Wind Energy's Production Tax Credit in Crosshairs

Davis Swan | Nov 10, 2013

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The U.S. government had been "closed for business" while a looming debt ceiling crisis was pending. Now those same lawmakers must decide whether to extend the wind energy Production Tax Credit (PTC). President Obama's official position is that the PTC should be extended indefinitely. Many in Congress disagree and there are is ample private sector and research lab commentary on both sides of the question. 

In my opinion the PTC debate has to be framed within the context of what is the most effective use of scarce public funding to advance our transition from an economy based upon hydro-carbons to one based upon renewable energy sources. On that basis and with all due respect to President Obama I don't think the PTC should be a priority. 

Initially there was general acceptance of the need to spur innovation and reduce the installation costs of wind generation. With the transition to larger and larger turbines and very tall mounting towers the efficiency of wind generation has been improved and costs per MW of generation have fallen. But those cost reductions were driven in large part by competition from Chinese manufacturers rather than any breakthroughs in technology and the cost reductions have largely leveled off. 

As wind generation in many jurisdictions in the world has developed it has moved from being a "green energy" bragging point in annual reports to being an operational concern for most Independent System Operators. The fundamental problem with wind generation is its unreliability and variability. 

Wind generation is a bit like nutmeg. In small doses nutmeg is a pleasant treat to sprinkle on coffee or eggnog; taken in bulk it can be fatal. We are rapidly moving out of "pleasant treat" territory when it comes to wind generation. 

In areas where wind capacity is relatively large compared to demand (Denmark, Germany, The U.S. Mid-West and Texas) the problems with wind are starting to get serious.  From a physical grid standpoint the most difficult problem is the very rapid ramp-up and ramp-down that wind farms can experience, even over very large areas. A quick look at the German generation for 2012 demonstrates the problem. 

Despite having over 30 GW of Nameplate capacity there are many times when there is virtually no wind energy production across the whole of Germany. The periods of regional calm have lasted from a few minutes to many consecutive hours. In Germany's case interconnections with Norway, Sweden, France, and the Czech Republic allow these rapid variations to be balanced by fast response hydro and nuclear generation outside the country. The same is true of Denmark.

In Texas these variations are balanced by thermal generation assets (mostly coal and natural gas fired plants) many of which have to be kept on-line as "spinning reserves" able to respond quickly to wind generation fluctuations. But because of the deregulated market in Texas and the existence of the PTC wind electricity producers can bid very low prices into the ERCOT market to the point where quite often they are bidding negative prices (this practice of bidding negative prices is even more prevalent with the Midcontinent Independent System operator - MISO).  No responsible operator of a thermal generating plant can bid negative prices which means that they get blocked out of the electricity market when the wind is blowing strongly.  In many places wind energy also gets preferential access to the grid by regulation.

As a result there is a growing crisis in traditional (and reliable) electricity generation. This has manifested itself in various ways. In the Euro zone almost all utilities are on credit watch. In both Europe and Texas it is becoming increasingly difficult to get financing for new thermal generation. ERCOT in Texas is raising the ceiling price in the spot market to $9,000/MW-Hour (the annual average in Texas is $45/MW-Hour) in an effort to get new generation built. That strategy is not working particularly well. 

Even more worrisome is the fact that it is becoming increasingly obvious that the more wind generation that exists the more reliable reserve capacity is required. What that means is that it is necessary to maintain almost a complete duplication of reliable generation assets to backup the wind farms. That is physically wasteful and economically untenable. 

It also must be recognized that the actual amount of effective wind generation at peak demand times is a small fraction of the "Nameplate" generation. While average capacity factors for wind in the U.S. are about 25%, more than half of that generation takes place at night when demand is low. Looking more specifically at generation at peak demand times the availability of wind is even less. This is because peak demand often occurs during cloudless high pressure weather events in both summer and winter when temperatures will be extreme and winds will be calm.  I published a somewhat humorous take on that possibility in my Christmas, 2012 blog "The Fright Before Christmas"

MISO’s Independent Market Monitor (Potomac Economics) noted in a June, 2013 report on page 39 that 

"wind resource output is negatively correlated with load and often contributes to congestion at higher output levels, so hourly-integrated prices often overstate the economic value of wind generation"

As a result they state that the MISO practice of counting 13.3% of wind as reliable is much too high.  They recommend instead that a value of 2.7% would be more appropriate (page 16 of the report). 

