“This seems a little crazy. During these negative price periods, suppliers are paying ERCOT to take their power…. You could … build a giant toaster in West Texas and be paid by generators to operate it.”
Some 15 years ago, Michael Giberson at Knowledge Problem commented on a strange phenomenon–negative pricing by wind power, where operators with very low marginal costs (the wind is free) were paying takers per KWh to gain big tax credits, mostly federal.
Giberson’s analysis (reposted below) identified the malinvestment and ‘big anti-conservation incentive’. But he did not focus on what cumulatively would result from this distortion: a wounded Texas grid from chronic low prices/margins knocking out thermal generation. The unreliables–via government privilege– knocking out the reliables (what Bill Peacock would call predatory pricing).
More than a decade of artificially low pricing (negative and positive) resulted in premature retirements of gas-fired and coal-fired power plants and a lack of new (gas-plant) capacity additions. Combined with other government distortions, the stage was set for the debacle of debacles, Storm Uri in Texas in February 2021. [2]
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Also note the exchange (below) on this 2008 post between Lynne Kiesling and Giberson. Kiesling is slow to condemn wind and suggests more government involvement to address the problem. Her recipe? Build (uneconomic) transmission for wind. Add batteries (cost?). Regulate demand in the home via “smart meters” (Big Brother in the home?).
Back then, as today, she ignores a free market in electricity. [3] And she buys into climate alarmism and forced energy transformation, refusing to be politically incorrect for her rewards in a Statist environment (academic positions, etc.).
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Giberson’s Frequent Negative Power Prices in the West Region of ERCOT Result from Wasteful Renewable Power Subsidies follows:
What is with all of the negative power prices in the West region of ERCOT?
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.
This seems a little crazy. During these negative price periods, suppliers are paying ERCOT to take their power. Consumers (at least at the wholesale level) are getting paid for using power, and the more power consumers use the more they get paid. These prices are a big anti-conservation incentive. You could, as a correspondent put it to me, build a giant toaster in West Texas and be paid by generators to operate it.
In fact most of the regional power markets that are integrated into systems operations (so-called RTOs and ISOs in the U.S.) will produce a negative power price now and then. On the margin, a power supplier should offer power into the market at approximately the net marginal cost of supply, at least in a competitive market. These offers are typically at positive prices and the market will produce a positive price.
Infrequently, a power plant might choose to bid below the short term marginal price in order to stay in the market and avoid shutting down. It can be economically rational for operators of less responsive generation units to offer negative prices in order for it to avoid the costs of shutting down for just a few hours and then start up again when load increases – think coal-fueled or natural gas steam turbine. When energy load is very low, near zero or negative prices can result.
This isn’t the case in West Texas. Instead, 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.
Evidence from market data suggests that wind power producers will accept prices down to about negative $35 MWh before they shut down, since marginal operating costs are very low for wind power we can conclude that the subsidies are worth about $35 – $40 for each MWh of wind output. [UPDATE: Chart now includes data through December 2008.]
Subsidies do this sort of thing – distort the market and lead to waste – and of course to some degree distorting the market is just what is intended when policymakers offer a subsidy. Only usually it isn’t so easy to see the evidence of the waste created by the subsidies. Wind turbines that operate more hours require more maintenance, so these hours spent producing negative-value electric power do consume real resources. At the same time, the conventionally-fueled generation that is forced offline temporarily will also face additional “wear-and-tear” and require additional maintenance because of the effects of shutting down and then restarting the machines. This extra wear-and-tear and extra maintenance also represents wasteful use of resources due to PTC- and REC-subsidized power production.
The subsidy for renewable power may be defended as compensation for avoiding the environmental costs associated with power produced by conventional means, but in 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.
A second possible defense for the renewable power PTC is that it will spur enough growth in the industry to allow progress in research and development and economies of scale to reduce costs in the future. I think these learning and economies of scale arguments are much abused in renewable policy discussions – treated as if they are somehow automatic if we only spend enough resources now. If learning by doing and economies of scale were automatic, the U.S. auto industry would now be a paragon of efficiency. (A paper on “Learning Curves For Energy Technology and Policy Analysis“, by Tooraj Jamasb and Jonathan Khler is on my “to read” list, but I haven’t read it yet.) In the wind energy case, the industry is led by huge international corporations like General Electric, Siemens, and Gamesa. These companies and many others have been in the business for years, and in some cases decades. This is hardly a case of an “infant industry” that needs a handout to grow to maturity.
Maybe there is a public good argument buried in this line of thinking, but like the externality argument my sense here is that some alternative approach would more effectively achieve the desired public policy goals.
