Debating Wind Power Cost Estimates – 2

[Series header: On the Morning of October 15 the Institute for Energy Research in Washington DC released a report I’d written about wind power cost estimates sponsored by the federal government. (Links available here.) Later that day Michael Goggin of the American Wind Energy Association, the lobbying organization in Washington DC that represents the wind energy industry, posted a response on the AWEA website: “Fact check: Fossil-funded think tank strikes out on cost of wind.” I’m considering points made by the AWEA response in a series of posts.]

Goggin complains I am relying on obsolete data and government estimates in my report instead of “price data from signed contracts.” He wrote:

The reality is that wind energy is driving electricity prices down, thanks to large recent reductions in its cost. Contracts that utilities signed to purchase wind energy, which were approved by state regulators and filed with the Federal Energy Regulatory Commission, document that the average purchase price for wind energy was $40 per MWh in 2011 and 2012.

While IER tries to hide behind old data and theoretical estimates, it cannot escape from the real-world data proving that utilities are signing low-cost contracts to purchase wind power. It is strange that an organization that claims to support free-market price signals would use government estimates instead of price data from signed contracts.

Wind energy’s costs have fallen by more than 40 percent over the last four years. These cost declines have been driven by technological improvements as well as the development of a domestic wind-turbine manufacturing sector that now builds over 70 percent of wind turbine value in the United States. [Emphasis in original.]

It is true that wind energy is driving electric prices down, but it has little to do with the reduction in capital cost and more to do with the effect of adding low marginal cost wind power in regional power markets. Whether these are efficient prices are another matter–consider, for example, that many in Texas are worried that low power prices are discouraging investment in new generation at a time that ERCOT studies suggest new investment will soon be needed. I’ll come back to this question in a later post.

Old data? My primary resources are the 2012 Wind Technologies Market Report (WTMR) produced by the Lawrence Berkeley National Lab, published in August of 2013, and the 2011 Cost of Wind Energy Review (CWER) produced by the National Renewable Energy Lab, published in March 2013.These two document series funded by the Department of Energy are the most recent publications in the longest, most detailed and complete assessments of wind power costs available targeting the U.S. wind industry. I cite to earlier reports in the WTMR and CWER series on a number of occasions when they present relevant discussions of methods and data sources that are not reproduced in the most recent report. A scan through my bibliography shows I cited one document as old as 2004, but the bulk of my citations link to documents published in 2011, 2012, and 2013.

Government estimates instead of market data? Goggin claims, “It is strange that an organization that claims to support free-market price signals would use government estimates instead of price data from signed contracts.” Not at all. The Berkeley Lab and NREL reports are the most frequently cited and likely most authoritative resources available on the topic of wind power costs. The primary point of the my report was to evaluate and provide broader context for understanding the frequently-cited wind cost estimates presented in the Berkeley Lab and NREL reports. For that reason, the report focuses on these “government estimates instead of price data.”

There is more. Cost and price are far from equivalent concepts. Goggin seems to miss this point, but the Berkeley Lab understands. At page 49 of the 2012 WTMR, the report authors said, “because the PPA prices in the Berkeley Lab sample are reduced by the receipt of state and federal incentives (e.g., the levelized PPA prices reported here would be at least $20/MWh higher without the PTC, ITC, or Treasury Grant), and are also influenced by various local policies and market characteristics, they do not directly represent wind energy generation costs.” (Emphasis in the original.)

As even a basic understanding of economics reveals, a subsidy can reduce a price even as it increases the cost of a good or service.

Goggin claims that, because “the average purchase price for wind energy was $40 per MWh in 2011 and 2012,” we can conclude that there are large reductions in cost. Goggin’s $40 per MWh report likely comes from the most recent WTMR, but here is the full sentence with a bit more information:

After topping out at nearly $70/MWh for PPAs executed in 2009, the average levelized price of wind PPAs signed in 2011/2012—many of which were for projects built in 2012—fell to around $40/MWh nationwide, which rivals previous lows set back in the 2000–2005 period.

So prices for contracts in 2011/2012 have returned to levels of the 2000-2005 period? And this is, supposedly, evidence of vast reductions in the cost of wind power, that we are now–after shoveling billions of dollars into the wind power industry post 2005–only now getting wind power contract prices back to the level that they used to be? Goggin’s got more explaining to do if he wants to make an argument using prices to represent costs.

A much more likely explanation is that wind power contract prices depend, in part, on alternative sources of electric power. As natural gas prices rose up through 2008, utilities were willing to pay higher prices for wind power. As natural gas prices fell beginning in late 2008, wind power contract prices fell with them. I’ll hazard the guess that these contract prices have more to do with natural gas prices then reductions in wind power costs.

Up next: Are government subsidies for wind power large or unusual compared to government support for fossil fuels, nuclear power, and other resources?