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

Click to access TWC-Negative-Pricing.pdf

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

CREZ: Bringing Wires to Wind

Texas, a treasure trove for wind energy, has installed by far more wind power capacity than any other state in the US. Texas currently boasts more than twice the capacity as its next-closest neighbor, California, on the wind rankings. However, a lack of transmission wires has bottlenecked this potential, preventing wind energy delivery from the remote areas in West Texas to the rest of Texas, particularly for big cities like Houston, Dallas, and Austin.

Figure 1. Texas Wind Map 

Presently, less than 1% of the high-capacity transmission lines in the US serve areas with the highest wind power capacity. Historically, when transmission lines were built, the high-capacity transmission wires were made to serve one large power plant in one densely populated region. This old model left smaller transmission lines to be constructed in less populated rural regions, exactly where the most robust wind resources are found. 

Figure 2. US Wind Capacity Statistics

So exactly how bad is the wind energy bottleneck in Texas?

Currently, only one major transmission line connects the wind-rich west Texas to the big cities. This one line has created a huge bottleneck because most wind turbines can’t pump power into the grid when the wind blows the hardest, which is usually at night. Many of these turbines receive a “negative price” on the market thanks to the controversial federal Production Tax Credit (PTC) which provides $.022/kWh subsidies to wind production (which received a one-year extension to the relief of wind developers everywhere). The PTC enables wind farms to pay the power companies to take their wind power, since they still receive a net profit through the federal tax credit. This leaves many of the other wind farms on hold, wasting wind energy, until more lines are built that can take their capacity. 

Texas is taking great strides towards relieving this bottleneck thanks to a new transmission line project, Competitive Renewable Energy Zones (CREZ), expected for completion by the end of this year, and thanks to the extension of the federal production tax credit (PTC) for renewable energy sources. CREZ is Texas’ four-year-old $5 billion plan for building an extensive transmission network to support the development and relieve the bottleneck of wind farms in West Texas. Renewable energy advocates in the US have hailed Texas as the new leader in wind energy thanks to the development of the CREZ model. Authorized by the Texas’ Public Utility Commission in 2008, CREZ is scheduled for completion by the end of 2013. 

Figure 3. CREZ Transmission Lines

Upon completion, an addition of 3,500 miles of new transmission lines that will carry up to 18,456 MW will be added to the Texas transmission network. It is rumored that once this project is complete, PUC is already looking to create even more wind power transmission lines but by collaborating with out-of-state party markets.

However, like all large-scale development projects, CREZ has received a considerable amount of opposition. A huge backlash against the power lines have emerged against CREZ from Texans that fear for their backyards and the Greenbelt. This opposition has spread from Hill Country, where it was ignited, to other parts of Texas, and has resulted in the applications of a number of other CREZ power line alternative routes that involves long hearings to determine where exactly the lines will be constructed.

The Texas CREZ system has become the inspiration for a number of similar transmission line projects around the country, including in New Mexico and California. But as is often told, Texas is different from all the other states and has an inherent advantage: it’s own separate power grid. While all the other states are tied to either the east of west electricity grid, Texas enjoys the independence from many regulatory constraints that allows it grow with more freedom. 

 

Texas Wind Farm Diaries

Wind is making quite a big stir in the energy world these days. It seems everyone is talking about, and that eventually leads those discussions to Texas, where a large percentage of American wind energy is being built and generated! Just yesterday the [1] American Wind Energy Association (AWEA) issued a press release announcing wind energy was the top source for new generation in 2012! The wind energy installed over 13,000 MW of electric generating capacity! The cumulative total reached over 60,000 MW, which has the potential to power around 15,000 homes. Be looking for the final report in April, which will discuss the new capacity built in the 2012. Some reasons for the rapid expansion of wind energy in the U.S. have been pointed out, including the [2]  looming expiration of the Production Tax Credit at the end of 2012. This credit was renewed on January 1, 2013. Even in light of this “renewed” production tax credit, there are predictions that the [3] wind energy will still have a difficult time this coming year.  Only time will tell when it comes to the future of wind energy! This AWEA also discussed the U.S. states that are leading in wind energy installations, please see the list below [1].