ERCOT takes a similarly optimistic approach by counting 8% of Nameplate wind capacity as available.  The reserve estimates do not explicitly address the possibility of a very calm, high demand event for an extended period of time. In the Report on the Capacity, Demand, and Reserves issued in May, 2013 ERCOT forecasts Reserve Margins declining from 13.8% in 2013 to less than 5% in 2023. 

Two things seem strange about this forecast as far as I am concerned. The first is that wind capacity is not forecast to increase for the next ten years. That will certainly not be the case if the PTC is renewed. Second, the amount of coal-fired thermal generation capacity is forecast to decrease only very marginally over the next 10 years. That seems unlikely given that the new MACT regulations will almost certainly cause some large coal-fired plants to be decommissioned. The more likely scenario is that ERCOT Reserve Margins will decrease more quickly than indicated in this forecast. 

Viewed objectively the investment of something close to $100 billion in wind generation (a significant portion of which was provided by taxpayers and ratepayers) has not produced very impressive results.  No thermal generation plants have been decommissioned soley because of the existence of these wind farms.  Capacity factors at peak demand times are in the single digits.  The financial health of existing utilities which still provide the firm capacity needed to keep the lights on has been put in serious jeopardy. 

There are much better ways to allocate the funds that would extend the PTC for wind developers.  I have outlined a comprehensive program in my "Sustainable Energy Manifesto" with some of the major items being significantly increased support for energy storage R&D, a PTC or FIT for energy storage, hydro-kinetics, and Concentrated Solar Power developers, and regulatory changes that would cost very little. 

Given how strong the wind energy lobby is, how politically correct renewables are, and how much money is at stake, extending the PTC would be the easy choice. I just don't think it is the right choice.

The opinions are those of the author, Davis Swan. Energy Central and EnergyBiz welcome all viewpoints and civil dialogues.

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Liquid Metal Battery "AMRI"

A Confluence of Influence directs ARRA stimulus, state and federal loan guarantees and grants to renewable energy and efficiency projects in Massachusetts.  Governor Deval Patrick has just cut another green ceremonial ribbon for “AMRI”, the Liquid Metal Battery (LMB)  manufacturing plant in Marlboro, MA.    Liquid Metal Battery technology was developed at MIT in the lab of Professor Donald Sadoway with a $6,949,624 award from ARPA-E to Massachusetts Institute of Technology. 

The renewable energy market created by the Massachusetts’ Deval Patrick Administration requires citizens to purchase high cost electricity from unreliable sources like wind energy.  Wind requires back-up energy sources, and/or experiments involving molten magnesium and molten antimony that Ambri will conduct.  The Ambri system will be deployed in Partnership with UPC First Wind with funding by Hawaii Energy Excelerator sponsored jointly by the Office of Naval Research, (note military funding for battery storage and renewables).  

Ambri has announced the subjects of the AMRI experiment are folks living in Hawaii, “...16 months after the inevitable Kahuku wind farm battery fire spewed molten lead across the sacred 'aina, First Wind, the company that couldn't see the August, 2012 fire coming even after two earlier fires, is doing it again.”

 See Hawaii Free Press 10/09/13 'Playing with Fire": Kahuku to Install Molten Magnesium Batteries'

http://www.hawaiifreepress.com/ArticlesMain/tabid/56/ID/11066/Playing-with-Fire-Kahuku-Windfarm-to-Install-Molten-Magnesium-Batteries.aspx

 

The last battery storage facility in Hawaii for the First Wind Kahuku Wind project has burned to the ground after an uncontrollable fire that lasted for three days, while spewing lead and toxic smoke.  The developer, Paul Gaynor CEO and President of First Wind, is Massachusetts Governor Deval Patrick’s appointed Co-chair of “The Climate Protection Advisory Committee” under the Global Warming Solutions Act, and the co-chair of the Mass Department of Environmental Protection Advisory Committee “Low Carbon Energy Supply Subcommittee”.

