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Clean Power victoria-wind-costs

Published on July 20th, 2014 | by Giles Parkinson

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Why The Fossil Fuel Industry Hates Wind Power

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July 20th, 2014 by  

Originally published on RenewEconomy by Giles Parkinson.

Wind energy has a significant impact on wholesale prices, particularly in those peak demand events when fossil fuel generators used to make most money.

New research from the University of Queensland has added more understanding about why fossil fuel generators hate wind energy, and why they are seeking to bring the renewable energy target to a halt, or at least have it greatly reduced.

The research from the Energy Economics and Management Group in the School of Economics shows that wind energy – particularly in South Australia and Victoria – has a big impact on wholesale prices, but not just at night-time when wind energy blows the most, and demand is normally lowest.

It has the most dramatic impact on pricing during those peak events that usually occur during the day or early evening.

It has long been recognized that fossil fuel  generators make a large part of their revenue and profits during those peak events, when expensive peaking plant is brought into production. Prices can soar above $10,000/MWh, and even the “cheap” coal fired generators get that price.

The university research shows that these peak event prices have been sharply reduced by the impact of wind energy.

In Victoria in 2011, its modeling showed that without wind, and using only thermal generation to meet the peak demand, cost $338 million. That is almost 20 per cent of annual revenue from just 6.5 hours of peak demand.

But when wind energy is included, the cost of those peaks is reduced to just $126 million. The impact on fossil fuel generators should not be underestimated, because the finance of some coal generators had been heavily geared with debt on the assumption that these revenue events would provide funds to meet interest payments.

In a one hour peak period  on January 31, 2011, from 10.30am, the heavy demand required the most expensive forms of generation to dispatch, which raised the price to the maximum and a wholesale cost of $45.6 million when only thermal generators could respond.

But the inclusion of wind power and its very low marginal cost reduced that half hour to just $1.4 million of wholesale cost.

victoria wind costs

 

A similar impact was experienced in South Australia, which has the highest penetration of wind farms, with some 1,200MW of capacity accounting for more than a quarter of generation in the 2012/13.

The modelling done by the university showed again that the impact was greatest at times of highest demand – without wind generation the spot prices ranges from $1,000 to $6,000/MWh, but with wind they ranged from $200 to $1600/MWh. (See table below).

wind prices

The research shows that states that have the highest penetration of wind farms generally experience the greatest reduction in prices.  The impacts in NSW and Queensland were more muted because of the relatively small number of wind farms.

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About the Author

is the founding editor of RenewEconomy.com.au, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia's energy grid with great interest.



  • Rob Lewis

    True point, but I think it’s a bit more complicated than that. You have to understand the utility mindset, which has always been totally geared toward what’s steady, safe, and predictable. Their whole financial structure is predicated on this. Wind comes along, and it’s not totally predictable. It upsets their world in many ways. So they hate it.

    • Ross

      Indeed, it requires innovative thinking, which is against the nature of established utilities.

  • Ross

    We should welcome their hate as the next stage is they lose.

    • Randall Mathews

      Sometimes the ‘I told you so’ feels lovely.

    • Calamity_Jean

      From your keyboard to the FSM’s inbox!

  • nirsnet

    Not just fossil fuel industry that hates wind. So does nuclear industry–it is in the same position and hates wind just as much….

    • Calamity_Jean

      No, the nukes hate wind more; their costs are higher.

      • sault

        And nuclear isn’t flexible enough to mesh with an increasingly renewable grid either.

        • Calamity_Jean

          Yep. It was nukes’ “stiffness” that caused pumped storage to be invented. It was originally intended to hold some of nuclear power plants’ overnight output so that it could be used the next day.

          Inflexible and expensive! They’ve got both kinds of bad. (Hat tip to The Blues Brothers.)

          • eveee

            The prize goes to Calamity and sault. Here is a nice video showing nuclear inflexibility.

          • phoenix

            That’s little more than a commercial for natgas.

          • eveee

            nuclear is a commercial for natgas? Yes. That’s right. It is.

          • phoenix

            Sorry, you’re not making sense.

          • eveee

            Ok. Try to imagine a power source A that cannot change output. Now you have a demand curve that varies 2:1. You need to follow the demand curve that A cannot. Power source B is flexible and can rapidly adjust to changes in demand. So you need just as much A as B. B get used less often, but you still must have it available. A is nuclear. B is gas peakers.

