Wind Energy Jumps 27% and Pressures Downward Power Prices

Wind Energy had a banner 2011, with production jumping another 27%, and wind now provides about 3% of America's electricity, 20% in Iowa and South Dakota, 7% in Texas, and 5% in California.  www.eia.gov/todayinenergy/detail.cfm?id=5350.  All that new wind power is good news for consumers, because it is real electricity supply that puts downward pressure on market prices in competitive, "deregulated" wholesale markets that set electricity prices based on supply and demand.  In those competitive markets, more electricity supply from any and all sources of generation or less demand leads to lower prices for consumers.

In fact wind power has characteristics--very low production costs--that especially puts downward pressure on competitive market clearing prices to the benefit of consumers. Here is why and how wind benefits consumers in competitive markets, where every generator bids a price to provide service and no generator dispatches power to the grid, unless the generator's bid is accepted by the grid operator.

The grid operator selects or dispatches the generators based on the price they bid to operate, but importantly the generators do not normally get paid the price that they bid to operate. The grid operator puts the bids in order of lowest to highest, then selects the lowest bids first, and continues accepting bids, until he reaches the amount of supply needed to match demand.

There is always a last bid accepted from a generator who provides the last increment of supply needed to meet demand. The price bid by the last generator needed to meet demand is the market clearing price, and this price is paid to all generators selected, no matter that they bid less than the last bid accepted that becomes the market clearing price.  That generator's price is typically not the highest of all bids received, but it is always the highest bid that is accepted by the grid operator.

Since the price bid by the last generator accepted by the grid operator to meet demand sets the entire market price, consumers want the last bid accepted by grid operators to be as low as possible.  Two general means exist to lowering the price of the last bid accepted--increasing supply from low production cost generators or decreasing demand to move down the list of bids submitted to reach a lower last accepted bid.

Generation plants with very low production costs or costs to operate, such as wind, most renewables, and nuclear plants, typically bid zero into competitive markets to insure that they will be accepted or dispatched by the grid operator. Wind farms are complete price takers.  They do not set the market price, except in the rare circumstance, when they and other generation plants that bid zero provide enough power to meet demand.  In that circumstance, the market price actually clears at zero or can clear at negative levels, if generators bid money to dispatch.

Fossil fuel plants typically bid enough to cover the costs of at least their fuel--coal, gas, or oil--when operating or they would be losing money when running.

Here is a golden rule for consumers of electricity from competitive markets.  More wind or renewables in a competitive market produces more zero bids into the market.  More wind or renewables in a competitive market means that the last accepted bid, the market clearing price bid, will be lower than if the wind or renewables did not exist.

In this fashion wind or renewables lower the price of every single kilowatt-hour paid by every consumer, below what it would have been, had the wind and renewable power not been generated. A great deal for consumers and the environment, since wind power emits zero air and water pollution.

If you want to buy wind power for your home or business, go to www.choosepawind.org.