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Wind Pricing: Not Cheap but Subsidized

“Ignoring how competitive markets operate–and pretending that wind energy is exempt from the basic rules of economics–will not change the fact that windpower is an expensive, unpredictable resource that cannot compete without enormous public hand-outs. If the PTC were permitted to expired today, the wind industry might be forced to increase its efficiencies and lower project costs, but the effect on electricity prices at large would likely go unnoticed.”

Last fall, utility-giant, Exelon Corp., encouraged Congress to let the federal production tax credit (PTC) expire, citing the subsidy’s distortionary effect on competitive wholesale energy markets. The American Wind Energy Association (AWEA) slapped back by publicly booting Exelon off its board and unleashing an army of surrogates to control the damage and berate the company for putting its interests first.

The latest attack came July 4th when eco-youth Gabe Elsner, a “public interest advocate” of The Checks and Balances Project, accused Exelon of conspiring with Big Oil to squeeze out cheaper competitors like wind in order to drive up consumer electricity prices and increase profits.

The absurd claim exposes Elsner’s feeble grasp of how wholesale power markets operate. We examined several characteristics of wind generation in the context of existing market rules in order to demonstrate the flaws in his complaint.

Since Exelon participates in the PJM wholesale market, we focused our attention there. [1] The below table provides quick facts about PJM’s 2012 control area.

PJM Table

(CLICK for better resolution); Source – State of the Market Report for PJM 2012

Subsidized “Cheapness”

Under PJM rules, wind generators are permitted to offer their energy at zero ($0.00) or negative prices. But don’t be fooled into believing wind energy is a low-cost resource. Quite the opposite!

With capacity factors under 30%, project operation costs likely exceed the average wholesale price of energy in most areas of the U.S. Wind only appears to be a ‘cheaper competitor’ because it’s subsidized to a point where economics have no meaning in the wholesale market.

Substantial non-energy market revenues, including the PTC and renewable energy credits (RECs) keep wind in the black. [2]

But there’s a catch. Before wind generators can collect their out-of-market windfalls, their energy must first get to market. The best way to make that happen is for project owners to price their energy below any of the competition. It’s hard to turn down a commodity when its seller pays you to take it off his hands. Wind and solar are the only resources in PJM that offer product at negative prices. [3]

If the PTC were to expire, wholesale electricity prices would go up — but for wind power only– reflecting the reallocation of cost from U.S. taxpayers at large back to the rate-base. The rest of the competitive market would continue largely unaffected.

Too Unpredictable to Lower Prices

Wind generation may displace other energy resources in PJM, but its ability to lower wholesale energy prices within the overall market is limited.

Since wind is intermittent, most of PJM’s wind capacity competes in the real-time energy market. The remaining reliable resources (about 95% of all generation) are required to participate in the day-ahead market where energy sales are scheduled and locked in at day-ahead prices. Significant penalties are imposed if generators fail to deliver on their commitments.

Selling in the real-time market limits a wind project’s exposure to non-performance penalties, but it also limits its ability to influence energy prices. That’s because day-ahead commitments are financially binding.

In other words, if a wind facility is called by PJM to displace generation scheduled in the day-ahead market, the displaced resource would still receive payment for its committed energy at the day-ahead price. There is no cost savings to ratepayers since, in essence, they’re paying for the energy twice!

Wind could potentially reduce wholesale electricity prices in certain locations and during certain seasons and times of day, but absent better forecasting tools, it’s unlikely project owners will move into PJM’s day-ahead market in a major way.

A recent study by the NYISO found that “the correlation between load and wind generation is de minimis and that wind generation from hour-to-hour and day-to-day exhibits the time series characteristics of a random walk.” Translation: wind largely delivers at a time of day and year when least needed and any semblance of reliable forecastability is accidental.

Claims that wind will drive down wholesale prices by displacing reliable generation fail to consider existing market rules — rules that were designed specifically to avoid the production and price volatility that wind can create.

Claiming the Impossible, Forgetting the Details

Gabe Elsner insists that wind energy is set to save Exelon customers billions. His proof? A recent Synapse study that found (in Elsner’s words) “if wind energy doubled in the PJM market over the next few years, it would produce a net benefit of about $1 billion in 2021 and $6.9 billion in 2026 by driving down PJM energy customer costs.”

The problem is that’s NOT what the report said.

The Synapse study assumed the doubling of current RPS mandates, which means expanding PJM’s wind capacity to 65,400 megawatts by 2026 — a 10-fold increase!

But that’s not all. Other assumptions Elsner neglected to mention (or didn’t know) include:

(a) PJM wind achieving a Herculean 38% annual capacity factor (from 26% today);

(b) The region retiring 58,000 MW of coal capacity (76% of existing) and adding 73,000 MW of flexible gas-fired combined cycle; and

(c) The U.S. imposing a $30/ton carbon price. [4]

Synapse did not differentiate between PJM’s day-ahead and real-time markets nor did they consider many of the market rules governing competitive energy markets. That’s because they assumed the billions in required ‘investments’ to pull off this scheme would be entirely borne by consumers outside of the competitive energy market, i.e. public funding far exceeding the PTC subsidy.