      • phoenix

        Actually, what hates (new) wind the most is (old) wind. After all, nuclear and coal only gets killed prices due to high wind supply for one hour in three or so. But a wind turbine kills other turbines’ prices virtually all of the time!

        • Bob_Wallace

          The marginal price for all wind turbines, old or new, is zero. That means that whenever the wind is blowing they can generate electricity and make money.

          Old and new turbines take market away from nuclear, forcing nuclear to sell at a loss. Nuclear has to price cheaper than what wind, old or new, can offer and both can offer for almost nothing.

          New wind (farms less than ten years old and using the PTC) can price lower than old, then use use the PTC to offset their ‘below zero’ selling price. But I think you’d find it very hard to find any significant amount of time that new wind has pushed old wind off the grid.

          • phoenix

            I’m not sure you understood my point. Subsidies and PPAs can certainly postpone an economic reality check, but in the end, the true basis of economic viability can be found in the spot markets.

            If wind is low day 1, high day 2 and low again day 3, then it ruins spot prices for all power sources on day 2 only. Still hydro and natgas get good prices for most of their power, because they’ll easily curtail production day 2 and produce more day 1 and 3. Nuclear is hurt more, but still does ok day 1 and 3. However, wind itself is really, really hurt. Almost all its production is at day 2, and the revenue is close to zero then.

            Of course, this does not push wind off the grid, but stops new wind from coming in.

          • eveee

            No it doesn’t. Wind isn’t counting on peak rates. It just bids low at the PPA price. Its coal and other baseloads that lose. They are the ones that bid the lowest prices because the have to be on all the time. Just look at Germany. Its not wind and solar that went out of business first, and its not wind and solar that bid negative. Its baseload. And they are going out of business, FIT or not. Its not about the FIT or PTC or whatever. Its about merit order effect and how baseload is inflexible. There are places where there are no subsidies and wind has no subsidy in the US right now. Yet there is still investment and new builds. Even Warren Buffet.

          • phoenix

            You’re thinking of existing plants. I’m talking about investment decisions for new ones. If you have 25% wind already, why would you build a new wind plant? At a spot market, much of what you produce will be worth little, zero or even negative.

            A baseload plant will be hurt and might very well be pushed out of the market by a pinch of intermittent generation and cheap natural gas, but the baseload plant, if operating, will still fetch a better average price than the high-penetration intermittent sources. That’s simple supply and demand.

          • eveee

            Uh, your kind of getting into hypotheticals there with 25% wind. We are nowhere near that. To have real saturation with that, you would need to have 25% over such a wide region that they all could see nothing but wind in all directions for a very long distance. If you look at papers about renewable penetration, the high scenarios split the amounts between them. By the time wind hits 25% over a country, other generation forms are limping away. That is happening in Germany. The base load plants don’t garner a better average price than the the renewables. Quite the opposite. They bid negative prices so they can stay on because they cannot turn off. They have two inflexibilities. One is that they cannot follow load. The other is that they dare not turn off because it takes too long to turn back off, kills their economics, and ruins their operation and maintenance.

        • eveee

          You seem to have little grasp of how the energy market works. Its the highest, not the lowest bid that all the generators get. The only bid lower than wind is baseload. Its still are when wholesale prices are bid negative. Wind participates in peak pricing just like every power plant does. All the generators receive payments as along as they are producing. Wind does not just produce when other wind is producing. That’s not the point. It matters what the load is doing, not just the source.

        • eveee

          You assume that all wind turbines operate at the same time. Some do. Some don’t. The goal is to make uncorrelated sources. It varies. The statement you made is too broad. It certainly is true that any source can be over represented. Including coal, oil, gas, and all the rest.

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    • Calamity_Jean

      Flagged as spam.

  • http://www.michaeljberndtson.com/ Michael Berndtson

    Awesome stuff. Enviro minded folks with a mind for economic analysis should double check this work and apply similar analysis to the US market. Especially the great plains states extending from north Texas to North Dakota, the Saudi Arabia of Wind. And the Saudi Arabia of loess soil blown off the Rocky Mountains, etc.

