Someone please explain the American Wind Energy Association’s funky electricity price arithmetic

About a month ago the American Wind Energy Association blogged: “Fact Check: New Evidence Rebuts Heartland’s Bogus RPS Claims.” I’m scratching my head a bit trying to understand their so-called facts. The big claim from AWEA:

The eleven states that produce more than seven percent of their electricity from wind energy have seen their electricity prices fall 0.37 percent over the last five years, while all other states have seen their electricity prices rise by 7.79 percent.

The blog post mentions DOE data, and the post links to a report the AWEA assembled titled “Wind Power’s Consumer Benefits” which cites U.S. EIA data on “Average Retail Price of Electricity to Ultimate Customers” (find the data here). The blog doesn’t explain their method and the report is only barely more helpful in that regard.

The AWEA report describes the price suppressing “merit order” effect of subsidized/low marginal cost wind energy, but that is a wholesale price phenomena that doesn’t include various other utility compliance costs, and anyway the AWEA is making claims about end consumer benefits from lower retail prices. The merit order effect only matters to consumers if consumers end up paying lower retail prices.

So I downloaded data from the EIA site and tried to calculate the retail percent change in price for every state over the last five years, then compared the eleven states that AWEA said produce more than seven percent of their electricity from wind energy to the remaining states and DC.

By my simple average, prices in the 11 “wind states” were about 18.8 percent higher in December 2013 than they were in December 2008; prices in the 39 other states and DC were about 5.7 percent higher in December 2013 than they were in December 2008. Now maybe AWEA is doing a weighted average by kwh sold or something different than my straightforward calculation, but they don’t explain it and I can’t reproduce it.

Can you?

The price data from December 2008 and December 2013 for the eleven “wind states” and “Avg-All Others” are:

State Dec-08 Dec-13 Percent change
Iowa          7.10          7.77 9.4%
Kansas          7.01          9.19 31.1%
Minnesota          7.66          9.27 21.0%
North Dakota          6.35          8.03 26.5%
South Dakota          6.93          8.57 23.7%
Oklahoma          6.55          7.14 9.0%
Texas        10.85          8.77 -19.2%
Colorado          8.01          9.48 18.4%
Idaho          5.97          7.91 32.5%
Wyoming          5.68          7.71 35.7%
Oregon          7.24          8.61 18.9%
Avg-All Others        10.60        11.19 5.7%
* Prices are cents/kwh

I can’t help but notice that only one of the 11 wind states (Texas) saw a decline in prices over the time period, and the other 10 wind states actually saw prices increase from December 2008 to December 2009 faster than the overall average of the other states.

So what kind of funky AWEA arithmetic turns (mostly) larger retail price increases in the 11 states into a big consumer benefit?

NOTE: By the way, a sophisticated attempt to address the questions of wind power’s consumer benefits-if any on net-would look at a lot more information than simple average retail rates by states. I was trying to engage the debate on the level presented and even at this simple level of analysis I can’t tell how they got their numbers.

EIA shows higher wind power output cutting into baseload power generation

The Energy Information Administration’s “Today in Energy” series shows with a couple of charts how growing wind power output in the Southwest Power Pool region is cutting into the income of baseload power plants.

U.S. EIA chart based on Southwest Power Pool data.

The effect matters because baseload power plants tend to have the lowest operating costs. As baseload plants get pushed off the system, more of system capacity will shift to more flexible “load following” plants, which tend to have higher operating costs. Power prices in the Southwest Power Pool and other ISO power markets tend to reflect the operating costs of load following plants, so the effect will be to increase average wholesale power prices.

Wind power advocates sometimes want to claim credit for driving down power prices, and in the short run the addition of wind power can push prices down (especially, of course, if wind power plants have their output subsidized as with the Production Tax Credit). In the long run, as output of cheap-to-run baseload power plants is squeezed from the system, average prices will rise again.