Obviously, these details were lost on Mr. Elsner. But since he thinks the PTC is part of the equation, we estimated the cost of increasing PJM’s wind resource 10-fold with a 38% capacity factor. The result — $45 billion in new tax credits.

Conclusion

The “Exelon-Big Oil” conspiracy is nothing more than a misunderstanding of how competitive energy markets operate. Unfortunately, Elsner is not alone: AWEA talking points exhibit the same ignorance and misrepresentations.

Elsner’s defense of the PTC as an ‘investment’ that will lead to lower energy prices misses the crucial link between the subsidy and seller behavior. It is fallacious to believe that negative pricing proves that wind is cheap relative to other resources. Synapse modelers go further in claiming a 100% subsidized wind industry can participate in a competitive market and produce pure benefit without bringing harm to other generators. Both are clearly naive, or is that “green,” in their thinking.

Ignoring how competitive markets operate–and pretending that wind energy is exempt from the basic rules of economics–will not change the fact that windpower is an expensive, unpredictable resource that cannot compete without enormous public hand-outs. If the PTC were permitted to expired today, the wind industry might be forced to increase its efficiencies and lower project costs, but the effect on electricity prices at large would likely go unnoticed.


FOOTNOTES

[1]The PJM control area includes Kentucky, Ohio, Pennsylvania, Virginia, North Carolina, West Virginia, Illinois, Maryland, New Jersey and Washington, DC. PJM operates the largest wholesale electricity market in the United States with over 60 million customers and generation of 790,090 GWh.

[2]In New England, renewable energy credits (REC) combined with the PTC pay project owners over $100/MWh in outside revenue. In New York, projects receive $50/MWh or more in REC and PTC subsidies and in PJM, projects receive at least $35/MWh.

[3]In general, negative pricing is an important tool used by PJM to manage transmission congestion and ‘excess-gen’ conditions where supply exceeds demand. Wind generators use negative pricing in a way unintended by the market.

[4] When the Synapse model was run with no carbon price, the savings was $2.6 billion by 2026.

5 comments

1 JohnInMA { 07.23.13 at 7:32 am }

A number of studies I’ve read assume improved CF for future wind installations due to technology in design and build as well as more effective siting and forecasting methods. But I’ve never seen a thorough justification for any end point – 38% in this case. I also wonder if life cycle costs are built into the analysis. There is a solid history of capital costs, including maintenance and upgrades, to study for coal and gas fired plants. However, for large scale wind the data is less complete, and perhaps not as optimistic. For example, how much further investment might be needed – or at least useful – for the existing and near-future suggested installations in order to achieve the aggressive capacity goals? Surely the ~6.5 GW units in operation are not of satisfactory design or location given their current measures, for example. And are 25 or 30 year turbine lifetimes (or whatever may have been assumed) proven to be conservative or realistic? Many could be replaced or significantly modified and upgraded in 10, 20 years time, in order to meet performance goals.

2 Ronald Walter { 07.23.13 at 10:25 am }

Week ending carloads of coal in week 28 for the BNSF is 1.156 million.

Wind will never compete with coal.

3 MaryInMN { 07.23.13 at 8:53 pm }

John, Research out of Denmark shows the average life expectancy for industrial turbines to be 10 years, with decreasing production and efficiency with each passing year. Xcel Energy purchased a wind installation in Grand Meadow, MN. They requested an 11% rate increase because “maintenance costs are higher than expected and electrical generation was much lower than promised.” According to the maintenance crews on site, the gear boxes in the GE 1.5 and 1.6 MW turbines typically break down and need replacing within three years of operation. The specialized crane required is $100,000.00 PER turbine as it must be dismantled and re-assembled at each turbine site, and the new gear boxes cost $260,000.00 a piece. Xcel had the additional problem of having the transmission lines burning up for reasons no one could explain, though it most likely has to do with the extraordinary amount of electricity that must be dumped into the ground in order to protect the ball bearings in the nacelles. Take those numbers and consider what consumer’s and protection agency’s would have to say about an expensive automobile that operated so dismally. It becomes quickly apparent that industrial wind is permitted based on politics, not science.

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5 Kristi { 08.26.13 at 6:09 am }

The wind industry seems confused about the difference between “cheap” and “worthless”. Even with the federal subsidies, wind in MN is priced at 2 to 4 times the competitive wholesale rates on the 20 year contracts utilities have signed to meet MN’s 25X25 RPS – a wind mandate. MN Rural Electric Association estimated that MN rural rate payers lost $70 million in 2011 JUST on the portion of wind energy produced when it can’t be used by MN consumers (most of it); the total wind income to all of MN in the same year was $13 million. Elsner is the same genius who decided that a group of citizens who gathered at their own expense in D.C. in 2012 to discuss national wind policy, where paid by the Koch brothers.

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