An Argument Over Wind
By MATTHEW L. WALD
Green: Business
With the wind industry facing the expiration of a production tax
credit at the end of the year, the sector’s main trade association is
facing off against Exelon, the big power generation company, over
whether the tax break should be renewed. Last week, the Wind Energy
Association expelled Exelon as a member because the company opposed a
renewal of the credit.
The association says that if the tax credit expires, some 17,000 jobs
will be eliminated next year and that deliveries of new turbines will
spiral to zero.
But Exelon says the tax credit is distorting energy markets because
the credit itself is larger than the average value of electricity
produced in the Midwest. Surges of wind energy late at night during
periods of low electricity demand are driving the market price of
electricity below zero, according to independent statistics.
Exelon complains that in that circumstance, its nuclear plants
actually have to pay grid operators to accept their electricity. The
wind farms in that region do as well, but they remain profitable
because they earn the production credit.
The issue of the tax credit and so-called negative pricing has emerged
in the presidential campaign, with the Obama administration favoring
an extension of the credit and Mitt Romney opposing it. But the
credit’s fate may be resolved by the November election, depending on
Congressional action.
Exelon plans to release a study on Friday that says that distortions
in the market are getting larger as more wind is added.
The company is not alone in its complaints. In Texas, the chairwoman
of the state’s Public Utility Commission, Donna Nelson,told a state
Senate committee last week that Texas had a shortage of generating
capacity as a result of a market distortion in which wind energy drove
the price of electricity into negative territory. When wind developers
can make money even when prices are negative, she said, it discourages
others from building other kinds of power plants.
The problem for Texas is that wind generation does not coincide with
peak demand, which is on hot days that are mostly windless. State
power planners estimate that for every 100 megawatts of wind machines
installed in the state, only about 8 megawatts will be available on
peak days.
The tax credit, which applies to projects that are completed by Dec.
31, is 2.2 cents per kilowatt-hour. Depending on the tax status of the
wind farm developer, the credit can be worth as much as $34 per
megawatt-hour.
Joseph Dominguez, Exelon’s senior vice president for governmental and
regulatory affairs, said that in the last two years, the average price
of a megawatt-hour at the Northern Illinois Hub , one of the main
spots on the grid in eastern North America where electricity is
priced, has ranged from $28 to $31.
There is a bit of a paradox in Exelon’s exile from the wind
association; the company owns nearly 2 percent of the wind capacity in
the United States.
Wind industry advocates say that negative pricing is rare and highly
localized and simply points up shortcomings in transmission capacity.
“It’s all driven by a lack of transmission,’’ said Michael Goggin, the
association’s expert on integrating wind into the grid. “Negative
prices are the market’s way of saying there is too much supply and not
enough demand, and there’s a roadblock keeping that low-cost
electricity from reaching consumers.’’ New wind machines are sometimes
built faster than new transmission lines, he said.
The wind industry also argues that companies that burn coal and
natural gas get a subsidy too, in that they are allowed to dump
pollutants into the air without paying for the damage they cause.
Sometimes new transmission lines can alleviate the negative pricing
phenomenon. In 2010 in the Chicago area, the occurrence of negative
pricing peaked at 3.1 percent of all hours, according to the regional
grid operator, the PJM Interconnection. That dropped to 2.1 percent
the following year when more transmission capacity was added.
But across the country, wind farms are likely to be added faster than
transmission lines.
The study sponsored by Exelon, prepared by the NorthBridge Group,
which does extensive consulting for utilities around the country,
found pockets where the number of negative hours reached 12 percent or
more. While various types of electricity generation have received
subsidies over the decades, said Frank Huntowski, one of the authors,
“I don’t think we’ve seen something as dramatic as this.’’
Part of the problem is also that wholesale electricity prices have
declined because of an economic slump and a decline in the price of
natural gas. Before the recession began, the subsidy for wind power
production was smaller than the average price of a megawatt-hour.
Negative pricing occurs mostly on spring and fall nights when the wind
is blowing strongly but offices, stores and factories are mostly
closed and temperatures are so mild that there is virtually no demand
for home heating or air-conditioning. The phenomenon existed before
the surge in construction of wind machines, but the new industry is
making it worse, some industry participants say, especially for
companies with baseload plants that were built to run at a steady rate
around the clock.
That is a special problem for Exelon, which runs many nuclear plants
in the Midwest; nuclear plants cannot change their output quickly.
“Prices will go down for an hour and then come back up and a few hours
later, go down again, and it’s very hard to maneuver the nuclear
plants to work around that,’’ Christopher Crane, the company’s chief
executive, said in an interview. “By the time you have briefed the
crew to power down the plant, the price is up again,’’ he said.
The wind energy association argues that the production tax credit is
an incentive to invest in a clean energy source and does not directly
affect market prices. But opponents say that when new generation is
added in a way that creates sudden surpluses, the market impact is
clear.
Either way, low prices are a boon for consumers, said Peter L. Kelley,
a spokesman for the wind association. “It’s indisputable that wind
energy, with or without the production tax credit, drives down
electricity prices,’’ he said. “Consumers receive massive benefits of
billions and billions of dollars.’’
Meanwhile, the wind business is already preparing for a slowdown. On
Tuesday, a wind tower manufacturer, Katana Summit, said it would
probably sell or close its two plants, in Nebraska and Washington
State, because of the expiration of the tax credit. The two plants
employ a total of about 300 people.