The case for allowing negative electricity prices – Benedettini and Stagnaro

Simona Benedettini and Carlo Stagnaro make the case for allowing negative prices in electric power markets in Europe. A few of the larger power markets in Europe allow prices to go negative, but others retain a zero price lower limit. Benedettini and Stagnaro explain both why it is reasonable, economically speaking, to allow electricity prices to go negative and the hazards of retaining a zero-price minimum in a market which is interconnected to markets allowing the more efficient negative prices.

It is all good, but I can’t resist quoting this part:

Negative prices are not just the result of some abstruse algorithm underlying the power exchange and the functioning of the power system. They are also, and more fundamentally, the way in which the market conveys the decentralized information that is distributed among all market participants, and that cannot be centralized in one single brain, as Nobel-prize winner Friederich Hayek would say. That information is translated into two major market signals, which are embodied in negative prices.

In the short run, negative prices show that there is a local condition of oversupply under which electricity is not an economic good which society is willing to pay for, but an economic bad for which consumers should be compensated. Therefore, negative prices create an economic incentive for consumers to shift their consumption patterns so as to capture the opportunity of being paid, instead of paying, to receive energy….

However, in the long run, negative prices talk to energy producers, not to energy consumers. The emergence of negative prices, although strongly conditioned by demand-side constraints, shows that the generating fleet encompasses too much “rigid” capacity (i.e. too much nuclear and coal-fuelled plants) and too little “flexible” capacity (for example CCGTs or turbo-gas power plants); or that grid interconnections are insufficient to properly exploit the spare, flexible capacity available within a market area.

So far as I know, all of the regional power markets in the United States now allow prices to go negative. The connections between wind power policy and negative prices have politicized the issue a bit in the United States. Benedettini and Stagnaro explain in a straightforward manner why, no matter what you think of renewable energy policies, you ought to favor allowing wholesale power market prices to go negative.

Texas wind power, the ERCOT power market, the Public Utility Commission

From SNL Energy, “Texas utility regulators expect to open investigation on wind ‘cost apportionment’“:

Having seen record wind output of more than 10,000 MW in March, ERCOT in the report also noted that Texas has gone well beyond its 10,000-MW capacity goal and far earlier than the 2025 target established in the state’s Public Utility Regulatory Act. …

And while wind energy continues to boom in Texas, the PUCT has been working with ERCOT on ensuring a reliable power grid amid wholesale prices that are not encouraging new fossil-fuel plant construction.

Perhaps, just perhaps, there is a connection between the “wind energy … boom” and the “wholesale prices that are not encouraging new fossil-fuel plant construction”?

The SNL Energy report noted the PUCT was beginning an investigation into cost apportionment issues surrounding wind energy and the recently completed CREZ transmission line additions.

AWEA brags about wind energy’s mediocre performance

On May 2 The Hill published a column by AWEA data spinner Michael Goggin, “Wind energy protects consumers,” in which the reader is regaled by tales of great service and low, low prices provided by the wind energy industry.

Sorting through the claims led me back to the AWEA blog, where among other things Goggin applauds the industry that pays his salary for its grand performance in trying times this past January in New York. Goggin exclaimed the New York grid operator “received very high wind output when it needed it most during the last cold snap, while other forms of generation experienced a variety [of] problems.”

Following the link provided to the NYISO press release I find the claim, “On Tuesday, the NYISO had the benefit of more than 1,000 MW of wind power throughout much of the day.” The New York grid operator reported peak demand during the day (January 7, 2014) at 25,738 MW, so wind energy’s contribution was in the 4 percent range. Another way to say that is that other forms of generation, despite experiencing a variety of problems, provided about 96 percent of the energy New York consumers received when they “needed it most.”

The AWEA website indicates that New York has an installed capacity of 1,722 MW of wind power. Doing the math reveals that about 40 percent of the wind energy industry’s generating capability failed to show when New York electric power consumers “needed it most.”

Impressive? Not really.

To more fully consider the situation, we’d have to ask just how much non-wind electric generating capacity has been driven from the New York market by subsidized wind power. It is part of the AWEA storyline that clean, low-cost wind energy “displace[s] output from the most expensive and least efficient power plants,” and obviously over time frequently displaced units are driven from the market. One may reasonably wonder how much generation capacity was driven from the market before that cold January day when New York electric power consumers “needed it most.”

