The Wind Production Tax Credit should not be renewed

Posted in Uncategorized at 2:36 pm by Administrator

With the U.S. government “closed for business” and a looming debt ceiling crisis the debate over whether or not to extend the wind energy Production Tax Credit (PTC) is not getting much attention these days. President Obama’s official position is that the PTC should be extended indefinitely. Many in Congress disagree and there are is ample private sector and research lab commentary on both sides of the question.

In my opinion the PTC debate has to be framed within the context of what is the most effective use of scarce public funding to advance our transition from an economy based upon hydro-carbons to one based upon renewable energy sources. On that basis and with all due respect to President Obama I don’t think the PTC should be a priority.

Initially there was general acceptance of the need to spur innovation and reduce the installation costs of wind generation. With the transition to larger and larger turbines and very tall mounting towers the efficiency of wind generation has been improved and costs per MW of generation have fallen. But those cost reductions were driven in large part by competition from Chinese manufacturers rather than any breakthroughs in technology and the cost reductions have largely leveled off.

As wind generation in many jurisdictions in the world has developed it has moved from being a “green energy” bragging point in annual reports to being an operational concern for most Independent System Operators. The fundamental problem with wind generation is its unreliability and variability.

Wind generation is a bit like nutmeg. In small doses nutmeg is a pleasant treat to sprinkle on coffee or eggnog; taken in bulk it can be fatal. We are rapidly moving out of “pleasant treat” territory when it comes to wind generation.

In areas where wind capacity is relatively large compared to demand (Denmark, Germany, The U.S. Mid-West and Texas) the problems with wind are starting to get serious.

From a physical grid standpoint the most difficult problem is the very rapid ramp-up and ramp-down that wind farms can experience, even over very large areas. A quick look at the German generation for 2012 demonstrates the problem.

Despite having over 30 GW of Nameplate capacity there are many times when there is virtually no wind energy production across the whole of Germany. The periods of regional calm have lasted from a few minutes to many consecutive hours. In Germany’s case interconnections with Norway, Sweden, France, and the Czech Republic allow these rapid variations to be balanced by fast response hydro and nuclear generation outside the country. The same is true of Denmark.

In Texas these variations are balanced by thermal generation assets (mostly coal and natural gas fired plants) many of which have to be kept on-line as “spinning reserves” able to respond quickly to wind generation fluctuations. But because of the deregulated market in Texas and the existence of the PTC wind electricity producers can bid very low prices into the ERCOT market to the point where quite often they are bidding negative prices (this practice of bidding negative prices is even more prevalent with the Midcontinent Independent System operator – MISO).  No responsible operator of a thermal generating plant can bid negative prices which means that they get blocked out of the electricity market when the wind is blowing strongly.  In many places wind energy also gets preferential access to the grid by regulation.

As a result there is a growing crisis in traditional (and reliable) electricity generation. This has manifested itself in various ways. In the Euro zone almost all utilities are on credit watch. In both Europe and Texas it is becoming increasingly difficult to get financing for new thermal generation. ERCOT in Texas is raising the ceiling price in the spot market to $9,000/MW-Hour (the annual average in Texas is $45/MW-Hour) in an effort to get new generation built. That strategy is not working particularly well.

Even more worrisome is the fact that it is becoming increasingly obvious that the more wind generation that exists the more reliable reserve capacity is required. What that means is that it is necessary to maintain almost a complete duplication of reliable generation assets to backup the wind farms. That is physically wasteful and economically untenable.

It also must be recognized that the actual amount of effective wind generation at peak demand times is a small fraction of the “Nameplate” generation. While average capacity factors for wind in the U.S. are about 25%, more than half of that generation takes place at night when demand is low. Looking more specifically at generation at peak demand times the availability of wind is even less. This is because peak demand often occurs during cloudless high pressure weather events in both summer and winter when temperatures will be extreme and winds will be calm.  I published a somewhat humorous take on that possibility in my Christmas, 2012 blog “The Fright Before Christmas”.

MISO’s Independent Market Monitor (Potomac Economics) noted in a June, 2013 report on page 39 that

“wind resource output is negatively correlated with load and often contributes to congestion at higher output levels, so hourly-integrated prices often overstate the economic value of wind generation”

As a result they state that the MISO practice of counting 13.3% of wind as reliable is much too high.  They recommend instead that a value of 2.7% would be more appropriate (page 16 of the report).

ERCOT takes a similarly optimistic approach by counting 8% of Nameplate wind capacity as available.  The reserve estimates do not explicitly address the possibility of a very calm, high demand event for an extended period of time. In the Report on the Capacity, Demand, and Reserves issued in May, 2013 ERCOT forecasts Reserve Margins declining from 13.8% in 2013 to less than 5% in 2023.

Two things seem strange about this forecast as far as I am concerned. The first is that wind capacity is not forecast to increase for the next ten years. That will certainly not be the case if the PTC is renewed. Second, the amount of coal-fired thermal generation capacity is forecast to decrease only very marginally over the next 10 years. That seems unlikely given that the new MACT regulations will almost certainly cause some large coal-fired plants to be decommissioned. The more likely scenario is that ERCOT Reserve Margins will decrease more quickly than indicated in this forecast.

Viewed objectively the investment of something close to $100 billion in wind generation (a significant portion of which was provided by taxpayers and ratepayers) has not produced very impressive results.  No thermal generation plants have been decommissioned soley because of the existence of these wind farms.  Capacity factors at peak demand times are in the single digits.  The financial health of existing utilities which still provide the firm capacity needed to keep the lights on has been put in serious jeopardy.

There are much better ways to allocate the funds that would extend the PTC for wind developers.  I have outlined a comprehensive program in my “Sustainable Energy Manifesto” with some of the major items being significantly increased support for energy storage R&D, a PTC or FIT for energy storage, hydro-kinetics, and Concentrated Solar Power developers, and regulatory changes that would cost very little.

Given how strong the wind energy lobby is, how politically correct renewables are, and how much money is at stake, extending the PTC would be the easy choice. I just don’t think it is the right choice.

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