The ERCOT market in Texas faces this same problem — in fact I suspect it is a little further down this path than the Southwest Power Pool — and the state has been struggling over projected resource adequacy concerns on the horizon. Of course, as Texas PUC commission Kenneth Anderson has pointed out, an efficient “energy-only” market with growing consumption should always see resource adequacy problems about four or five years ahead. If it doesn’t see shortages in the future, it implies the system is currently overbuilt. Still, incentives to invest in generation appear weak, wind power capacity additions in Texas are expected to continue, and resource adequacy analysts in ERCOT are nervous.

How did an oil and gas state come to lead in wind power?

The Great Texas Wind Rush by Kate Galbraith and Asher Price

“The Great Texas Wind Rush” by Kate Galbraith and Asher Price

Kate Galbraith, a reporter for the Texas Tribune, and Asher Price, a reporter for the Austin American-Statesman, have written a great historical review of the development of wind power in Texas.

Admittedly, the book is a little light on the kind of details that the interested energy economist wants to know, but the narrative is strong and the economic clues are there for the interested reader to follow. The book covers the emergence of the industry from the pre-1980s idealists and tinkerers to the 2000′s industrial scale wind farms. Both the hopes and dreams of designers and developers, and the frequent crashing of those dreams, are reported upon. The industry has been boosted by often generous but usually uncertain policies, and challenged by sometimes high and sometimes low electric power prices. Some early California wind projects, mentioned in the book, seemed mostly about capturing generous investment incentives rather than long term power production. Many of these didn’t last long enough to meet their initial PURPA-based contract obligations. Texans tried to avoid the worst of the California policy experiences. (Turbine reliability has improved over the years, but remains an important issue in Texas and everywhere else.)

The book goes into all of these issues and more, all along keeping in touch with the characters that moved the business along.

West Texas locations and people feature prominently in the stories, and since I grew up in Amarillo and now work in Lubbock, I got a special kick out of reading about the locals. I have met five or six of the people interviewed for the book (and also met author Kate Galbraith when she was in Lubbock last year), and I’ve seen many of the wind power projects mentioned as I’ve driven around the state. Maybe I have an overly positive reaction to the book for personal reasons.

Still, I think the book provides a good review of the development of the industry. Whether you support or oppose wind power policies, this book will improve your understanding of the industry in Texas. It would provide a useful supplemental text for college courses on the wind power industry and renewable energy policy.

Chu’s solar power regrets

Michael Giberson

From The Onion:

WASHINGTON—Sources have reported that following a long night of carousing at a series of D.C. watering holes, Energy Secretary Steven Chu awoke Thursday morning to find himself sleeping next to a giant solar panel he had met the previous evening. “Oh, Christ, what the hell did I do last night?” Chu is said to have muttered to himself while clutching his aching head and grimacing at the partially blanketed 18-square-foot photovoltaic solar module whose manufacturer he was reportedly unable to recall… According to sources, Chu’s encounter with the crystalline-silicon solar receptor was his most regrettable dalliance since 2009, when an extended fling with a 90-foot wind turbine nearly ended his marriage.

What, no Solyndra jokes?

Secretary Chu responded on Facebook:

I just want everyone to know that my decision not to serve a second term as Energy Secretary has absolutely nothing to do with the allegations made in this week’s edition of the Onion. While I’m not going to confirm or deny the charges specifically, I will say that clean, renewable solar power is a growing source of U.S. jobs and is becoming more and more affordable, so it’s no surprise that lots of Americans are falling in love with solar.

Reading between the lines here, in particular, the claim “renewable solar power is a growing source of U.S. jobs,” I think we can conclude that the solar panel’s manufacturer has even more damning photos in a vault somewhere.

The Onion:

The Onion: “Hungover Energy Secretary Wakes Up Next To Solar Panel”

“Please, sirs, may I have some more … subsidies for wind power?”

Michael Giberson

From The Hill’s Energy & Environment Blog:

A group of military veterans pressed congressional Republicans on Thursday to renew a tax credit for the wind industry that their party’s standard-bearer, Mitt Romney, has vowed to end.