In related news, the National Renewable Energy Lab just produced an exploration of the wind energy industry’s future with and without the Production Tax Credit. In brief, if the PTC is not revived once again, the industry will likely shrink by about half over the next several years, kept in business mostly by state renewable energy purchase requirements. Indirectly the study concedes that NREL doesn’t think wind power is cost competitive with alternative electric energy supplies, but under the best possible wind resource and grid access conditions.

Please note my occasional wind energy disclaimer: I am not against wind energy (a technology which can contribute real value in the right places), just against bad policy (which takes real value created by other people and shovels it in the direction of investors in wind energy assets and people who happen to own windy plots of land with good grid access).

Easy to dream big when you can spend other people’s money, and really, why else would you build solar power in Michigan?

Crain’s Detroit Business reports:

A solar power work group in Michigan is making progress discussing the possibility of expanding the current utility-sponsored solar incentive program ….

But the real question is whether DTE and Consumers will voluntarily expand their programs — as environmentalists, manufacturers and solar installers have been asking the state to require for job creation and public health reasons — before the programs expire in 2015.

Involved in the solar power work group discussion are state regulators, solar PV installers, solar PV manufacturers, environmental groups, and the state’s two large regulated utilities, DTE and Consumers Energy Co., who collect a regulator-approved renewable energy surcharge from their customers.

Not mentioned in the article are the views of retail electric power consumers, whose money is up for grabs, nor anyone thinking of federal taxpayers’ stake in the matter.

There is a respectable answer to the question “why else would you build solar energy in Michigan?” If you have strong pro-solar commitments, for ethical or other reasons, the you may well feel strongly enough about it to be willing to spend your own money on a system. Or, if you are off-grid or want to be, solar is one way to stay powered.

But the answer most prevalent in the work group, at least if the Crain’s article is a guide, is much less respectable: they are mostly people who feel strongly enough about solar power–or the money they might make from it–that they want to force their unwilling neighbors to pay.

Background on the Michigan solar power work group can be found at the pro-solar-policy Michigan Land Use Institute.

Decarbonization Now? (No, not yet.)

Paul Krugman’s recent opinion column in the New York Times ran under the headline, “Salvation Gets Cheap.” At first I though Krugman was making a snarky comment on ex-Mayor Michael Bloomberg’s claim that the ex-mayor’s work on restricting access to guns, and efforts on obesity and smoking would ensure a place in heaven. But no, Krugman is opining that technology is providing an easy way forward on climate change:

The climate change panel, in its usual deadpan prose, notes that “many RE [renewable energy] technologies have demonstrated substantial performance improvements and cost reductions” since it released its last assessment, back in 2007. The Department of Energy is willing to display a bit more open enthusiasm; it titled a report on clean energy released last year “Revolution Now.” That sounds like hyperbole, but you realize that it isn’t when you learn that the price of solar panels has fallen more than 75 percent just since 2008.

Thanks to this technological leap forward, the climate panel can talk about “decarbonizing” electricity generation as a realistic goal — and since coal-fired power plants are a very large part of the climate problem, that’s a big part of the solution right there.

It’s even possible that decarbonizing will take place without special encouragement, but we can’t and shouldn’t count on that. The point, instead, is that drastic cuts in greenhouse gas emissions are now within fairly easy reach.

The “Revolution Now” report, which was linked in Krugman’s column online, is surprisingly weak sauce. The U.S. Department of Energy report (your tax dollars at work) purports to describe “four technology revolutions that are here today” and “have achieved dramatic reductions in cost” and “a surge in consumer, industrial and commercial deployment” in the last five years. The four “revolutions” are onshore wind power, polysilicon photovoltaic modules, LED lighting, and electric vehicles.

Each “revolution” gets a two-page summary and a colorful chart showing declining costs and rising use. The summaries are footnoted, just like real research, and studded with more factoids than the front page of USA Today. Here’s a fun fact: the ratio of empirical claims to footnotes in the article’s two pages on wind power is 4-to-1.

You can get a sense of the quality of the report by considering the claims strung together on electric vehicles: First it is reported “more and more drivers are abandoning the gas pump for the affordability and convenience of in-home electric charging,” then that 50,000 EVs were purchased in 2012 and the rate of purchase doubled in early 2013. Next we are told “to maintain this momentum the most critical area for cost reduction is batteries.” A paragraph later the report said, “In many senses, EVs are already competitive with traditional cars.” In the final paragraph, however, a sober note: it will take “further progress on reducing the cost of EV batteries” to make “these benefits available to a larger audience.”

