A Free-Market Energy Blog

“Negative Electricity Prices and the Production Tax Credit” (2012 warning for Texas went unheeded)

By Robert Bradley Jr. -- May 17, 2022

[Editor note: The current (May) problems of the Texas Grid reflect a socialized wholesale market (ERCOT) in light of the wind/solar cancer that has wounded the ‘reliables.’ Specifically, negative pricing of windpower, a decade-old phenomenon, has ruined margins for natural gas and coal plants, causing premature retirements, decisions against new capacity, and less maintenance.]

History matters to understand the wounded Texas electricity grid of today. There were warnings time and again that the distorted market would have reliability issues, and reliability issues would cause price spikes for the worst of all worlds.

Consider the study Negative Electricity Prices and the Production Tax Credit” by Frank Huntowski, Aaron Patterson, and Michael Schnitzer (The NorthBridge Group: September 10, 2012), which was commissioned by Exelon, whose nuclear-plant margins were badly compromised by wind’s “predatory” pricing.

The article was subtitled: “Why wind producers can pay us to take their
power – and why that is a bad thing.” The executive summary speaks for itself–and speaks loudly today in Texas, as well as other parts of the country, given the federal Production Tax Credit for wind, already extended 13 times.

As a matter of both economics and public policy, no government production tax subsidy should ever be so large that it creates an incentive for a business to actually pay customers to take its product. Yet, the federal Production Tax Credit (“PTC”) for wind generation is doing just that with increasing frequency in electricity markets across the United States.

In some “wind-rich” regions of the country, wind producers are paying grid operators to take their generation during periods of surplus supply. But wind producers more than make up the cost of the “negative price” payment, because they receive a $22/MWH federal production tax credit for every MWH generated.

The federal wind Production Tax Credit (“PTC”) was originally enacted in 1992 to jumpstart the wind energy industry. The PTC has since been extended on six occasions [now 13 times] and is now due to expire on December 31, 2012. Today, policymakers on both sides of the issue are debating the merits of yet another extension of the subsidy on a variety of grounds. This paper focuses on one harmful, but often overlooked, aspect of the PTC — specifically, how the PTC interacts with wholesale electricity markets to create the phenomenon of distortionary “negative prices.” While the concept of negative prices might at first glance seem to be a money-saver for electricity users, or at best a harmless phenomenon, in fact these negative prices are: (a) funded by taxpayers; (b) distorting wholesale electricity markets; and (c) harming conventional generation and imperiling reliability.

As recently as September 6, 2012 the Public Utilities Commission of Texas Chairman Donna Nelson cautioned policymakers against further subsidies, noting that the PTC had undermined Texas reliability:

“Federal incentives for renewable energy… have distorted the competitive wholesale market in ERCOT. Wind has been supported by a federal production tax credit that provides $22 per MWH of energy generated by a wind resource. With this substantial incentive, wind resources can actually bid negative prices into the market and still make a profit. We’ve seen a number of days with a negative clearing price in the west zone of ERCOT where most of the wind resources are installed….

The market distortions caused by renewable energy incentives are one of the primary causes I believe of our current resource adequacy issue… [T]his distortion makes it difficult for other generation types to recover their cost and discourages investment in new generation.”

As part of our analysis, we have reviewed energy production and real time pricing information from the Nation’s grid operators to understand the production characteristics and bidding behavior of wind producers and to assess their impact on essential conventional electric resources.

We find that:

The PTC undermines and distorts price signals in wholesale electricity markets by incenting PTC-subsidized wind producers to sell electricity at a loss to earn enormous tax subsidies.

This taxpayer-funded subsidy artificially depresses wholesale power prices, and in hours of the year when demand for electricity is low it can result in negative pricing. Figure 1 shows the frequency of negative prices in a number of particularly wind-rich areas over 2006-11 alongside the growth in national installed wind capacity over the same period.

This figure demonstrates the clear linkage between wind generation and negative prices.

Wind producers can readily turn wind turbines on and off, but have no incentive to do so because they still receive positive margins during negative price hours due to the PTC subsidy they earn when they generate. They have no incentive to curtail their output – which, absent the PTC, would be in their economic interest. The failure of wind generators to curtail output when wholesale prices approach zero has both short term
and long term negative consequences. In the short term, the failure of wind producers to curtail output makes it more difficult for system operators to maintain reliability, and also makes it more costly for them to operate the regional electric grid.

In the long run, the PTC destabilizes the market for conventional electricity as generators that are not eligible for the PTC are significantly harmed by negative prices, both in terms of near-term daily operational decisions, as well as long-term decisions to build or retire generation.

America’s continued reliance on the PTC subsidy therefore will invariably deter investments in the conventional power generation needed to maintain a reliable electric system. Conventional generation is critical to reliability because wind generation often does not produce energy during times of peak electricity demand, while producing at high levels (and driving negative prices) when demand is low. In recent years, about
85% of total wind capacity has not operated during the peak hours on the highest demand days of the year, on average. Controllable conventional generation is thus needed to backstop wind and ensure the lights stay on. Our findings lead us to conclude that the PTC should be allowed to expire under current law.

PTC-driven negative prices directly conflict with the performance and operational needs of the electric system and with federal energy policies supporting well-functioning competitive wholesale markets. We urge policymakers to: (1) reconsider a national energy policy based on a tax incentive so large it incents wind producers to pay system operators to take their wind power; (2) address the reality that wind energy, while an important part of the energy mix, remains unpredictable and cannot be relied upon, especially during periods of high demand; and (3) ensure policies promoting wind do not undermine the conventional technologies that are needed to maintain reliability.

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