Wind Not A Silver Bullet, Study Suggests

Carl Dombek | May 31, 2012

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A former regulator says a study that concludes an increasing amount of wind generation will put downward pressure on electricity prices may not be giving adequate weight to certain critical factors.

The study, “The Potential Rate Effects of Wind Energy and Transmission in the Midwest ISO Region," released May 22, concludes that increasing the amount of wind generation in the Midwest ISO (MISO) region will result in significant reductions in energy costs with only a comparatively modest investment in additional transmission.

“Wind may have the effects of bringing average wholesale prices down but you have to remember how wind delivers. It generally delivers off-peak, so it may lower prices off-peak,” said Sherman Elliott, former Illinois Commerce Commissioner and principal of the regulatory, policy, and energy consultancy SJE Consulting.

While lower off-peak prices may contribute to a reduction in the annual average price of power, other costs may go up. For example, if the wind generation is a ‘must-take’ for the grid operator, then the operator is forced to redispatch other types of generation out of economic merit order to compensate for the additional wind on their systems, Elliott said.

While redispatch may lower the cost of energy, it may also increase costs in at least three areas: increased operation and maintenance (O&M) costs due to cycling baseload coal plants, increased revenue uplift if generators are taken out of merit order, and increased costs for ancillary services to manage wind’s generation characteristics.

For example, if a baseload coal plant is backed down to accommodate wind, “You’re increasing O&M costs, you’re shortening the life of the equipment by cycling it – turbines are designed to run 24/7/365 at a high load factor – plus you’re probably increasing carbon output per kilowatt-hour,” Elliott said.

When redispatch to accommodate wind results in taking generation out of merit order, it can create additional challenges – and costs – through revenue “uplift.”

“Merit order” means committing the lowest-cost generation first, followed by the next lowest, and so on. When wind displaces generation that was previously committed, the economic merit order is disrupted, and those generators that were previously committed have to be compensated for that displacement.

That compensation takes place through a mechanism called a “revenue sufficiency guarantee,” a provision that ensures generators that are committed for reliability reasons by the grid operator will receive sufficient funds to cover their costs, even if they are not ultimately called upon to generate at the level to which they were committed.

“If a unit is committed in the day-ahead market because it was an economic unit, then [the generator] is counting on being compensated,” Elliott said. “If you have to redispatch because of wind, then you have to compensate [the generator], and that cost is uplifted” to other generators on the system through the revenue sufficiency guarantee, Elliott said.

Other costs result from the balancing services needed to manage wind’s variability.

“You may see wind have the effect of bringing energy prices down off-peak, but you end up funding all of this through ancillary services – regulation up and down to deal with the intermittency, the ramp [rate] problems that you have,” Elliott said.  “At the same time, other costs – uplift, ancillary services, the cost for operating and maintenance – may go up.”

Elliott also takes issue with the study’s assertion that lower wholesale prices will result in cost savings for end-use customers.

“If a utility customer was on a real-time rate and paid hourly prices, the customer might be able to take advantage of that by shifting ... a flexible manufacturing process [to the off-peak] third shift,” he said. “But for the most part, what’s happening is that [wind generators] are increasing energy production during a period of time where there’s insufficient demand to absorb it.”

In addition, Elliott said, a reduction in average wholesale prices would not necessarily be passed on to retail customers unless or until the utility brings a rate case before its state commission.

“In individual states, there can be some regulatory lag in terms of how long it takes for those utilities to come in and have their rates adjusted,” Ezra Hausman, vice president and COO of Synapse Energy Economics, which performed the study, told Energy Central on May 22. “In general, the [utilities] like going in for rate adjustments when prices are going up and they’re not quite as happy to do it when rates are going down.”

Just as the map is not the territory, the bottom line for Elliott is that forecasts and predictions are not the final outcome.

“All in all, it’s hard to say whether the effect will, in essence, bring prices down or whether the increasing off-peak energy is basically just being dumped,” Elliott said.

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Comments

Viewpoint from Tehachapi Pass

Wind farms are not a silver bullet, and much worse, looking out my door, considering I can see and hear at least 150 of them from my property. It's amazing how the developers and proponents of turbines neglect to discuss the process of making and transporting the machinery. Turbine components are made from mined metals, require coal fired plants to manufacture the steel, and aluminum and components parts, and let's not forget coal fired cement kilns required to produce the cement used to pour the pads. Sure the wind is free when the wind blows after all the construction is completed... right? No. Gas turbines, manufactured by coal fired processing and dirty natural gas are on the rise to use to make up for the intermittence of the "green" turbines. And how about the transmission poles and hundreds of miles of transmission lines. How many tons of coal pollutants enter the atmosphere during their manufacture?

Someone or many ones made the wrong turn, commiting to use wind technology to kick start the economy. Thin film solar panel technology is no better because of the greenhouse gas nitrogen triflouride.

