Tuesday, November 25, 2008

Texas wind operators pay to give away electricity

Hat tip one to the Sovietologist

Michael Giberson on Knowledge Problem has given us a stunning revelation about Texas wind.
In the first half of 2008, prices were below zero nearly 20 percent of the time. During March, when negative prices were most frequent, prices were below zero about 33 percent of the time. After mostly taking the summer off, negative power prices were back to near 10 percent in October.

Does it sound crazy to you that Texas Wind producers were paying ERCOT to take their power? Giberson explains the insanity:
the negative prices appear to be the result of the large installed capacity of wind generation. Wind generators face very small costs of shutting down and starting back up, but they do face another cost when shutting down: loss of the Production Tax Credit and state Renewable Energy Credit revenue which depend upon generator output. It is economically rational for wind power producers to operate as long as the subsidy exceeds their operating costs plus the negative price they have to pay the market. Even if the market value of the power is zero or negative, the subsidies encourage wind power producers to keep churning the megawatts out.

So tax payers are paying wind farmers to generate unwanted electricity. So much for the rationality of the renewables subsidy system.

The rational for the wind subsidy is reduced CO2 emissions, but as Giberson points out,
n this case the link between the payments and the possible reduced emissions effect is tenuous. In Texas the PTC is probably offsetting natural gas generation most of the time, perhaps a relatively efficient combined-cycle gas unit, but maybe an inefficient old steam generator. Sometimes the PTC will displace coal-fired generation. The environmental benefits will vary dramatically depending upon just which kind of unit is displaced by the subsidy, but the cost of the policy is the same. Surely there are more targeted and effective ways of achieving environmental goals.


Soylent said...

This is a text-book example of a perverse incentive.

If the incentive was properly structured it would at least encourage wind operators to do something useful with their surplus electricity. Perhaps storage, but I doubt it, perhaps generating chlorine and lye through electrolysis; I don't know what but at least they'd have to try.

Sovietologist said...

And if you think the PTC is bad, just imagine what a disaster a Renewable Portfolio Standard would be...


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