Wasted wind is on the rise in America's competitive wholesale power markets as inadequate transmission keeps cheap wind from reaching power hungry load centres. On markets in Texas and New York, prices for wind power are hitting zero and below as turbines produce more electricity than the wires can carry, even being turned off on occasion. More and more frequently, it is costing wind power generators to feed electricity into the network when market prices turn "negative" in areas where wind is trapped by lack of transmission. The industry calls it an unsustainable situation.
"Negative pricing in our market is cutting these guys to the bone," says Mike Sloan, president of Virtus Energy Research in Texas, referring to wind plant owners. "If you do that very often, they're going to go bankrupt and their projects will collapse." Back in June, Direct Energy, a large electricity retailer, said that in parts of Texas generators were paying to offload electricity to the wires about 20% of the time.
That market prices are turning negative in pockets of the country is a major concern, says Dave Grober, head of Texas operations for Invenergy, a mid-sized, Chicago-based independent power producer operating close to 500 MW of wind in Texas. "I think you're going to see a dramatic slowdown, if not a complete stop, on developers building projects in west Texas until some additional transmission is built." Many developers are increasingly "slow playing" the west Texas market and not charging ahead with as much project development as possible.
Prices turn negative on electricity markets when supply exceeds demand. As a market instrument, negative prices provide a strong incentive for generators burning expensive fuel to back off production. As fossil fuel generation is reduced, space becomes available on the wires for more wind power. The system goes wrong when large, remote wind farms concentrated in one area are unable to get all their power to centres of population. Stopping wind turbines is the option of last resort, since owners still qualify for wind's federal production tax credit (PTC), even if they cannot sell the electricity.
Generators can withstand the economic impact of short periods of negative prices, but if overall revenues fall short of budget in the longer term the risk of financial collapse looms as debts go unpaid. The tipping point for when wind cannot cover its marginal operating costs is when generators have to pay $35/MWh or more to dump power, which is more than the $21/MWh value of the PTC combined with the $10/MWh average that sale of the renewable energy credits associated with the physical power provides.
Merchant risk
Far from all wind farms in the US are hit by this market anomaly. Most sell power at fixed rates through long term power purchase agreements (PPA) with utilities. Increasingly, however, owners of wind projects are taking on some merchant risk, meaning that all or a portion of their electricity sales revenue is tied to short term spot market prices. A few wind projects are true merchant plants that run "naked" and unprotected against wild price fluctuations. But most merchant wind plants use financial arrangements with a third party to hedge against price risk.
Wind plant owners forgo a PPA and take the merchant route to find higher returns in markets when prices are high. But they are also those most exposed to market forces. Although third party financial hedge providers take the initial hit when prices drop through the floor, wind farm owners feel the sting too. New projects seeking PPAs or hedge agreements in west Texas are finding them harder to secure than before because of the negative pricing syndrome. Grid interconnection requests for new wind plants by developers has been slowing down, which is seen as a sign that the pricing conditions, predominantly in west Texas, are no longer as attractive.
Last year, merchant plant accounted for about 12% of the around 17 GW of wind capacity in the US, according to the Lawrence Berkeley National Laboratory, and about 15% of the around 5300 MW that went online in 2007. Almost all the merchant plant are in Texas and New York, which have the most fluid wholesale markets.
In Texas, about 20% of all wind plant, or well over 1 GW, are now selling their output directly into the wholesale market, estimates Michael Goggin of the American Wind Energy Association (AWEA). That is just based on what companies are reporting. Some split their power between a PPA and the wholesale market.
"Wind companies are becoming increasingly protective of competitive information and there is a much wider variety and complexity of power agreements now than in the old days, where the vast majority of deals were long term PPAs to a single buyer," says Sloan. The latest snapshot of wind on the system operated by the Electric Reliability Council of Texas (ERCOT) shows 6400 MW operating in the state, higher than AWEA projections. Merchant plants are likely much higher than 1 GW, he adds.
How price is determined in a competitive wholesale market explains partly how prices can drop low or negative in some regions while staying high in others. Base load power sets the first bar for price. In Texas, coal and nuclear plants could provide at a given time about 60% of the state's electricity needs. Those plants bid into the market at their operating cost, maybe $10/MWh for nuclear plants and $30/MWh for coal plants.
