0.02/kWh federal production tax credit?”

Last month, a cold front propelled Texas to a new record for wind power, according to the Electric Reliability Council of Texas (ERCOT). Wind-generated electricity provided 9,481 MW on Feb. 9, almost 28 percent of the power generated in ERCOT at that time. This surpassed the previous record of 8,667 MW set only two weeks earlier.

Hold the applause. These records are being set because of Texas’s renewable-energy mandate–the strictest in the nation–and a raft of special tax subsidies. This government largesse harms taxpayers, consumers, and businesses as documented in a study released by the Texas Public Policy Foundation (TPPF) last November.

Here are some key points to keep in mind when thinking about renewable energy and related subsidies:

· Before the wind started blowing heavily on Feb. 9, the electricity that was soon to be replaced by wind power was being supplied by gas turbines.

· Once the wind began blowing, the gas turbines had to stop generating electricity to accommodate wind electricity. (An electrical grid cannot handle at any one moment more generation than is needed to meet demand.)

· Owners and operators of gas turbines that were displaced by wind lost money from forgone sales. Owners and operators of coal- and nuclear-fired generation were likely also harmed, perhaps not because they were displaced on the grid, but because wind likely drove down prices.

· The reason the wind turbines can force the gas turbines off of the grid is because the wind operators get subsidies from taxpayers. Therefore, they can offer electricity at a lower price than the gas operators.

· This is not a case of the free market at work. In fact, because of the subsidies, wind operators can actually pay companies to take wind from them and still make a marginal profit—nothing free market about that.

· Some gas turbines have to keep running on idle to be ready for when the wind stops blowing, to meet consumer demand. These gas turbines don’t run for free—somebody has to pay for the gas turbines held in reserve.

· Buyers of electricity generated from wind on Feb. 9 may well have paid less for it than they would have had they continued to purchase from gas turbine operators—though most consumers who are on fixed contracts wouldn’t have noticed any difference. But the wind-generated electricity wasn’t cheaper.

· In fact, it is almost certain that the wind-generated electricity cost more when the consumer payments, taxpayer subsidies, and the cost of the backup gas generation are added together. There is no doubt that it cost significantly more to generate electricity from wind than from natural gas.

· Renewable energy subsidies transfer wealth from one set of consumers/taxpayers to another set of consumers/taxpayers in two ways. One wealth redistribution is from people generally south and east of Abilene to people generally north and west of Abilene, where landowners, cities, counties, taxing districts, and others receive wind revenue. Two, wealth is transferred from generators using gas, coal, and nuclear fuel to owners using wind and other “renewable” fuels eligible for the subsidy.

· Renewable energy subsidies harm the reliability of Texas electricity markets by resulting in artificially low sales prices, victimizing conventional energy generators and investors. Why build a new gas-fired plant when spot prices might be below production cost because wind receives a $0.02/kWh federal production tax credit?

· With the prospect of inadequate firm capacity, Texans might be forced to pay billions of dollars in subsidies to generators using conventional fuels through a capacity market.

Let me recap: A state mandate and a raft of special subsidies opened the door for wind, advertised as a pollution-free, new way of generating electricity.

Now, because of renewable energy subsidies:

1) we have to keep turbines using pollution-generating fuels sitting on idle in case the wind stops blowing—or the sun stops shining, etc., and

2) we may have to spend billions of dollars in additional subsidies to ensure that the owners of plants using pollution-generating fuels build enough new plants to supply us with enough electricity to keep the lights on.

Going forward, even though wind power is setting new records for use and breaking all the goals for it set by the state, it is still not a “mature” technology—despite the fact that it has been in use for thousands of years—and so it must continue to receive subsidies that may in turn mean more subsidies for conventional fuels.

Consumers lose coming and going.

Texas Legislature Initiatives

I was recently quoted in the New York Times discussing the prospects of renewable energy subsidies in the 83rd Texas Legislature. The article points out that at least two bills have been filed to extend/increase renewable energy subsidies. HB 621 would extend property tax credits for renewable energy that are set to expire next year; HB 723 would add new subsidies for electricity generated by solar power.

Heading in the other direction, HB 2026 would eliminate the current renewable energy credits mandated under Texas’s renewable portfolio standards. These credits will cost consumers about $70 million this year, with a ten-year price tag of more than $500 million beginning in 2006.