“Top states for new capacity installations in 2012 include:”

1. Texas (1,826 MW) 2. California (1,656 MW) 3. Kansas (1,440 MW) 4. Oklahoma (1,127 MW) 5. Illinois (823 MW)

6. Iowa (814 MW) 7. Oregon (640 MW) 8. Michigan (611 MW) 9. Pennsylvania (550 MW) 10. Colorado (496 MW)

Of course Texas leads the new installed capacity factor, but do not mistake these numbers with capacity already built prior to 2012. Texas wind energy is most intriguing to me because I had the golden opportunity to visit the west Texas area (specifically Sweetwater) to get a first hand look at the wind farms. The [4] Roscoe wind farm, the wind farm I got the pleasure to experience is quite an interesting place in the middle of  “no where,” as urban Texans might say. I received a first hand tour from Mr. Cliff Etheredge, a wind farm expert! He is quite a fellow and gives an amazing breakdown of wind energy on his tours. He was recently interviewed in the [6] Switch Energy Project and documentary discussing Texas wind energy and the wind farms near Sweetwater (some of the same places I visited are shown in the interview!). Have a look at what Texas wind energy is all about [6]:

 

Sources:

[1] American Wind Energy Association. “Wind Energy Top Source for New Generation in 2012.” Press Release.  2013. http://www.awea.org/newsroom/pressreleases/officialyearendnumbersreleased.cfm

[2] Colman, Zach. “Facing Expiring Tax Credit, Wind Industry Posts Record Year.” The Hill. 2013. http://thehill.com/blogs/e2-wire/e2-wire/280175-facing-expiring-tax-credit-wind-industry-posts-record-year

[3] Wernau, Jill. ” Illinois 5th in Wind Power Installations in 2012.” Chicago Tribune. 2013. http://articles.chicagotribune.com/2013-01-30/business/chi-illinois-5th-in-wind-power-installations-in-2012-20130130_1_wind-power-awea-new-wind

[4] E.ON. “The Roscoe Wind Complex.” 2013. http://eoncrna.com/contentProjectsRoscoe.html

[5] Switch Energy Project. 2012. http://www.switchenergyproject.com/index.php

Wind Will It End?

Please forgive me for the cheezy post title, but if you choose to read on I think you will see it is relevant. When we discuss the challenges facing wind energy we hear about the intermittency and storage issues, destroying the visual landscape, lack of transmission and even the dangers posed to birds. Many people also raise valid concerns regard whether or not wind can be economically feasible without government subsidies, regulations and mandates. A recent Scientific American article shows that wind proponents should also worry about the challenges we don’t hear about every day.

Not surprisingly, a lot of these less discussed challenges are coming from wind’s competitors. The Coalition for Fair Transmission Policy believes wind producers should fork over the funds needed to expand the transmission infrastructure from the areas of the country where wind energy is produced (the Midwest) to the areas with the highest energy demand (the East Coast). While this seems like a reasonable idea on the surface you should be asking yourself who is this Coalition?  Turns out the Coalition for Fair Transmission Policy is made up of East Coast utilities.

Closer to home we have players in the natural gas game demanding that wind developers be held responsible for some of the costs associated with running backup natural gas generators. These generators are essential in providing electricity when the wind slows down and is unable to produce the needed amount of electricity. As before this appears to be a reasonable suggestion. Why shouldn’t wind energy producers help foot at least part of the costs generated when a gas turbine is turned on to make up for a decline in wind energy? At the same time this seems like an attempt by the natural gas industry to increase their competitions costs and help keep natural gas competitive on price.

Anyone who is familiar with the wind industry understands the large role played by the government. While people can certainly debate whether the government should be involved at all and if so to what level, nobody can deny the importance of politics in the past or in the future. In my podcast I touched on the concerns Senator Charles Schumer raised regarding the spending of stimulus funds on projects that were creating more jobs in China than in the United States. Now Schumer and three other Senators proposed a plan that would prevent federal grants being issued to any project used blades or turbines manufactured outside of the U.S. opponents of the Senators’ plan claim that the U.S. cannot afford to slow or limit the growth of the wind industry because it will only put us at risk of falling behind Chinese and European manufacturers. They also point out that Schumer and his colleagues are simply trying to funnel jobs to their states and the number of jobs going overseas has been exaggerated. As with most things in politics the number of jobs being created in and outside of the United States differs significantly depending on who you talk to and before you know it the whole issue has taken a nasty turn towards “he said, she said”-ville.