 

UPC First Wind CEO Paul Gaynor, who benefitted by a $117 million federal loan for the offline Kahuku Wind project, is also the subject of the Hawaii Free Press March 28, 2011 article:   

Hawaii Wind Developer tied to Largest-ever asset seizure by anti-Mafia police

 

http://hawaiifreepress.com/ArticlesMain/tabid/56/ID/4008/Hawaii-Wind-Developer-tied-to-Largest-ever-asset-seizure-by-anti-Mafia-police.aspx 

*Phil Guidice is the CEO of Abri and a Confluence of Influence.  Giudice led the team that invested over $54 million in federal stimulus dollars in energy efficiency and renewable energy projects.
http://www.metrowestdailynews.com/news/x1808786982/Wayland-resident-named-undersecretary-for-energy 

Philip Giudice has served as Commissioner, Massachusetts Department of Energy Resources; and for the Commonwealth of Massachusetts as Undersecretary of Energy in the Executive Office of Energy and Environmental Affairs.  Giudice is, or was formerly, Chair of the National Association of State Energy Officials (NASEO) appointed by then US Department of Energy Secretary Steven Chu to US DOE’s Energy Efficiency and Renewables Advisory Committee.  Guidice served on the State Energy Advisory Board.  He also served on the leadership group for the joint EPA– and US DOE–chartered State Energy Efficiency Action Network. Guidice has served as board executive committee member and treasurer of the Regional Greenhouse Gas Initiative, and was also a Senior Partner, and leader of Mercer Management Consulting’s global energy utilities practice. 

 

Working with the attorney general and stakeholders, Giudice’s team developed the three-year energy efficiency plans for the state’s investor-owned utilities. Guidice also oversaw the transition of DOER from a division of EEA to divisions specializing in energy efficiency, energy markets, renewable energy, Green Communities, and the Governor’s Leading by Example program.  Guidice has also served as the MA energy secretary’s key advisor on energy issues and has provided broad policy oversight of the Department of Energy Resources and the Department of Public Utilities.  Guidice has also served on the state Energy Facilities Siting Board.

Before joining the Patrick-Murray Administration, Giudice was senior vice president at EnerNOC, (with stock options). 

http://yahoo.brand.edgar-online.com/EFX_dll/EDGARpro.dll?FetchFilingHTML1?ID=5060485&SessionID=T--eHSsb1gQTc47

 

EnerNOC is the energy efficiency company in MA awarded a $10 million economic-stimulus contract, by their former Senior Vice President Giudice, through his MA energy department.   

 

This award represented approximately 20 percent of State Energy Program total funding awarded to Massachusetts by the U.S. Department of Energy under the American Recovery and Reinvestment Act (ARRA). 

 

http://www.bostonherald.com/business/general/view/20100416state_energy_agency_awards_10m_pact_to_chiefs_ex-firm_power-ful_connections/

 

What has the public to show for our $10 million to EnerNOC?


EnerNOC
was featured in Forbes [May 14, 2012]: “Who’s a Fat Cat”, “Who is the most over paid?”

 

 "The most overpaid executives are at Comverge and EnerNOC, both in absolute millions of dollars, and as a percentage of market capitalization."

http://www.forbes.com/sites/tomkonrad/2012/05/14/whos-a-fat-cat/

 Merit is not the driver in the renewables sector, particularly in Massachusetts.  Crony capitalists are moving through revolving doors while collecting public subsidies to offer non-solutions that make our energy supply less reliable and less affordable while the Confluence of Influential  prosper.  

 

Credits vs. Generating Energy Credibility

Left unsaid is that if there was a level playing field Big Nuclear and Big Coal would be listed as receiving far more money from the Government than either Wind or Solar.

This is the bottom line, especially since both Big Nuclear and Big Coal are self promoting like crazy in an effort to slow their loses in energy generation to renewables, whose prices are dropping monthly.

