More on Wind Power, Negative Prices, Transmission, and the Production Tax Credit

Michael Giberson

On the greentechmedia site: “Texas Wind Farms Paying People to Take Power“:

A power producer typically gets paid for the power it generates. In Texas, some wind energy generators are paying to have someone take power off their hands.

Because of intense competition, the way wind tax credits work, the location of the wind farms and the fact that the wind often blows at night, wind farms in Texas are generating power they can’t sell. To get rid of it, they are paying the state’s main grid operator to accept it. $40 a megawatt hour is roughly the going rate.

The story refers to some of the analysis in my earlier post on negative power prices in the West region of ERCOT, and includes some additional comments from me:

State regulators hope to see a lot of new transmission lines in the next four years. Until then, Giberson argues, the generous federal tax credit isn’t working as it should.

“You are wasting resources in order to produce subsidized goods,” Giberson said. “It shows the subsidies are more than necessary to keep them in business.”

Upon reflection, I don’t think I’d mash up those ideas quite like that. The earlier post is primarily about how short run conditions — primarily high wind power output and relatively light load in the West region of ERCOT — interact with limited transmission capacity to produce negative prices, and how the negative prices reveal economic waste produced by the production tax credit under these particular conditions. Whether or not the subsidies are more than needed to keep wind power producers in business would depend on a longer run analysis. And whether or not the tax credit is “generous” or “working as it should” depends upon still other considerations — about the goals of policy and if alternative policies might more effectively reach those goals. The original post speculated a bit about alternative approaches, but didn’t get too far along that line of thought.

A paper by Merrill Jones Barradale, “Impact of Policy Uncertainty on Renewable Energy Investment: Wind Power and PTC“, provides more analysis on the role played by the production tax credit in wind power development.

In particular, Barradale takes on the idea that the periodic expiration and renewal of the PTC, and the associated boom-bust cycle in wind power development, reveals that wind power would be uneconomic without the subsidy. Barradale suggests instead that the boom-bust pattern is created by the effects of public policy-based uncertainty on negotiations for wind power purchase agreements (PPAs). In particular, he said, when the PTC has expired and the terms of renewal are uncertain, the possibility of PTC renewal represents a potential windfall of uncertain value to one party or the other, depending on the structure of the power purchase agreement.

[ASIDE: Actually, though the article presents uncertain PTC renewal as a problem for contract negotiations, as the article itself notes there is a contract-based solution to this problem: specify two sets of bid prices in the contract, one set assuming the project qualifies for a renewed PTC and one assuming no PTC. Indeed, a current RFP for wind power by Xcel Energy’s Texas-based affiliate Southwestern Public Service takes this approach. Note, however, that requiring two sets of bids does raise negotiation costs and doesn’t fully eliminate policy uncertainty associated with PTC renewal.]

Barradale surveyed wind industry professionals and found that relatively few thought loss of the PTC would stop all wind power development. In fact, many of the people surveyed anticipate that the PTC would not be in place much longer. Among alternatives, Barradale reports that industry participants expect that regional or national Renewable Portfolio Standards would likely be more stable alternative policies and feed-in tariffs or other direct production subsidies would likely be less stable alternative policies. In addition, Barradale notes that policy efforts to restrict CO2 emissions would also tend to support wind power development.

On the topic of negative power prices in ERCOT, American Wind Energy Association analyst Michael Goggin pins the blame on inadequate transmission capacity in Curtailment, Negative Prices Symptomatic of Inadequate Transmission. (Mentioned briefly here previously.) He is absolutely right: with enough transmission capacity there would be no negative prices or curtailment of wind power output. His assessment elides the issues of whether the transmission expansion necessary to eliminate negative prices would be economical, or whether the PTC is an effective public policy, or whether the current PTC is too generous, or whether the PTC encourages waste, and several other topics of interest in public policy analysis. Goggin simply assumes the existing wind power capacity and more to come, and observes the relative inadequacy of the grid.

Goggin is writing for the wind power industry trade association, so we can understand why he takes this approach. In some sense, though, the approach is backward both as policy analysis and as analysis of the industry. Wind power projects can be developed relatively quickly, as these things go, while transmission capacity requires a much longer lead time. Wind power development is a West Texas jackrabbit to the tortoise of transmission planning, development and related Austin-based public policy processes. Wind power developers could easily time the addition of still more wind power capacity in the region to match the expansion of transmission capacity.

We could ask why still more wind capacity is under development in the area given the well known existing transmission limits. One possible answer is that the value promised in the future, when the transmission expansion finally arrives, is so great that it is worthwhile to invest now. (But why now and not, say, next year — why not avoid contributing to more frequent negative prices and curtailments for a year?)

Another possible answer is that, as I said before, “the subsidies are more than necessary to keep them in business.” More to the point, the subsidies are unlikely to be the best way to accomplish whatever policy goals lie underneath these programs.