There's a battle going on about whether man made climate change is real. It's impressive how effective the media, corporations and our government has been at casting serious doubt and lull the public into believe there is no impending end to our survival unless massive changes take place today, not in 20 or 40 years.

Viewpoint from Tehachapi Pass

Wind farms are not a silver bullet, and much worse, looking out my door, considering I can see and hear at least 150 of them from my property. It's amazing how the developers and proponents of turbines neglect to discuss the process of making and transporting the machinery. Turbine components are made from mined products, require coal fired plants to manufacture the steel, and aluminum and components parts, and let's not forget coal fired cement kilns required to produce the cement used to pour the pads. Sure the wind is free after all the construction is completed... right? No. Gas turbines, manufactured by coal fired processing and dirty natural gas are on the rise to use to make up for the intermittence of the "green" turbines. And how about the transmission poles and hundreds of miles of transmission lines. How many tons of coal pollutant enter the atmosphere during their manufacture?

Someone or many ones made the wrong turn, commiting to use wind technology to kick start the economy. Thin film solar panel technology is no better because of the greenhouse gas nitrogen triflouride.

There's a battle going on about whether man made climate change is real. It's impressive how effective the media, corporations and our government has been at casting serious doubt and lull the public into believe there is no impending end to our survival unless massive changes take place today, not in 20 or 40 years.

Data do not support these concerns

For a detailed response from the American Wind Energy Association, see 

http://www.awea.org/blog/index.cfm?customel_dataPageID_1699=16667.

Regards, Tom @ AWEA

Statistical disagreement

If we look at USEIA data from 2008 through 2011, one finds a slump in 2009 overall generation with 2011 only slightly less that 2008.  However, if we just take 2008 and 2001 we find the following:

  • Coal-fired generation was down by 13.7% in 2011 versus 2008.
  • Coal consumption decreased only 10.5% looking at those same years.
  • Natural gas generation accounted for 1/2 the lost coal fired generation and wind roughly 1/4.
  • Natural gas efficiency improved by about 0.7% in 2011 versus 2008.
  • Coal fired efficiency decreased by about 2.5% in 2011 versus 2008.

Since coal made up 42.24% of the electricity generated in 2011, I do not think the decrease in output from coal generated significant emissions reductions of CO2.

PTC and Other Energy Subsidies II

Read the previously mentioned resources, the CBO and CRS, and then re-consider your apples/oranges comment.  For good measure, read the Charles Koch founded (last name sound familiar?) Cato Institute's position to repeal two of the oil and gas tax provisions (subsidies): http://www.cato.org/publications/commentary/eliminating-oil-subsidies-two-cheers-president-obama

I am not advocating repeal of the oil and gas, nuclear, and other non-renewable tax provisions, only asking Congress to not leave the renewables without any favorable tax policy while leaving in place decades old provisions for the others.

I read them before writing my reply/comment

Still apples and oranges.

PTC and Other Energy Subsidies

Obviously the PTC does lower busbar price but also do subsidies to other forms of generation.  A complete analysis would need to include data available from the Congressional Budget Office in their March 2012 issue brief, Federal Financial Support for the Development of and Production of Fuels and Energy Technologies: http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-06-FuelsandEnergy_Brief.pdf  

Take for example, the $.9B/year to nuclear for decommissioning funding and the $2.7B to  fossil fuels in the report.  The oil and gas industry has received hundreds of billions over the past hundred years according to the Congressional Research Service in  Energy Tax Policy: Historical Perspectives on and Current Status of Energy Tax Expenditures: http://digital.library.unt.edu/ark:/67531/metadc40098/m1/1/high_res_d/R41227_2011May02.pdf  


We need to take a look at all energy subsidies before focusing entirely on renewable tax credits, etc. in making the comparisons.  Spend some time with the two non-partisan sources above that provide excellent unbiased energy tax policy information.

Apples and oranges

To my thinking, there is a big difference between tax credits and tax deductions--something I think many of those complaining about subsidies for fossil fuel industries fail to consider.  If a company is spending money on continual exploration and production of oil and gas, then that company is generating jobs and other economic activity that does result in tax revenues to the government, although not directly from the O&G company itself. 

A wind farm or solar array, once built, generates relatively little economic activity in the way of multiple jobs and intensive economic activity.  These facilities also get favorable depreciation treatment on their equipment so the comparative argument about depreciation treatment is out the window.  Collecting a PTC is a much more lucrative arrangement with little or no generation of jobs or other economic activity.  $1 in PTCs is worth $2.86 in pretax earnings and roughly $28 to $32 in spending to get earnings.

The whole argument concerning subsidies continues to revolve around fossil fuel supply industries versus renewable generators.  The argument should be revolving around generators versus generators because that is the sector that is being screwed up with the PTCs--other than the PTCs paid to ethanol manufacturers.  The owner of a gas-fired or coal-fired plant in a competitive power market such as ERCOT may not pay taxes if he loses money but he does not get anything either.  A wind farm can fail to make a profit and still get PTCs.  That does not amount to lost revenues to the government, it amounts to an actual expenditure of taxpayer dollars.  If an O&G company does not make a profit, the government does not hand them taxpayer dollars as a tax credit either.

