Wind Power and Natural Gas-fired Power and Power Market Design

Michael Giberson

The Wall Street Journal published a lengthy article by Russel Gold on the behind-the-scenes struggle over cost allocation and performance obligations between wind power producers and conventional generators.  Tension over how variable resources participate in markets have been simmering for years, but wind power and other intermittent resources have been too small to worry too much about.  Now wind power is edging into the big leagues and the rules begin to matter (e.g.: “Big blow boosts Texas wind record“).  The article focuses on the ERCOT power market in Texas, where the action is hottest, but the same kinds of issues arise in other markets.

From the WSJ:

Many environmental groups talk of how wind and relatively clean-burning natural gas can partner to displace dirtier coal, creating a path to power the U.S. while releasing fewer greenhouse gases. A bitter fuel fight in Texas points to a different future: one in which gas and wind are foes.

The gas and wind factions have been clashing over the state’s operating rules for the past several months. The gas people say the playing field is tilted in wind’s favor; wind accuses gas of trying to snuff out the nascent wind energy sector.

[…]

At the heart of the battle is a fight over the vicissitudes of wind itself. The wind industry argues that since it can’t control when the wind blows, it shouldn’t be held to the same rules that require everyone else to make payments when they fail to deliver promised power. The natural-gas generators say everyone should operate under the same rules, and lament that wind’s success is merely coming at the expense of another relatively clean energy source.

[…]

One grievance: Coal, nuclear and gas operators must pay for their own backup if an operational or maintenance problem prevents them from delivering power as promised. But if wind generators fail to deliver promised power because the wind doesn’t blow, the cost of backing up wind power companies is spread among all the generators, state officials say. This puts an unfair burden on nonwind generators, says the gas faction.

For a closer look at the behind-the-scenes battle, try searching the ERCOT website for information about “voltage ride through” requirements for wind generators or the actions of (and reactions to) the Wind Cost Allocation Task Force.  If you drill down beyond the meeting schedules and status reports, all the way down to the presentations, reports, and comments filed by individual parties, things can get a little sharp.

For example, this recent presentation opposing recommendations of the Wind Cost Allocation Task Force uses terms like “fundamentally flawed,” “unfortunate squandering of resources,” “solutions … in search of a largely non-existent problem,” “arbitrary,” “would thwart public policy goals of the State of Texas.” Thems fighting words, and that’s just from page 2 of a 15 page presentation. On page 8, there is the suggestion of “serious anti-trust concerns.”

One of the page 2 phrases is right on target: “not consistent with principles of sound market design.” Unfortunately it isn’t until p. 13 that any market design principles actually get raised by the presenter.  Not surprisingly, the presentation itself seems a bit cavalier in its own use of “the principles of sound market design,” invoking principle when principle is convenient and pleading overall policy benefits when principles are inconvenient. But the principles mentioned are a start: cost causation, non-discrimination, and something about allocating costs to motivate “proper market behavior.”

The way forward, in ERCOT’s committees and in other power market design efforts, is in the systematic working out of principles of sound market design to be invoked in these kinds of discussions.


3 thoughts on “Wind Power and Natural Gas-fired Power and Power Market Design

  1. How much of this results from Texas’ postage-stamp regulatory design? Wind has always been somewhat unique amongst renewables in that it is primarily a central station plant, and therefore favors the transmission subsidies that central plants have always depended on. (As compared to other, more innately local renewables that would favor explicit recognition of T&D costs so as to capture a greater portion of the value they create from local load reduction.) While I don’t claim expertise in the nuances of this particular fight, it does seem that the flat charges innate to the TX model do provide some potential for an unfair advantage to wind, at least from a transmission perspective. Does Texas apply the same cross-subsidization heuristic in the way they deal with intermittency?

  2. Wind Power and the Grid by Carl from Chicago on March 2nd, 2010
    http://chicagoboyz.net/archives/11886.html:

    “Wind in a way is “free riding” on the grid; wind is paid as if it is reliable, when in fact it isn’t, and then the other electricity providers de-facto subsidize wind (again, they already receive Federal and State subsidies) by not charging them for failing to deliver AND taking on their pro-rata share of the power needed when the wind farms don’t deliver.

    “Not only does wind power get a “free ride” on backup capacity, which hurts the gas generators, but the gas generators that DO run are also getting a lower per-unit reimbursement because the revenues are set based upon the highest “marginal” cost for electricity; on a given day when there is more wind only nuclear, coal and the most efficient gas plants will be online (along with the wind, which always is in the stack, depending on weather conditions) if there isn’t much demand, so not only do gas plants lose money from NOT being on but the gas plants that ARE on receive a lower price for their power. This concept wasn’t really touched upon in the WSJ article (it was better than most of their articles, but still had some holes).

    “This article is key to an understanding of wind’s impact on the grid; either wind operators should need to estimate their available power more cautiously (to ensure that they meet their commitments), or they should pay to have alternate power (in some reliable form, like natural gas) online.”

  3. Sean: The “postage stamp” transmission rate design does work out well from wind power (total transmission costs paid by energy retailers are dependent only on their load ratio share, not on how much or little transmission is used to deliver the power from the generation to the consumer). Since wind power tends to be far from consumers in the state, wind power companies probably are modestly advantaged.

    But I think this is a relatively minor factor in Texas, and I’m not aware that anyone is proposing to change the transmission rate design. (On the other hand, the Midwest ISO offers a bit more of a challenge given the long distances and diverse customer base served.)

    Fat Man: In general think that the ‘Carl from Chicago’ post is pretty on target. If I were to pick a bit, I think the use of the term ‘free riding’ is a bit fast and loose. But this quibble is exactly the complicated issue at the heart of the problem – who should be responsible for what share of which costs.

    Also, the low marginal price of wind power does push down prices in the market, but this is a desirable feature of power markets. Obviously, subsidies and other policy efforts are mostly responsible for getting the wind farms built in the first place. But given that the wind farms are there and generating at a low marginal cost, the resulting lower market price is locally efficient.

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