The veterans, who are all employed by the wind industry, secured meetings with staff for House Majority Leader Eric Cantor (R-Va.), House Ways and Means Committee Chairman…

The two elements of half-hearted policy substance mentioned in the article are both suspect: “jobs for veterans,” and “reduces dependence on foreign energy.”

Over the last decade the domestic oil and gas production industry added twice as many jobs as the 37,000 jobs the wind industry claims expiration of the PTC will threaten. The only “foreign energy” we import in any quantity is petroleum, excepting some power and natural gas from Canada, and the wind power subsidy has approximately nothing to do with how much petroleum we import.

On the other hand, increasing domestic oil and gas production actually is reducing “dependence on foreign energy,” including imports from OPEC members and other sources, and even including power and natural gas from Canada.

Using military vets to lobby for wind power tax breaks? I guess some K Street lobbying genius imagined using vets would help the industry get a bit of face time with Republican lawmakers who would otherwise rather meet with representatives of some other special interest group. Don’t our military veterans deserve better than to be made into poorly-informed lobbyists for wind energy?

What’s next, retired firefighters, grizzled ex-cops, harried emergency room nurses?

Why not just round up some starving orphans and have them come plead Congress, “Please, sirs, may I have some more … subsidies for wind power?”

Dolan on the WPTC and energy policy

Lynne Kiesling

Economist Ed Dolan makes a thorough argument for using the upcoming expiration of the wind production tax credit as an opportunity to rethink energy policy seriously. In particular, his combined focus on energy policy and tax policy, and whether such tax credits are good examples of either (guess what? No), makes for an informative discussion. He also argues that such policy falls short because it fails to focus on the policy objective, which he defines as reducing negative externalities. For that reason, he makes the Pigouvian tax argument.

While he is more confident than I am that we can devise such a tax effectively, identify the magnitudes of such external effects as are Pareto-relevant, and implement them in a politics-and-lobbying-light way, I think it’s worth considering the extent to which such a proposal would be an improvement on the subsidies for commercialization that are the current renewables policy, which are an abomination of rent-seeking and inefficiency.

Any reason to be worried about wind power industry layoffs?

Michael Giberson

In an article titled “4 Reasons All Americans Should Be Worried About Wind Layoffs,” you’d think there would be at least one reason that people should be worried about wind industry layoffs.

Sadly, no.

Instead the author tells the reader: (1) wind power installations are largely in GOP-held congressional districts, (2) the U.S. is losing the “race” with China to build the most wind power, (3) fossil fuels receive tax breaks too, and (4)  natural gas prices are low.

The only substantive content in the short piece was a casual invoking of “the externalities of fossil fuel.” I’d encourage the writer to hold on to this sentence, toss the rest, and start again.

Negative power prices due to wind power’s subsidy

Michael Giberson

On the NYTimes.com Green blog, Matthew Wald reports on “An argument over wind.” The issue is the scheduled-to-expire Production Tax Credit for wind power. As previously mentioned here, former PTC-supporter Exelon Corp. has come out against the PTC extension. It parted ways from the American Wind Energy Association, of which it had long been a member, over the issue.

Wald reports on an Exelon-funded study done by The NorthBridge Group, “Negative Electricity Prices and the Production Tax Credit.” According to Wald:

The study sponsored by Exelon, prepared by the NorthBridge Group, which does extensive consulting for utilities around the country, found pockets where the number of negative hours reached 12 percent or more. While various types of electricity generation have received subsidies over the decades, said Frank Huntowski, one of the authors, “I don’t think we’ve seen something as dramatic as this.’’ …

Negative pricing occurs mostly on spring and fall nights when the wind is blowing strongly but offices, stores and factories are mostly closed and temperatures are so mild that there is virtually no demand for home heating or air-conditioning. The phenomenon existed before the surge in construction of wind machines, but the new industry is making it worse, some industry participants say, especially for companies with baseload plants that were built to run at a steady rate around the clock.