I don’t see any easy approaches for Texas. The federal PTC is the main subsidy, and localized evidence of waste due to the PTC in part of Texas is unlikely to derail U.S. Congressional support. Even if more detailed examples of widespread waste could be produced, I’m not sure it would overcome the coming Congress’s warm fuzzy feelings for renewable power. Possibly Texas could take-away the Renewable Energy Credit for wind power generated at negative prices, and that would slightly reduce the waste. But the boom in wind power construction in Texas has already greatly reduced the value associated with a REC in Texas, so taking it away altogether wouldn’t do much. And really, the negative prices in ERCOT’s energy markets are only an especially visible indicator of the waste created by PTC-based distortions, any excessive investment in renewable power or production from existing wind power units at below-cost prices is wasteful.
To be clear, I’m not arguing that wind power or other renewable power projects are inherently wasteful. The policy design is at fault, not the technology. It is the policy that needs repair. Also, I don’t have an estimate of how significant this problem is. Maybe the waste is in the hundreds of thousands of dollars, but could be higher or lower. There may be more significant problems to work on. But the PTC is a key element of renewable power policy, and it is troubling that it causes waste.
Economics provides some guides for fixing the policy: if an externality is the problem, then tax the externality and compensate the harmed parties; if the goal is additional learning, don’t tie the payment to per unit output, tie the payment to progress toward the learning goal.
Renewable power industries are pushing for further expansion of the PTC. Before Congress agrees, it ought to try to find less wasteful ways to achieve intended public policy goals.
Kiesling (11-24-2008) There are two other factors that matter in this story:
1. Time required to build transmission
2. ERCOT’s transition from zonal to nodal wholesale market design
As these two factors take effect, those negative prices will change/diminish.
Is this really such a wasteful way to induce more investment in wind generation capacity? Yes, as we have more smart grid capabilities, and hopefully as storage evolves, these negative prices will change.
Giberson: Lynne, you are right that building transmission and improving congestion management (which comes as part of the value of moving from zonal to nodal pricing in ERCOT, sometime next year) will both reduce the frequency of negative prices.
In fact, ERCOT’s change in congestion management policy adopted approximately June 9 was associated with a fairly dramatic decrease in the frequency of negative prices. It would take a little more data than I have available at present on wind power output to sort out the value of the congestion management change vs. the usual tendency of wind power output to fall during the summer (and other seasonal factors) to sort out the relative impact of the congestion management change. The move to nodal should further improve congestion management and reduce the amount of time excess wind power is, in effect, shut-in in the west region.
But perhaps related is the fact that in September and October negative prices reached as far as the Houston zone in eighty-five 15 minute pricing intervals, whereas in the Spring there were only two 15 minute intervals of negative prices.
At least the subsidy is being passed along to more Texas consumers with better congestion management.
Smart grid & storage can both help overcome related problems. I’m not sure that these negative prices directly provide an incentive for storage, because I don’t anticipate that they will last beyond that transmission build-out and change to nodal congestion management. But even if the negative prices don’t persist, to some extent wind power in West Texas will remain out-of-sync with summer power demands and so smart grids, real time pricing, and storage can provide complementary value (at least given the wind patterns in West Texas, off shore winds tend to have different diurnal patterns).
While none of this – transmission, congestion management, smart grid, or storage – erases the allocative inefficiency due to the subsidy, they can all diminish the ‘collateral damage’ and thereby reduce the costs of the policy while maintaining the expected benefits.
And, like I say, I don’t estimate the amount of waste, so don’t claim this is the biggest problem. Maybe this is the best “second best” policy available, but I want to raise a point of information suggesting improvements are possible.
Comment: Giberson goes soft, very soft, on a major distortion that would lead Texas into “planned chaos,” to use a term of Ludwig von Mises. Instead, he reported on “collateral damage” of the day. To use a phrase of Milton Friedman, such is the tyranny of the status quo.
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[1] Also see Giberson, “More on Wind Power, Negative Prices, Transmission, and the Production Tax Credit (Dec 16, 2008).
[2] Record cold temperatures disabling natural gas infrastructure was the official narrative of the debacle. But wind and solar predictably fell off, representing tens of billions of dollars of immobilized investment when needed most. Regarding natural gas, off-the-shelf technology existed for weatherization, and a dress rehearsal occurred a decade before with wellhead freeze-offs. The unprecedented supply-side failure also reflected central planning errors by (PUCT/ERCOT) and demoted utility responsibility for the “obligation to serve.” EPA regulation of gas compressor stations and the “warmer winter” narrative from NOAA/climate models also played a role in the Texas debacle. For more analysis from a classical liberal perspective, see here and here.
[3] Free-market electricity policy would 1) abolish state and federal tax preferences and preferential take provisions for wind, solar, and other qualifying renewables (or thermal); 2) avoid/terminate mandatory open access transmission, a violation of property rights of asset owners; and 3) end franchise protection and rate-and-service regulation on electric utilities.