The sober note referenced a DOE battery cost target of $125/kwh by 2022, at which point the DOE expects ownership costs for a EV will be similar to a standard vehicle. A glance back at the chart suggests current battery costs nearer five times that level, leaving at least this reader wondering in which sense “EVs are already competitive with traditional cars” and part of the “technology revolutions that are here today.”

The revolution is here today! Or maybe in 2022!! Or maybe whenever “further progress” is made!!!

Overall the report is more enthusiasm than analysis, and not sufficient to justify changing beliefs on the cost of decarbonizing energy supplies.

Looking for renewable policy certainty in all the wrong places

From EnergyWire comes the headline, “In Missouri, industry wants off the ‘solar coaster’.” (link here via Midwest Energy News).

A utility rebate program authorized by voters in 2008 is making Missouri into a solar leader in the Midwest. But $175 million set aside to subsidize solar installations is [nearly] fully subscribed … and the same small businesses that scrambled to add workers last year to help meet surging demand are facing layoffs….

Heidi Schoen, executive director of the Missouri Solar Energy Industries Association, said the industry, which has generated thousands of jobs and millions of dollars in new taxes for the state, is just looking for certainty.

“We want off the solar coaster,” she said. “We don’t want to be in this boom-and-bust situation.”

It is a patently false claim.

If they wanted off of the boom-and-bust policy ‘solar coaster,’ they’d get off. They could go do unsubsidized solar installations for example, or if (when?) that proves unprofitable get work doing something else. By their actions they signal that they prefer the booms-and-busts that come with reliance on politicians for favors.

Better red than dead, but not red yet (on solar power)

In her New York Times Economix column Nancy Folbre recently said (“The Red Faces of the Solar Skeptics,” March 10, 2014):

If the faces of renewable energy critics are not red yet, they soon will be. For years, these critics — of solar photovoltaics in particular — have called renewable energy a boutique fantasy. A recent Wall Street Journal blog post continues the trend, asserting that solar subsidies take money from the poor to benefit the rich.

But solar-generated electricity is turning into a powerful environmental and economic success story. It’s also threatening the balance sheets of electric utility companies that continue to rely heavily on fossil fuels and nuclear energy.

I don’t count myself a renewable energy critic, but I do find myself as a critic of most renewable energy policies and so feel a bit like Folbre is addressing her points to me. In response I’ll say my face isn’t red yet, and I’m not expecting it to turn red anytime soon.

Folbre is a distinguished economist at the Univ. of Massachusetts, but she isn’t a specialist in environmental or energy economics, and I think her thinking here is a little muddled. (In this muddling through she has similarly distinguished company–consider this response to a Nobel prize winner.)

So a sample of my complaints: She trumpets the fast declining price of solar panels by picking a factoid out of a story in ComputerWorld: “declined an estimated 60 percent since the beginning of 2011!” ComputerWorld? Maybe the work of the U.S. Department of Energy or other more traditional information sources wasn’t sensational enough (claiming as it does, merely that “U.S. solar industry is more than 60 percent of the way to achieving cost-competitive utility-scale solar photovoltaic electricity”).

An investment company would have to acknowledge that cherry-picked past results are no guarantee of future performance, but it isn’t even clear that she is firm on the idea of “cost.” Folbre declares that generous subsidies and feed-in tariffs have “allowed solar photovoltaics to achieve vastly lower unit costs.” Really? Well maybe if we subsidize it a little harder, it will become free for everyone!

C’mon professor, get serious! Perhaps it is true that generous subsidies and feed-in tariffs have allowed owners of solar PV systems to experience lower out-of-pocket expenses, but it is a little embarrassing to see a distinguished economist make this mistake about costs. Should we conclude congressional junkets overseas don’t cost anything because the government foots the bill?

Not until the penultimate paragraph does Folbre get back on firm ground, talking about renewable energy policy rather than technology:

Subsidies are not the ideal public policy for promoting clean energy. As a recent analysis by the Carbon Tax Center points out, a carbon tax devised to protect low-income households from bearing a disproportionate share of higher energy prices would yield more efficient overall results, as well as encouraging solar power.

But in our subsidy-encrusted energy economy, some subsidies are better than others. As farmers say, make hay while the sun shines.

Yes, as any economist ought to say, “subsidies are not the ideal public policy for promoting clean energy.” In fact, it’s been said here a time or two.

[HT to Environmental Economics.]