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

AWEA Spins Price Distortions to Save PTC (hit on nuclear clouds CO2 rationale)

“Negative prices are not the goal of any healthy economy, yet the PTC fosters this behavior at the expense of other, reliable generation. Building more infrastructure to correct for this problem is exactly the wrong thing to do.”

The last extension of the federal production tax credit (PTC) [1], its eighth in over twenty years, expired at the end of 2013 and the industry is again clamoring for another extension. But this time, big wind is facing a more sophisticated argument advanced by critics who contend that the PTC is artificially depressing wholesale power prices, disrupting market signals and undercutting more reliable generation including Exelon’s fleet of nuclear power plants.

Wind for nuclear–and in a way that increases greenhouse gas emissions, or certainly fails to reduce it?  The irony for climate policy has been noted by James Hansen who was informed that renewable-energy subsidies were intended to “kill nuclear.” Wrote Matthew Wald in the New York Times:

To stave off climate change, sources of electricity that do not emit carbon will have to replace the ones that do. But at the moment, two of those largest sources, nuclear and wind power, are trying to kill each other off.

So much for wind power’s climate-change rationale.

Last month, the American Wind Energy Association (AWEA) released a detailed defense of wind arguing that its impact on energy prices is positive, with or without the PTC. But rather than making its case, AWEA’s rebuttal repeatedly misrepresented the rules governing competitive electricity markets and how out-of-market revenues impact energy prices. In this essay, we examine several of the assertions made by AWEA and show how they fall short.

Claim 1: Wind energy displaces the most expensive generation and decreases electricity prices.

This would be true if wind were reliable, but it isn’t. Under competitive wholesale market rules, most generators must ‘bid in’ firm levels of production for each hour of the next power day. Grid operators match available generation with hourly demand and schedule resources as needed. The most expensive generation dispatched in an hour sets the marginal price of supply.

The day-ahead price is established 24-hours in advance and it’s financially binding. Thus, any low-cost participation from wind, [2] which is intermittent and operates mainly in the real-time market, is limited to the 5% of resources operating in real-time.

If a wind facility were called to displace generation scheduled in day-ahead, the displaced resources would back down to the largest extent possible but still receive payment for any committed energy at the day-ahead price. There is no cost saving 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 the day-ahead market in a major way.

Claim 2: Exelon overstated the frequency of negative prices at its nuclear plants.

AWEA tallied the number of times Exelon’s nuclear fleet in Illinois experienced negative prices in the day-ahead market, and insisted Exelon exaggerated the problem by a factor of 10 or more. What AWEA failed to acknowledge was that nuclear plants within the PJM control area are categorized as self-scheduled or must-run resources.

Self-scheduled units are required to bid into the day-ahead market, however, their energy is subject to the more volatile real-time market rates. Natural gas and coal might set the clearing price in the day-ahead market, but a more objective analysis is needed to understand what’s happening to energy prices in real-time, particularly during periods of low demand and high wind output.

Claim 3: The PTC is not reflected in the market prices that other generators receive.

AWEA’s third claim is true in the day-ahead market but not true in the real-time market where wind largely operates. Within a competitive wholesale energy market, high energy prices signal the need for more investment in new capacity or transmission. Persistently low, or negative prices [3] would normally suggest excess supply and a potential need to retire capacity. These price signals should be independent of the PTC.

But by constructing tens of thousands of megawatts of government-subsidized, variable generation (wind) behind constrained transmission interfaces, a different scenario arises. Wind operators would rather produce at a loss than curtail their output and lose the PTC. When resources drive market prices into the negative in these situations, it’s an indicator that power plants are either built in the wrong location (no transmission) or producing at the wrong time (low demand). Negative prices are not the goal of any healthy economy, yet the PTC fosters this behavior at the expense of other, reliable generation. Building more infrastructure to correct for this problem is exactly the wrong thing to do.

Claim 4: The majority of negative prices are not caused by wind, but by Exelon’s own nuclear plants.