As for ethanol--there is no bigger waste of taxpayer dollars that does nothing to speak of for the environment than the ethanol PTC.  Any ethanol blended into gasoline beyond the amount needed for octane enhancement is a waste of taxpayer dollars.  Look at the heating value of ethanol and do the actual consumption calculations and chemical equations:  it is readily evident that ethanol reduces CO2 emissions by only a couple of percentage points while increasing the emission of water vapor by a multiple of 2.4.  Water vapor is a shorter-lived but much more effective GHG than CO2.  The ethanol PTC has also had the impact of increasing food prices and encouraging the farming of marginal lands that would otherwise support trees and other natural habitat.

Also, one must look at the amount of energy delivered for the 'subsidy' expenditure whether as PTCs or expensed deductions.  The amount of energy delivered by wind and solar are minute compared to that delivered by gas and coal fired generators.  When one compares the 'tax expenditure' per MWh for fossil fuels versus renewables, the comparison becomes ludicrous.   Plus, the energy delivered by fossil-fueled generators is dispatchable and reliable whereas energy from renewables is not.

Comparing subsidies to solar and wind via PTCs and cash grants versus alleged subsidies to fossil-fuel producers by deduction of expenses is disingenuous.

 

 

Good argument for distributed generation

Underlining that bigger is not better.  The USA economic model for wind energy has been flawed from the beginning.  Special interests have convinced lawmakers that utility sized turbines are the best way to go.  Distributed generation (including solar) funded through federally guaranteed loans and a sliding feed-in tariff, that favors small and midsized community integrated units, establishes rapid, but organic growth.  Paying a power producer for potential is ridiculous.  The concept promoted here is similar to paying farmers for not growing crops and we know where that idea leads us.

Focus for one minute on a concept of the “Model-T” of wind turbines and you will find that the most economic size will be in the 20-100kW range where mass production positively impacts price of fabrication, installation, and servicing. The custom made goliaths that have become standard to this discusion have their place, but they should not be the mainstream.

Its what the studies "don't say" that misleads

If the increased costs for baseload generation in accomodating wind to the system more than negates any off-peak gains, what's the benefit? If there is no proof that off-peak wind is doing anything except being "dumped", why are taxpayers being required to fund PTC's in the billions? If there is no proof that the effect of adding wind to the mix does anything to reduce CO2 emissions, what is the point of promoting it? Before billion, or trillion dollar checks are written out, transparency and proof of the net effects on air and economy should be required.

Elements missing in the study

Mr. Elliott is correct in that wind is not a silver bullet--that is unless the intent is to bring down the US economy, then it is a very effective bullet.  First of all, the only reason so much wind generation was built so fast is the production tax credit that wind generation companies are getting.  They start off with a considerable price advantage only because the US taxpayers are being forced to pay the PTCs.  The impact of a PTC is much more significant than is realized because not only does the receiver not pay that tax, he does not have to engage in the economic activity necessary to earn the money he would have to pay tax on.  The PTC is money to his bottom line without doing anything to earn it.

As Mr. Elliott points out, wind typically generates in the off-peak hours when the lowest price wholesale power is available.  This means the baseload coal and gas-fired plants may end up having to decrease load.  Coal plants do not cycle very well.  Partial loads increase heat rate and typically increase maintenance costs.  Many of the gas-fired plants running baseload are combined cycle gas turbine plants because they have the lowest heat rates and therefore fuel costs.  They do not like cycling that much either but tolerate it a bit better than coal plants but backing them down means the owner is getting less income to pay for his capital investment as are the coal units.  This discourages investment in these plants so reserve margins start to decrease.  To make up the difference, generation companies are putting in simple cycle gas turbines which will burn 30 to 35% more fuel per MWh generated.  Since wind generation typically is most active for only about a third of a calendar day, there is no gain in CO2 emissions.

Another element missing in the study is the impact on prices of construction materials due to the rapid proliferation of wind energy resulting from the attractiveness of PTCs.  Study the costs of cement, steel, copper, and rare earth elements in relation to the periods of intense activity in wind farm construction and I believe you will find correlation--at least it looked like that to me from the data I found.  Now all that is well and good for cement and steel producers but it also meant the costs of new facilities and maintenance on existing ones went up thereby negatively impacting other industries.

Lastly, one must consider what the lack of economic activity to earn money to pay income taxes on means.  That means the beneficiary of a tax credit does not have to buy things from suppliers or employ any additional people (either directly or indirectly) to get that additional money to his bottom line.

The conclusion of the study was wrong but the reason it was wrong is that it did not consider the cost of PTCs had to be added to the electricity rates.