It is obvious each of these parties (Senators, utilities, the natural gas industry) and their actions are motivated through their own self-interests, but it should be just as obvious that we cannot simply dismiss these legitimate concerns simply because we do not support the people raising them. In a perfect world we would be focused on finding solutions for the “natural” problems facing wind instead of creating additional artificial roadblocks. In that same perfect world everyone would be working towards the common goal of creating clean renewable energy and the traditional utility, natural gas and coal industries would be okay with that. Reality is the world isn’t perfect and the future of wind energy is hardly certain. For the wind industry to continue its impressive growth they will have to learn to be just as focused on navigating the wonderful world of politics and viciously competitive energy industry as they are with coming up with solutions to their storage issues.

Texas Nodal – The Next Step in Electricity Deregulation in Texas

Prior to 2002, generation, transmission, and sales of electricity in ERCOT were regulated.  Electric companies were vertically-integrated regulated monopolies based on geographic boundaries.

In 2002, the electricity industry in many areas in ERCOT was deregulated and a competitive market was created.   The vertically-integrated companies that existed prior to deregulation were broken up into power generation companies (PGs) which own and operate power plants, retail electric providers (REPs) which resell electricity to the final customers and handle the billing, and transmission and distribution (T&D) companies which remain regulated by the Public Utility Commission.   Not all areas of ERCOT were deregulated.  Municipally-owned utilities (such as Austin Energy) and customer-owned cooperatives (such as Bluebonnet Electric) were not required to deregulate but are allowed the option of entering the competitive market.  Also, some areas of Texas were judged to have insufficient room for competition and are therefore still regulated. [1]

In the retail market, deregulation resulted in a plethora of choices for most customers.  For example, in the 77002 zip code in Houston, 168 different plans are currently offered from 32 different retail electric providers, with different prices, contract terms, renewable energy content, and sign-up incentives. [2]

I am curious about the changes that are about to occur in the wholesale market [3].   The original (and still current) wholesale market is structured as a zonal market.  In this structure, ERCOT is divided into transmission congestion management zones as shown in the map below [4].

According to ERCOT, this model has problems with poor price transparency and indirect assignment of congestion costs, resulting in economically non-ideal dispatch of power plants and few tools for ERCOT to relieve congestion on the transmission system.  Consequently, ERCOT is preparing for a move to a new market structure later this year.   The new market structure is a nodal market, as shown in the map below [5].  ERCOT says the new structure will be able to directly assign the costs of congestion on the transmission system to the power plants that cause the congestion.  This is expected to result in clearer price signals to the market and improved dispatch of power plants.

One of the new concepts in the nodal market is the Locational Marginal Price.  The LMP is set by the highest accepted bid by any power plant at the node.  As I look at the nodal map, it appears that there are a large number of nodes between the wind generators in West Texas and the major cities.  My impression is that this will handicap the wind generators in comparison to other generators that are located closer to the major cities.  According to the published schedule, trial runs of the nodal market structure should currently be underway, and Texas Nodal is currently scheduled to go live on December 1, 2010.  We’ll see what happens!

Wind Around the World

When we think wind turbine, the first thing that probably comes to mind is a large, three-bladed structure in the middle of nowhere.  While this is the most common system for harvesting wind power on a large scale, there are many other options when dealing with small-scale devices.  The following video from the Popular Mechanics 2007 “Breakthrough Awards” [1] describes such a device:

A vibrating belt or “windbelt” forces small magnets to fluctuate.  The electromagnetic energy can be translated to electricity to power lamps and other devices like radios that do not require a large amount of power.

The young inventor, Shawn Frayne, is working to produce his windbelts in mass quantities.  As the video shows, his invention is very simple, compact, and does not require any materials that are scarce in the United States since the belt is simply Mylar coated taffeta [2].  If distributed to homes in third world countries, the windbelt could deliver free electricity to families that would otherwise go without.  Furthermore, if the manufacturers added capacitors to store the energy, it could offset the intermittency of wind and supply electricity on a more consistent basis.  Frayne was working on his invention in Haiti, but other countries like Nicaragua have proven to be even more suitable for wind power.  With “40 percent of the land area suitable for windmills” in Nicaragua and Mongolia, even more would be suitable for small-scale devices for individual homes [3].

Sometimes goods and services are even more important than directly sending money.  The windbelt is one small idea and may not even be able to provide enough power in the long run, but renewable energy may be the key to advancing third world countries because they are more self-sustainable than other forms of energy.  Of the trillions of dollars in the U.S. budget, it could be a helpful investment to devote a larger portion to wind power in places where the technology could transform the nation.

[1] http://www.popularmechanics.com/technology/industry/4224763.html

[2] http://en.wikipedia.org/wiki/PET_film_%28biaxially_oriented%29

[3] http://www.commondreams.org/headlines05/1205-07.htm