Texas Windpower: Will Negative Pricing Blow Out the Lights? (PTC vs. reliable new capacity)

By Josiah Neeley -- November 27, 2012

“It is well known that Texas is undergoing a major challenge in maintaining resource adequacy due to improper price signals; less well known is that a significant portion of the problem can be laid directly on the doorstep of subsidies for wind generation.”

The federal Production Tax Credit (PTC), which currently provides a $0.022/kWh subsidy to qualifying renewables, is set to expire at year-end. Just the prospect of expiration has dramatically slowed new construction of industrial wind capacity, despite a raft of other subsidies to politically correct energy. [1]

The Texas Public Policy Foundation has released a new paper looking at the effect of the production tax credit both on taxpayers and consumers. Bill Peacock and I found that PTC continuance puts the Texas electricity market at increased risk of price spikes and blackout by discouraging the construction of new reliable, on-peak generating capacity.

Texans are not only paying for the PTC’s direct annual cost of $622 million; they could pay billions of dollars more from forgone capacity given negative pricing where wind producers generate unneeded electricity just to pocket tax credits.

Background

It is well known that Texas is undergoing a major challenge in maintaining resource adequacy due to improper price signals; less well known is that a significant portion of the problem can be laid directly on the doorstep of subsidies for wind generation.

When wind is bid into the market at a negative price, superior forms of generation must match that price or risk getting knocked off the grid. This decreases the profitability of non-wind generation and makes companies less likely to invest in new capacity. This has already degraded Texas’s resource adequacy, and it could get worse before it gets better. This increases the risk of blackouts if unusual events reduce capacity and/or increase demand.

Donna Nelson, chairman of the Public Utility Commission of Texas (PUC) explains this well:

Federal incentives for renewable energy… have distorted the competitive wholesale market in ERCOT. Wind has been supported by a federal production tax credit that provides $22 per MWh of energy generated by a wind resource. With this substantial incentive, wind resources can actually bid negative prices into the market and still make a profit.

We’ve seen a number of days with a negative clearing price in the west zone of ERCOT where most of the wind resources are installed…. The market distortions caused by renewable energy incentives are one of the primary causes I believe of our current resource adequacy issue… [T]his distortion makes it difficult for other generation types to recover their cost and discourages investment in new generation.

The Northbridge Group recently published a study confirming the distortions in the market caused by the PTC. Northbridge found that the five-fold increase in wind generation since 2006 parallels the increase in negative pricing. In ERCOT, negative pricing occurred between 8 percent and 13 percent of the time from 2008 to 2011.

Percentage of Hours with Negative Real-Time Electric Energy Prices in ERCOT, 2006-11

Source: The Northbridge Group

The disruption of the Texas electrical market by negative wind prices is only going to get worse as more renewable-specific transmission lines are built, and as the frequency of negative pricing in new parts of the state comes to resemble the West Zone.

As another recent report by the Brattle Group noted:

Wind generation puts downward pressure on energy prices in all parts of ERCOT whenever the wind blows. However, the effect is greatest in the West Zone, where more than 70% of ERCOT’s wind capacity is located…

The CREZ project is primarily designed to move electricity generated by wind and other renewable resources from remote parts of Texas (i.e., West Texas and the Texas Panhandle) to the more heavily-populated areas of Texas (e.g., Austin, Dallas-Fort Worth, and San Antonio). This transmission expansion will also increase Texas’s ability to build more wind generation, but may in the future erode non-wind generator economics more by depressing energy prices in the other three zones.

The Real Cost of Wind

It is difficult to quantify the cost of the PTC’s distortions on the market, though the Foundation will address this issue more fully in an upcoming paper. But one method of doing so would be of looking at the cost of solving Texas’ resource adequacy challenges.

PUC Commissioner Ken Anderson recently did some “back of the envelope” calculations of the cost of imposing a PJM-style capacity market on ERCOT. He came up with a cost of over $3.6 billion per year. The portion of this cost that can be attributed to renewable energy subsidies is debatable, but these costs could easily exceed the costs of the direct subsidies, more than doubling the costs on consumers.

At a bare minimum, renewables energy subsidies in Texas are costing more than half a billion a year. Because of the PTC’s per megawatt hour subsidy, it causes substantially more distortion to the market than other renewable subsidies.

A credible case could be made that the PTC is more responsible than any other factor in causing ERCOT’s resource adequacy challenges and thus driving Texas toward some kind of forward capacity market.

Conclusion

Competition is working in the Texas electricity market. It is government interference with the market—led by the PTC—that is causing the current reliability challenges.

Texas need not abandon wholesale competition and move toward a capacity market. But this will be difficult to avoid as long as the PTC is in place. Congress should allow the PTC to expire; if not, we may see the end Texas’ world-class energy-only electricity market.

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[1] The PTC is only one of the subsidies available to renewable energy producers in Texas. Others available in Texas include Renewable Energy Credits (RECs) under the state’s Renewable Portfolio Standard, federal grants under the 2009 stimulus bill, and access to transmission through the Competitive Renewable Energy Zone (CREZ) program. Altogether, renewable energy subsidies in Texas, including PTC, will cost taxpayers and consumers about $12.9 billion over the same period.

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Josiah Neeley is a policy analyst for the Armstrong Center for Energy & the Environment at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. Bill Peacock, coauthor of this post, is the Vice President for Research and Director for the Center for Economic Freedom at the TPPF.