  • JimBouton

    Good article. We were seeing a lot of outages in Texas during the summer and winter peaks about five years back. Ever since wind has been added (significantly) to the mix, the blackouts have all but disappeared. Can’t wait to see the pricing impact when wind gets over 15% of the total electricity provided in the next couple of years in this state.

    • Ronald Brakels

      Not so long ago South Australia used to be incapable of meeting demand during a severe heatwave. But now we get over 5% of our electricity from rooftop solar it’s not a problem. I don’t know just solar Texas has at the moment but summer outages might be a thing of the past for you too. It only takes getting one or two percent of total electricity use from solar to make a big difference to grid reliability.

    • Kyle Field

      As wind penetration increases, the cost of producing “old power” will increase as well. Not only do they lose their huge profits during these peak events, but they are also losing share on the day to day volume that wind produces. They have to spread their initial capital investment and fixed operating costs across a smaller volume of sales which requires costs to go up. In the long run as these producers either figure out how to run at lower volumes at a lower cost or go out of business, we’ll see the new landscape shaping up but there are still a number of hurdles to cross before that point (grid storage solutions, net metering, etc)

      • sault

        Or, they’ll just crank up groups like ALEC or just buy off a Prime Minister like Abbott to get the government to interfere with free markets on their behalf and slow down renewable energy development.

      • phoenix

        But again, this problem is actually worse for wind itself. The more successful it is, the less revenue it can pull in. This problem is not nearly as pronounced for baseload and dispatchable power sources, which run all of the time or when prices are high, as for intermittent sources who run well only part of the time over huge areas.

        • Bob_Wallace

          I don’t think you’ve got a good grasp on pricing.

          Where merit order pricing is used all suppliers get the settling price, regardless of how much they bid.

          The more successful wind is in pulling down their costs, the larger spread between production and selling prices (that’s profit).

          Where long term purchases are made (Power Purchase Agreements, PPAs) the more successful wind is at pulling down its cost, the more it can make because all it has to do is to offer a price competitive with the highest price producer and force the most expensive out of the bidding process.

          • phoenix

            Of course I agree that wind turbines will not be decommissioned due to low pricing (at least not until there is a need for major maintenance/repairs). However, there might be bankruptcies due to loans that can’t be repaid. New owners will then take over and keep running them. But it will be increasingly difficult to build new ones in such an environment.

            Again, nuclear is hurt, but wind is hurting itself more. Certainly if nuclear is hurt enough, it will be decommissioned and that will prop up prices a bit, but that can only be temporary relief. There are no easy fixes to the fact that there is little demand for more wind once you have moderate penetrations (25% or so). Without the demand, how can you build?

          • Bob_Wallace

            When we get above ~30% wind (if EVs haven’t raised that number even higher) then we’ll need to add storage and/or strengthen connections to other grids.
            The upper limit may be around 40% – 50%, simply because solar is likely to cover another big hunk with hydro and other renewables filling in the rest.
            Since we’re working our way towards wind at 5% I think we don’t need to worry about some wind turbines pushing other wind turbines off the grid for now. We still have a lot of NG and hydro to curtail when the wind is blowing.

          • phoenix

            It would be interesting with an analysis of average fetching price of wind compared to average electricity price on the spot markets on the Iberian Peninsula and on Ireland. They are at 20% and what they see should be a good indication. Perhaps some high penetration US states also?

          • Bob_Wallace

            High penetration in individual US states isn’t very meaningful as grids cover multiple states. Iowa and South Dakota are already over 25% wind and Iowa expects to be 50% wind by 2018 (?).

            I’m not sure what fetching price has to do with anything. It seems that most wind is sold via PPA, it’s not a dispatchable generator that can jump in when demand is high. And to the extent wind is operating in competitive open markets, wind is going to be about the lowest bidder but getting the cost of the highest accepted source.

            BTW, it seems that the average PPA for wind in 2013 was 2.1 cents. That makes the non-subsidized price around 4 cents. The PPA cost is going to cause massive headaches for the portion of our nuclear plants that have higher operating rates.

  • jburt56

    Snappy rejoinder #893 for “wind don’t blow” shills–

    Shill–[earnestly, even piously, remarking with profundity while implying that you NEVER could have considered such a thing] “But the wind doesn’t always blow.”

    You–True, the wind doesn’t always blow but you do–hard!!

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