Wind power in Texas and the “negative pricing” conundrum

The issue of negative pricing from wind power has been in the news in Texas a lot lately, with some blaming these negative prices for stifling investment in new electric generation. [1]  First: what is negative pricing?  In the competitive market wholesale generators offer their product at differentiated prices based on their marginal cost of production, creating a ‘supply curve’ from which the most cost-effective generation is chosen to meet current demand.  Wind power has almost no marginal production cost and is often a price taker in the market, however at night when demand is low wind has been known to set the price, particularly in west Texas. 

This happens for two reasons: first, there is ample supply of wind in west Texas to meet demand during night-time hours; second, wind in west Texas has limited access to transmission lines to move the electricity into other regions with higher demand.  At the same time wind receives a Production Tax Credit (PTC), which provides a financial incentive for wind generators to produce electricity even when prices are low.  When wind energy sets the price in west Texas, the PTC makes it more valuable for wind generators to pay offtakers to consumer electricity by providing generators with an additional revenue stream. 

This negative pricing affects other power producers in the same region: since their marginal cost remains positive they are forced to choose between losing money or shutting down operations while prices are negative.  Such a choice makes it particularly difficult to invest in new generation given the uncertainty of future  revenues, these negative prices do not affect the bulk of power plant operators or investors.  A report to ERCOT on issues facing investors in new generation to meet reliability needs found that “Negative prices have largely been confined to the ERCOT’s West Zone, while the other 3 zones have not had more than 0.4% of hours with negative prices.” [2]  As I discussed in a blog post for EDF, only 10% of ERCOT’s non-wind capacity is in the West Zone, so investors looking to build new power plants in Texas rarely look to that region, and are only faced with negative pricing 0.4% of the time. [3]

Not only the problem restricted to a relatively remote area, it’s expected to end soon with the completion of a large set of new transmission lines connecting west Texas wind to population centers in the rest of the state.  [4] These lines, commonly referred to as Competitive Renewable Energy Zones (CREZ) will alleviate the congestion that forces wind operators into negative pricing conditions by connecting them with additional demand throughout the state, which, even during the night-time exceeds 20,000 MW – more than twice the amount of wind energy currently on the ERCOT grid. [5]

 

[1] “Texas Windpower: Will Negative Pricing Blow Out the Lights? (PTC vs. reliable new capacity),” Neely, J., November 27, 2012, http://www.masterresource.org/2012/11/texas-negative-pricing-ptc/

[2] “ERCOT Investment Incentives and Resource Adequacy,” p. 20, June 1, 2012, The Brattle Group

[3] “Chasing Red Herring on the Wind,” Meehan, EDF Energy Exchange

http://blogs.edf.org/energyexchange/2012/09/13/chasing-red-herring-on-the-wind-2/

[4] “Negative Pricing: Caused by Congestion, Ending Soon,” The Wind Coalition

http://windcoalition.org/wp-content/uploads/2013/02/TWC-Negative-Pricing.pdf

[5] “ERCOT – Challenges & Opportunities,” Doggett, T., p.30 http://www.ercot.com/content/news/presentations/2013/ChallengesOpportunities-Mar%202013.pdf

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3 Comments

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3 responses to “Wind power in Texas and the “negative pricing” conundrum

  1. rmnaylor

    While negative pricing in West Texas may potentially be causing a bottleneck in wind energy development, with the current development of improved transmission systems this should be a fleeting problem. As the development of large wind farms is pushed from extremely isolated locations closer to towns and cities, more problems may arise. Communities may be reluctant to having these structures close by. It is one thing if you own the land they are built on and are getting money from their presence, but quite another if you consider them an eyesore and aren’t directly getting any benefits. I think that going forward it is essential that any form of wind farm or wind energy development become as involved in the surrounding community as possible. If current installations become good local citizens, it will greatly ease the path for future projects.

  2. Negative pricing may not be a huge concern in the near term for Texas, given the CREZ transmission lines, but it is a growing issue across the country in areas where renewables are being developed at scale. The wind generation in the pacific northwest, much of which is used to power California, already faces negative pricing and curtailment due to the constraints on getting this power to load centers. And in Southern California the Mojave Desert region is facing potential negative pricing due to the large amount of solar and wind being developed there and limited transmission capacity. Large scale energy storage could help greatly alleviate these constraints by letting renewable generators shift their power sales around to avoid negative pricing/curtailment periods, but the economics on storage systems do not make this an attractive proposition as of yet. Presumably negative pricing will be a good tailwind to spur the development of storage solutions in the future.

  3. Pingback: More renewables? Watch out for the Duck Curve | Climate Etc.

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