It is widely known that nuclear power is a must-run resource that cannot easily ramp up and down in response to demand. When the U.S. economy went into recession in 2008, lower demand may have depressed wholesale prices. But more information is needed before we can fully evaluate the effect of the recession.

AWEA tries to prove in its report that wind was not the reason for the negative prices by comparing specific hours of negative pricing against wind capacity factors grid-wide. But looking at averages tells us very little about the conditions which caused prices to go negative and the degree to which they did.

Claim 5: Transmission upgrades are eliminating negative prices.

According to AWEA, the instances of negative prices are decreasing as more transmission is built. We agree. Consistent with our comments under Claim 3, we’d argue that the over-building of wind generation behind constrained interfaces created most of the congestion. Generous governmental subsidies have skewed competitive energy markets such that on-shore wind energy facilities can afford to operate despite time of day, year and locational price penalties.

As a result, rather than trying to keep the deployment of transmission to a minimum, renewable energy facilities are fueling the race to build thousands of miles of new transmission capacity where none was needed before.

Claim 6: The expiration of long-term power purchase agreements (PPAs) have exposed Exelon to market price fluctuations.

The arrogance of this claim is hard to miss given that big wind financers are demanding long-term PPAs be in place before they will commit. The wind industry touts PPAs as a way to protect ratepayers from fuel price volatility but the truth is that above-market contract prices protect project owners, NOT ratepayers, and allows them to go even more negative than the PTC would permit.

Ultimately, ratepayers could pay more for wind energy since they’re on the hook to pay the delta between the wholesale market price and contract price. The more negative the price, the larger the delta.

Conclusion

In this latest piece, AWEA attempts to portray wind as an equal among its competitors while diverting attention away from the PTC but the fact remains that the tax credit is enabling big wind to practice predatory pricing schemes that undercut competition and distort market signals necessary for balancing supply with demand.

Given the vigor in which AWEA is pushing for another PTC extension, we’re no longer convinced the wind industry can survive without it. Big wind grew up on the tax credit, developed market plans and forecasts that relied on it, and now the wind PTC appears to be a required component of the industry’s economics. It’s time taxpayers recognize this fact and pull the plug on this losing technology once and for all.

—————————————————–

[1] A 1-year, $12 billion extension of the PTC was passed as part of the Fiscal Cliff bill. Renewable energy projects need only ‘commence construction’ by January 1, 2014 to qualify for the credit, instead of projects being ‘placed-in-service’ by that date. Under the new extension, wind’s project pipeline recovered to 12,000 MW of new developments under construction — this after being flushed at the end of 2012.

[2] The bulk of wind generation operates in the real-time market, which carries no performance penalties. Only about 3% of PJM’s wind resource participates day-ahead (e-mail communication with PJM).

[3] Negative prices fall into a range below that needed for generators to cover operating costs.

2 comments

1 Frank { 04.15.14 at 2:40 am }

Customers don’t necessarily pay twice for the cost of wind power: once for the electricity generated from wind and once for the fossil fuel plant displaced by wind. The customer clearly must pay the redundant capital costs for associated with wind, which produces no power some of the time. However, most of the cost of operation a fossil fuel plant comes from the cost of the fossil fuel it consumes. If we know far enough ahead of time how much wind power will be generated, we don’t have to burn fossil fuel when the wind is blowing. Everything depends on the quality of the wind output forecast, how far ahead of time that forecast is made and how long it takes to bring the fossil fuel plant online or ramp up its output. The problem with wind is that power output varies with the cube of the wind speed. If the actual wind speed is 20% less than forecast, then power output will be 50% less. When wind output is expected to be high, a 50% reserve might be needed to accommodate the possibility the wind speed will be 80% of forecast.

2 Lisa Linowes { 04.15.14 at 8:19 am }

Frank, Thanks for your comment. Day-ahead commitments are binding. If wind in the real-time market is called to displace a facility that is scheduled in day-ahead, the DA generation will be compensated at the DA price AND wind will also be paid. But you’re correct that the bulk of the market issues arise from the fact that the wind forecasts are not sufficient to schedule wind generation day ahead.

Leave a Comment