That is a special problem for Exelon, which runs many nuclear plants in the Midwest; nuclear plants cannot change their output quickly.

Long-time readers may recall that we’ve discussed negative power prices many times before here on Knowledge Problem. This link will execute a search of the KP archives: negative+prices.

Related:

Financial regulations add burden to wind power projects

Michael Giberson

Lawrence Berkeley National Lab’s recently published 2011 Wind Technologies Market Report (pdf) provides a fairly focused look at wind power industry developments. Among the insights:

At the same time [as the European debt crisis began creating trouble for some lenders], new banking regulations took hold, driving considerably shorter bank loan tenors (institutional lenders, meanwhile, continued to offer significantly longer products). In contrast to the weakened debt market, the market for tax equity improved somewhat in 2011 … As the number of grandfathered Section 1603 grant deals begins to taper off in 2012, however, attrition in tax equity investors is possible, as some have indicated no interest in PTC deals.

I’m sure banking regulators didn’t intend to lead banks to offer shorter loan terms to wind power developers, but the rain falls on the just and the unjust and similarly the consequences of bank regulations are no respecter of conflicting government policies. (I’m wondering how banking regulators would score the net costs and benefits of slightly discouraging subsidized energy projects?)

The fraying of support for wind power’s PTC subsidy

Michael Giberson

The coalition in support of  wind power’s Production Tax Credit has always had a bit of a “Baptists and Bootleggers” flavor: environmentalists making a clean and green argument in favor of wind power and the multinational wind power development corporations funding the political muscle needed to get things done. The coalition has proven durable even as wind power took a few environmental hits, but now the business side of the coalition is beginning to fray. The Production Tax Credit will expire at the end of 2012 unless Congress acts to extend it.

One example: The Chicago Tribune reports that Exelon Corp., a large electric power company that owns a significant amount of wind power and a member of the American Wind Energy Association, is opposing efforts to renew the tax credit (reg. required).

“The (production tax credit) has been in place since 1992, I believe,” Exelon Chief Executive Christopher Crane said in a conference call with investors and analysts Wednesday. “And I think that’s enough time to jump-start an industry, 20 years.”

The economic logic behind Exelon’s position is clear: “with nearly half of its profits coming from its nuclear fleet and low-cost wind power cutting into its margins, Exelon is in Washington leading a fight to kill a tax credit the wind industry says is crucial to its survival.” Note that “low cost wind power” is referring to the low marginal cost of production, not the total cost per MWh of energy produced. Most of Exelon’s generating assets are in markets with energy prices driven toward the marginal cost of production, and additional wind power in these markets tends to push average prices down.

It isn’t just the nuclear fleet that sees its profitability pushed down, either. Wind on wind competition is also becoming an issue. If additional wind power comes online near existing wind power, it naturally produces more output at the same time that existing wind power plants produce more output. The profit-suppressing effect of new wind is thereby intensified for existing wind assets.

Wind power project owners contemplating PTC extension have to weigh the benefits from anticipated new projects against the price suppressing consequences for their existing wind power and other generation assets. It is a cost-benefit weighing that is increasingly turning against continued support for the PTC among owners of wind power assets. Of course, on the other hand, manufacturers of wind power turbines and towers, and those developers who build but don’t own wind power projects benefit only from the construction of new projects. Wind power coalition dynamics should see these players taking a bigger and bigger role over time.

The Chicago Tribune article contains more good stuff. They found someone willing to claim that wind power needs the subsidy because it is “on the cusp of seeing real price declines,” and “In three to five years wind energy will be cost competitive … without the subsidy.” The claimant doesn’t explain why we shouldn’t just wait three to five years and build wind power when it is actually competitive.

(Research efforts do seem to be making progress in improving wind power productivity. That progress justifies maybe a few million dollars for continued research, not a few billion dollars to build more not-quite-cost-competitive wind power projects now.)

Other Production Tax Credit news and commentary: