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Too much cheap wind?!

A study by consultants Poyry on behalf of the European Wind Energy Association claims that wind power generation can reduce electricity prices by between €3 and €23 (£2.60 and £19.90) per megawatt hour depending on the scale and location. Entitled Wind Energy and Electricity Prices, the report looks at a range of studies of prices and concluded that an increased penetration of wind power reduces wholesale spot prices. Overall it says that “due to market dynamics and the lower marginal costs of wind power compared to conventional power, the spot electricity prices decrease by 1.9 €/MWh per additional 1,000 MW wind capacity in the system”.

That already seem to have been playing out in practice. Poyry reports studies that suggest that, for example, in Germany, increased wind power has reduced costs in the range of €1.3–5 bn per year. One result has it seems been that some power companies have begun to reduce charges to consumers, although this is mainly because of the need to avoid wind curtailment: at periods of low demand and when there is excess wind available, a price-rebate system has been used in Germany, to avoid wind curtailment (i.e. power dumping), and according to an article in Offshore Wind Magazine (OWM), “payments have risen as high as 500.02 euros a megawatt-hour” for some users. In effect it’s negative pricing-selling power at below cost.

Anti-wind cynics might of course say that this just goes to show that we should not subsidise wind – then suppliers wouldn’t have to pay people to use it when there was excess. However, the counter point is that, although the capital cost is high, so that subsidies may initially be needed to establish it in the market, once it is established the marginal operating costs are low (there is no fuel cost) making it very competitive, especially if curtailment can be limited.

Dropping the price locally can certainly help to avoid having to curtail the wind-turbine output, but of course, like curtailment, this does eat into profits. Since the spot-price volatility is unpredictable, it makes it hard to plan ahead. So arguably there have to be limits on how low prices can fall or else it becomes uneconomic to produce power, at least within a competitive market system.

To avoid this, and the risk of the market collapsing, OWM notes: “Nord Pool, the Nasdaq OMX Group Inc.-owned Scandinavian power bourse, last year took steps to encourage generators to limit production by implementing a minimum price. The most generators would pay users to take their power is 200 euros per megawatt hour if there is excess electricity from too much wind.” It added, the measures are meant to “increase the effectiveness of the market, forcing power generators to consider reducing their electricity generation or having to pay for delivering electricity”. Similar arrangements have evidently been made in Australia, where excess wind generation has also at times been forcing pool prices to go negative, leading the market regulator to set a minimum floor price. But that is a pretty crude approach – fixing the market. It’s not a sustainable long-term solution.

Diversity is another way out. OWM noted that RWE, Germany’s second-largest utility, minimizes the risks of having to pay consumers to use power by using a “broad” range of different-generation technologies in different markets. RWE said that rebates or negative prices didn’t have a big effect on the company.

Longer term, what’s needed is diversity plus better and wider-ranging grid links, which can allow excess power to be sold further afield, and also compensate for any shortfalls by drawing power from other areas (i.e. via regional and even inter-country power trading). OWM noted that this is already done among France, the Netherlands and Belgium, and Germany plans to join them soon – selling excess power to power-short areas. That’s where the HVDC supergrid would come into play, allowing for EU-wide optimization of green energy.

Storing excess energy (e.g. using it to pump water up into hydro reservoirs) is another option, and this could be done on an EU-wide basis, using the supergrid. That’s what Denmark already does with some of its surplus wind-derived electricity, selling excess to Norway and Sweden, who, if they don’t need it immediately, may store in their hydro reservoirs. Denmark then, in effect, buys it back when there is a wind shortfall in Denmark. The only problem is that the Danes get less for the excess wind that they sell than they have to pay for the bought-back power.

Negative pricing and surpluses are not just an EU issue. OWM noted that, according to the Electricity Reliability Council of Texas, Texas had so-called negative power prices in the first half of 2008 because wind turbines in the western part of the state weren’t adequately linked with more populated regions in the east. See my earlier blog on grid congestion and wind-curtailment issues in the US.

OWM quote Andrew Garrad, chief executive officer of GL Garrad Hassan, a wind-consulting company, that commented that in parts of Texas, some utilities are using wind power because it’s the cheapest form of energy. But until there’s more integration and better transmission grids, prices probably will continue to fluctuate, leading to negative prices, with payment to consumers being reflected as a discount on their monthly bills. Garrard conclude that “we do need to get the right market mechanisms in place” to better integrate wind power into energy grids.

That’s clearly true. But rather than just leaving it up to the market or fixing floor prices, one idea might be to introduce a cross feed tariff on power transfers, to help balance cash and energy flows, so as to optimize carbon savings by avoiding curtailment. For example, it could raise money via a levy on the overall transfer or from sales to stimulate investment in grid upgrades and reward suppliers who can deal with excess generation, and then meet shortfalls, using energy-storage facilities.

Source: www.offshorewind.biz/2010/04/25/offshore-wind-boom-lowers-electricity-prices/

A version of the OWM article originally appeared in Bloombergs Business Week, authored by Jeremy van Loon.

Posted by Dave Elliott on May 15, 2010 1:18 PM | Permalink