Thursday, July 12, 2012

Study Shows Wind Could Cut Generation Prices By 25% In Midwest Power Markets

Synapse Energy Economics published a study this May that a build out of wind in the midwest power market would lower wholesale power prices by 25%.  Savings to retail customers would range from $65 to $200 per year.

The study is entitled, "The Potential Rate Effects of Wind Energy and Transmission in the Midwest ISO."  The market area includes North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Wisconsin, Illinois, Indiana, Michigan and parts of Montana, Missouri, Kentucky and Ohio.  Currently about 10,000 megawatts of wind operates in these states.

The paper looks at scenarios of adding up to 50,000 more megawtts of wind energy and the impacts of adding such supply to wholesale market prices.  As Bob Fagan, a co-author of the paper states, "The general effect is lowering the clearing price of the market."

The study also includes costs of expanding transmission and finds the consumer savings from lower generation prices exceed increases in transmission costs. 

Wind generation, as well as nuclear plants, solar, and hydro units, bid zero into markets and accept the market cleaing price.  Wind can do so, because its production costs are very low, typically around 0.5 cents per kilowatt-hour.  When wind and other zero bids are enough to meet demand the market clears at zero or can even go negative (see the posting about the strange, real world of negative electricity prices). 

1 comment:

  1. Once again, the ability to “claim” wind energy results in savings to the ratepayer at the retail level requires a number of assumptions to be made and environmental and systems conditions to be met. From a cursory review of the consultant’s report, it is not clear what capital assumptions are made (grants, credits, etc.), but the focus appears to be on supply induced pricing – the marginal pricing advantage that allows for short term bidding competition at the wholesale level. That is valid and also incomplete. The study does honestly highlight that the character of the wind regime (“fuel supply” so to speak) is very important. But the conclusion of savings to the ratepayer is built from a complex set of conditions which must be met. It’s akin to the EPA mileage rating on cars where one owner’s experience can be quite different from another based on locale, driving habits, etc.
    Consider Australia and Germany, where in Australia the electricity prices are comparatively low. One region has had a somewhat high wind penetration for long enough to evaluate real costs. More than one study has concluded that there are, on average, downward pricing forces (bid advantages), however each demands a number of caveats –including high seasonal variation (at times no pricing advantage or worse), meeting only a certain portion of the mix (around 20%), and capacity factor (availability) above a calculated minimum. The recommendation is to include other mechanisms such as carbon costing in order to assure wind energy’s downward influence. In Germany, where rates are nearly double and feed-in-tariffs mandate first priority and higher pricing (granted that is for all renewable source), studies also conclude there is a delicate balance to be met to assure downward influence. In fact, authorities are dealing with the created threat resulting from their specific mix of regulations and subsidies where the mandatory spinning reserves are so inefficient and unable to recover costs that another artificial cost (retail) may be needed. Although they have a mandate for 80% renewable by 2050, they do not yet have a viable path. Power quality and transmission cost are among the biggest challenges.
    Wind energy is a key component in the mix. But I still argue it shouldn’t be tainted by precarious claims which will lead people to believe it is “cheap” by comparison. On the whole, it would be better to claim that it can be integrated safely – meaning carefully and in a controlled fashion - without necessarily escalating costs or sacrificing quality. As with most complicated systems in the real world, many factors must be just so.