I suggest that the author look toward Germany where because of the lack of Big Nuclear and Big Coals political influence, renewables are making huge gains in providing clean and safe RISK-FREE energy, while at the same time sharing the profits with citizens not just shareholders of big Utilities!

Half true?

The notion that wind's "cost reductions were driven in large part by competition from Chinese manufacturers rather than any breakthroughs in technology" indicates the author's ignorance of the US wind turbine market. The Chinese wind turbine OEM's are unrepresented in the US market due to quality and reliability concerns and financing hurdles. The US and European turbine OEM's have driven cost reduction to a level where UNSUBSIDIZED wind is now the lowest cost new-generation resource in many parts of the USA. The wind COE reductions have been driven by technology and competition, and show no sign of abating.

The real question is whether storage technologies can come along so that the combination of renewables and storage becomes less expensive than other generation options. In order for storage to make strong commercial strides the generation industries bias for generation assets over storage assets should be addressed.

I agree I overstated Chinese Manufacturer's influence

However, prices are no longer declining significantly and further subsidies in order to drive technological innovation are no longer needed.

Comments regarding UNSUBSIDIZED wind costs are misleading in my opinion because they do not account for either storage or capacity payments to pay for reliable backup thermal  generation.  If any jurisdiction tried to survive on wind or wind+solar they would soon start experiencing blackouts on a regular basis (see my post on wind variablility in Alberta http://www.theblackswanblog.com/blog1/?p=245).  So although it is not incorrect to say that operationally on a per MW basis wind can compete as an incremental or opportunistic source of electricity that is not the complete and accurate picture.  Wind without storage is simply a luxury good - like having a beautiful 1962 Triumph Spitfire parked in your back lane.  Lovely to drive on a hot summer day but you couldn't rely upon it for your daily commute.

Wind PTC the Only Subsidy?

While arguing there is a better outlet for our scarce public funding than the wind PTC, the author fails to acknowledge how the PTC is becoming a key driver in reducing the cost of electricity to the consumer.

Xcell Energy  in October signed several $25-$35/MWhr wind power purchase agreements and according to their President & CEO Ben Fowke: "It works out to a very good levelized cost for our customers," Fowke said. "These prices are so compelling, the energy [cost] associated with it is less than you can do locking in a 20-year gas strip."   Fowke continues saying customers will save $800 million over the 20 years.

 Public Service Company of Oklahoma about the same time signed similar deals projected to save their customers $53 million the first year. 

The customer savings will add up to nearly $2 billion over the term of the two projects.  Individual utilities adding wind to their portfolio are apparently not incurring the negative impacts as suggested above—so what’s the beef?  Is it more complicated than that?  It does complicate the life for independent power producers legacy sources, but that's not the customers' problem.

renewables integration study was completed in October for PJM which indicates that a 30% ramp up of renewables would not only reduce emissions, but also costs.  Again, it looks like a good deal for the customer.

It would be remiss of me not to mention that the $2 billion a year PTC tax break is a key driver.  However, those in the oil and gas industry say the $2 billion a year Intangible Drilling Costs and Percentage Depletion tax breaks are also key drivers in keeping oil and gas prices down.  And, we know where nuclear would be without public funding.

Why all the fuss about a 20 year wind subsidy while the two mentioned oil and gas subsidies go mostly unnoticed and have been around for nearly 100 years? 

Since the author was in the oil and gas industry for 20 years, maybe he can explain why IDCs and percentage depletion are a better use of scarce government funding than the wind PTC.  

I never implied that wind was the only subsidized resource

I am not even arguing against the principle of subsidizing renewables once we have the storage technology even close to being economical. 

But here's the thing.  The operational cost of wind generation once a wind farm has been constructed is very low - no thermal plant could compete.  But the value of wind will also trend to zero as more and more wind development takes place because the wind ramps up and down over very large geographic areas.  That means we will have too much or too little most of the time (see my posting on the economics of renewables - http://www.theblackswanblog.com/blog1/?p=216).  If, on the other and we put together a serious International effort to solve the storage issue (see http://www.theblackswanblog.com/blog1/?p=32) we can aggressively develop wind and solar and actually decommission thermal generation facilities rather than just use them less.  Doesn't that make sense?