CREZ Costs

Of course, there are more renewable energy subsidies than the renewable energy credit program. The largest subsidy is through the building of transmission lines for wind-generated electricity through the Competitive Renewable Energy Zone (CREZ) process. Most of these lines would not have been built if not mandated by the Texas Legislature for the purpose of supporting renewable energy. Originally projected to cost less than $5 billion, the cost is now up to $6.9 billion–and growing. Most of these lines are nearing completion, so there is little that can be done to help consumers here.

There has never been a better time than now to end renewable energy subsidies in Texas.

——————————

Bill Peacock is Vice President of Research and Director, Center for Economic Freedom at the Texas Public Policy Foundation.

6 comments

1 Rolf Westgard { 03.12.13 at 4:16 am }

Well stated. These subsidies and must take laws for the ‘unreliables’ will leave us with an energy grid mess.

2 ttanton { 03.12.13 at 7:47 am }

Excellent case study; for generic analysis showing that this will ALWAYS hapen (everywhere not just Texas) see my Hidden Cost report at http://www.atinstitute.org/wp-content/uploads/2012/12/Hidden-Cost.pdf

3 Jon Boone { 03.12.13 at 8:01 am }

For augmentation of this post, readers might consider reading a recent paper from the Northbridge Group by Frank Huntowski, et al, entitled Negative Electricity Prices and the PTC: http://graphics8.nytimes.com/news/business/exelon.pdf

Here’s a quote from page 12 re wind in ERCOT and MISO for periods in 2011:

“A closer examination of the data for each market confirms that negative prices tend to occur in times of low demand and high wind output. Figure 8 plots the output of wind generation relative to total demand on an hourly basis versus the prevalence of negative prices in wind-rich regions across MISO and ERCOT. Thus, for hours in which wind generation output is small relative to total demand (i.e., less than 5%, indicating that demand is high and/or wind output is low), Figure 8 indicates that negative prices account for less than 2% of the hourly prices in such hours. However, for hours in which wind generation forms a relatively high proportion of total demand (i.e., greater than 10% in MISO or greater than 15% in ERCOT, indicating low demand / high wind system conditions), we find that the frequency of negative prices greatly increases, reaching 50% or higher in hours in which wind is most prevalent.”

Readers should note that Figure 11 a few paragraphs later shows that wind production was minuscule during on-peak hours for the top ten demand days of 2012, where in ERCOT 84% of the installed wind capacity “does not operate.”

4 Kathy Hamilton { 03.12.13 at 9:51 am }

In what percentage of cases might one anticipate finding that private wind and/or solar developers cashing in on subsidized generation are also the operators of gas/ co-gen plants (and/or storage plants)?

5 Ken Langford { 03.13.13 at 12:35 am }

Businesses always evaluate the risk of investment and the owners of conventional generation find it hard not to take advantage of highly subsidized investments. That certainly doesn’t mean the owners regard the investment as a good value for their customers

6 JohnInMA { 03.15.13 at 1:35 pm }

To Kathy Hamilton: There is a lot of effort behind what many call ‘balancing portfolios’ with renewable sources. I see it as much for PR as for financial reasons. You can investigate Duke Energy (http://www.duke-energy.com/environment/renewable-standards.asp) to see an example of a large utility going so far as to advocate for – and receiving – government partnerships (i.e. tax subsidies). So, I think there are cases of those who are willing to take less than optimum risks. And there are others who simply cannot refuse the “offer” of subsidy for other reasons, like perhaps Exelon who is a large nuclear operator. I don’t think they really want or need solar and wind, but they fit in that second category (PR reasons). While there are independent operators usually tied to green energy funds or to system’s manufacturers (like Gamesa?), I suspect at least half of the investment fits your point.

And to Bill Peacock: Is there a summary of the total actual cost of the negative pricing on the existing ERCOT market? I’m simply trying to quantify a cost I rarely see except in models. And since the battle of costs has wind advocates stressing intangibles (‘externalities’) beyond real/tangible costs, it seems only fair to increase the precision of the real, negative impacts on existing operations. I have seen theoretical opportunity costs for backup generation, and a rough look at real LMP impact years back (IEEE? I don’t recall), but I haven’t found a good empirical study of all factors. Instinctually it seem that without some change in regulations, negative pricing impacts for marginal pricing markets worsen as wind generation increases. I’m not clear on how to isolate what I am looking for in the study you link associating PTC to negative pricing.

Leave a Comment