To fill in the remaining demand, natural gas plants bid in at around $70-$80/MWh. Power plants providing on the margin of the load determine the final spot price paid to all generators. Wind trends along with natural gas and is a price taker based on the final price. Sloan says ERCOT load varies between roughly 20-60 GW. Since ERCOT has about 20 GW of nuclear and coal, about 80% of the time natural gas is on the margin and drives fairly high prices that are similar to wind power costs.
A drop in demand, however, can quickly push market prices down. Natural gas usually drops off the system once prices are unprofitable at around $50/MWh, although in some regions gas plants are required to keep running to provide grid stability. While low prices for all electricity in periods of slack demand are normal, frequent negative pricing is occurring in regions with more wind generation than transmission capacity to take it to customers. West Texas wind is effectively stuck in a generation pocket.
"Wind gets bottled up and has to compete against a smaller subset of power plants. If the subset of plants wanting to use constrained transmission is reduced to just wind plants, there is a sharp change in prices, often to negative prices, until enough generators drop off the system," explains Sloan.
For short periods, negative pricing is not a problem since peak prices at other times still allow wind generators to make a profit. But if owners have no hedge protection, long periods of negative prices mean trouble. "Companies have been using different strategies to hedge their risk," says Sloan. "The negative clearing prices are hurting some wind companies much more than others."
Price zones
Texas and New York set different power prices for different zones. Power-hungry urban centres command high prices, while remote and unpopulated areas fetch a much lower price. Goggin says ERCOT showed that on two days in June average wholesale prices were $103/MWh in the North Zone compared to minus $3/MWh in the nearby, wind-rich West Zone.
"If adequate transmission capacity were in place at that time, excess wind energy from west Texas could have been transported to the rest of the state to alleviate high electricity prices," he says. Sloan agrees, adding: "If there is enough transmission, there is no reason for urban and rural prices to be different. The problem only surfaces when there is scarcity of transmission. Negative prices are an artefact of something weird going on in the market."
The negative prices only occur in Texas when there is "wind on wind" competition, says Sloan, but if more west Texas wind could be delivered to the east, the prices in urban areas should be more moderate than $103/MWh. If prices go negative it often means that wind is on the margin in the constrained area. With enough wires, prices should be more moderate on both sides and be similar, if not identical. "The generators have to be making money to be in business. So if they go negative for too long or are too low overall, people will not build generation," he points out.
New York too
New York is facing a similar problem. The state is operating just over 700 MW of wind and less than 10 MW is selling its output through a fixed PPA. The rest is selling into New York's competitive wholesale market. Like Texas, New York's best wind is in remote regions fetching lower power prices than in urban regions. The state also has major transmission bottlenecks that crimp the amount of wind power than can flow from remote upstate and western areas to the pricey seaboard metropolis, which would balance out prices.
"The overall trend is that wind plants are being curtailed, there is not enough transmission to get their power out," says Goggin. "With power prices starting to go up across the country, people are starting to see in their electric bills the natural gas price increases, and now in the eastern US coal prices have skyrocketed, and it's gradually trickling down to electricity prices. I think a lot of people would be shocked to hear that this free or zero cost wind energy is out there and we can't use it because we don't have enough transmission."
In New York's market, the transmission problem is so acute that wind is no longer just a price taker waiting for the final spot cost determined by the market. Instead, wind operators are submitting early day-ahead bids, along with base-load power, just to ensure transmission rights on the state's congested wires the next day.
"Because renewables are intermittent, you've got to run in order to get paid, so they are bidding in at very low prices or zero," says Carol Murphy of the Alliance for Clean Energy New York. "You fill that bucket up first with those cheap resources...with the last increment deciding what price everyone gets paid. So the concern is, sometimes people are bidding negative just to get service on that line. The concern is that as more wind is added, they will see more instances of negative pricing."
Both New York and Texas are working to resolve transmission congestion, but it is a slow process. An ambitious wires plan in Texas is not expected to be complete for another five years and New York has no near term transmission expansions that would greatly benefit wind.
Meantime, grid operator procedures establishing how much power should be allowed to flow along the wires can affect the problem, says Sloan. Transmission operators often hold back from operating the network at full capacity to stay within safety margins for how much power the wires can carry. The hotter the wires get, the more they sag. If operators used dynamic line ratings -- and account for external influences such as the cooling effect of strong winds on the wires during periods of high wind generation -- more transmission capacity would be available. "There may also be some fixes by tweaking market rules, such as one suggestion to simply treat wind as a price taker at all times and let the controllable plants duke it out to set the market price," Sloan says.
