Monday, May 4, 2009

Jerome's Conundrum

First off, here is a great article on the economics of commercial wind turbines. It does not depend on a particular type of turbine, and it makes a number of important points:

In particular, it compares how the economics of capital intensive, low marginal cost electricity producers (wind turbines are a great example of this class of generator) behave in a "market" electricity system (such as NYISO, the New York Independent System Operator, at, in comparison to a less capital intensive, high marginal cost generators, such as those using natural gas. As long as the wind is available, wind turbines can generate additional electricity for close to zero extra cost; for fossil fuel consumers such as gas burners, additional electricity production requires the purchase of additional fuel. In the NYISO system, the electricity price in a given hour is set by the marginal cost (the cost to make the last needed increment needed to satisfy the electricity demand for that hour). If this is wind turbine derived, that cost could be very low - close to zero, while for natural gas or oil, the marginal cost/price is quite high, by comparison, and it gets higher as more gas is required to satisfy demand. Add in a natural gas price spike - as has happened during hurricane seasons past, or in some winter situations, and marginal prices go up and up. The record NYISO marginal price is 99.5 c/kw-hr for Long Island in a summer heat wave a few years ago.

In a NYISO like system, it turns out that wind is a price getter, while gas is a price setter. Wind gets whatever the price is for that hour - it can't be predicted/turned on at will. Adding in more wind for that hour depresses the price, since more supply at a given demand depresses prices. On the contrary, if less wind energy is added in for that hour the result is higher prices - less supply for a given demand gives higher prices. Generally, turbines are producing whenever they can, while gas fired units can be turned on and off whenever the owner judges that the price warrants this. If electricity prices are too low, those gas consuming generators can choose not generate extra (or any) electricity, lowering the supply, and raising the price, while at the same time, lowering the demand for gas, and possibly its price. Increased gas usage generally raises both the price of natural gas and of electricity made from that gas (high marginal production cost/required price), while increased usage of wind...lowers the marginal price for electricity, and lowers the gas price (less usage, same supply gives lower gas price).

However, the average cost for wind turbine electricity is largely determined by paying back the loans/equity invested that were used to buy and install the wind turbine, and is far greater than its marginal production price. Hence, the following pickle vat.

Here is the conundrum:
"But the consequence of this is that the more wind you have into the system, the lower the price for electricity. With gas, it's the opposite: the more gas you need, the higher the price will be (in the short term, because you need more expensive plants to be turned on; in the long run because you push the demand for gas up, and thus the price of gas, and thus of gas-burning plants, up).

In fact, if you get to a significant share of wind in a system that uses market prices, you get to a point where wind drives prices down to levels where wind power loses money all the time! (That may sound impossible, but it does happen because the difference between the low marginal cost and the higher long term cost is so big)."

For April of 2009 in the NYISO West Zone, the price for generated electricity was 2.76 c/kw-hr. Just about every producer of electricity is losing money at that rate - even the coal burners would be hard pressed to make a profit. But this is especially true for the $500 million worth of recently installed wind farms in the area (Wetersfield 2, Sheldon, Lackawanna), even if the owners are eligible to use the tax incentives because they have profits from other business activities which they can use for tax credits (PTC) or tax deductions (MACRS). And we are not alone in this bizarre situation - for April, Ontario's average price was 1.96 c/kw-hr = US 1.6 c/kw-hr. Rumor has it that the nukes had to actually PAY people to take their electricity during the low demand/high wind time periods......because nukes are dangerous to ramp power outputs up or down on a continual basis, and their economics also start to suffer if they are not operating at maximum output.

The only remedy for renewables is to provide constant, predictable prices for renewable sources which have high capital costs/low to non-existent fuel costs (= low marginal prices). There are two possible positive solutions - 20 year or more Power Purchase Agreements (PPA's), or Feed-In Laws, or both. Of the two, Feed-In Laws are the most equitable, and allow for many wind turbine owners. In general, PPA's favor large companies even to a greater extent than would occur with Feed-in Laws, and they would tend to be the exclusive winners. And there is that negative solution - no new renewable energy contribution of any consequence, no jobs created form that activity, and either pricier electricity with more associated pollution and/or no electricity to be had for any money. Ugh....

But regardless, if a high renewable energy content is desired in NY State's electricity portfolio, the "merchant wind" option in NYISO will not work, and will instead lead to greater and greater numbers of bankruptcy for new renewable investments, and thus few, if any renewable investments. There is a non-viable temporary solution - increased tax-payer subsidies to renewable energy providers. But since the state is way beyond broke, that won't really work for long. Even the RPS incentive - which seems pegged at 1.5 c/kw-hr - will be of little help. In effect, Feed-In Laws lead to maximum level of new renewable installs, and without Feed-In Laws, energy independence and greenhouse gas pollution control will not happen unless SIGNIFICANT CO2 pollution taxes (or some convoluted cap and trade system that has the same effect as CO2 pollution taxes) are instituted. And that is extremely unlikely...after all, an increase in the gasoline tax can't even be accomplished, so why could an equivalent for electricity occur? NYISO pricing without a Feed-In Law also minimizes the probability of renewable energy manufacturing within the state to satisfy the internal demand - a minimal demand can't justify such investments. Oh well......the "market economic fundamentalists" - a sort of Chicago School of Economics/Milton Friedman acolytes version of the Economic Talibaners - won't be happy, but sometimes theory has to bend to reality.


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