How wind is cutting energy costs

Giles Parkinson at The Climate Spectator has some more real world validation of Jerome a Paris’ frequently made argument that wind power lowers power prices - Why wind is cutting energy costs.

The most common critique of wind energy, and renewables in general, in the mainstream media and anywhere the issue is discussed is that it is expensive.
The problem is, this is only half true. Or at least, it only tells half the story. While the levelised cost of energy from wind farms is higher than that of baseload coal and gas, the deployment of wind energy here and overseas is having a surprising impact on energy market prices: it is causing them to fall.

And it’s not the only myth that a new analysis of the South Australian market has busted: wind is succeeding in displacing coal, it is also having a dramatic impact on the state’s energy emissions, and it doesn’t need anywhere near as much back-up generation as some like to claim.

The International Energy Agency wrote on the price impact earlier this year – and we reported on it – when it cited the case of Ireland, where wind energy is causing wholesale prices to fall by around €74 million; the same as the cost of feed-in tariffs to support the financing of wind power and the associated balancing costs.

Now Windlab Systems, the CSIRO spin-off that has developed the world’s leading wind mapping technology and is now in the business of developing wind farms – including some in places in inland Australia where you wouldn’t expect them – has produced a similar assessment of how its proposed 700MW Kennedy wind farm in north Queensland would impact pool prices in the state. But it says the cost benefits could be even greater.

According to modeling presented at a seminar in Sydney last week, a 700MW wind farm – which would be the largest in the country – would cost consumers $120 million a year from 2013/14 from the amount of renewable energy certificates that are used to subsidise green energy under the renewable energy target. (That figure is based on a REC price of $55/MWh, compared to around $40 now).

But the modeling also suggests that the amount of electricity generated by the wind farm would cause pool prices to fall by up to 9 per cent, reducing the average price in 2013/14 from around $67/MWh (a carbon price would be included by then) to around $61/MWh. The savings in costs to consumers would be $330 million, nearly three times the cost of the subsidy. There is a further cost benefit from a reduction in transmission losses, because the wind farm would be situated far closer to customers than current generators. Windlab estimates these savings to be around 5 per cent from the cost of energy.

So how does “expensive" wind deliver cheaper energy prices? By a mechanism known as the merit order effect, which has successfully delivered cheap electricity prices to Australia (and other countries) by allowing those generators with the lowest variable marginal cost (mostly, the cost of fuel) to get priority. The final price is set by the last generator needed to meet demand – the higher the demand, the higher the price paid by all.

What the MRET and other subsidies do is allow the wind farms to jump to the top of the queue, meaning less of the expensive generators are needed, and so the marginal cost that sets the pool price is cheaper. “It is actually a very efficient mechanism to capture those benefits," says Richard Mackie, Windlab’s general manager in Australia.

(It should be noted that some funny things do happen at night, when demand is low and coal generators, which don’t like to be switched off, bid negative prices. The introduction of large amount of wind in SA has made this a more regular event, and this has added to the lower pool prices. Some wind farms have chosen instead to switch off capacity).

Unsurprisingly, the fossil fuel industry hates this. For decades, they have enjoyed a system where rising demand pushed prices up until a strong enough signal was given for more capacity to be built. Once it was, prices eased back again and so the process renewed itself.

The arrival of wind in the last decade, and the MRET, threw a spanner in these works. Apart from cutting their margins, it also means that significant baseload gas generation is less likely to occur unless coal capacity is removed, which is why some call for the MRET to be scrapped or reduced.

But doesn’t this mean that wind is simply displacing gas, rather than coal, and not achieving so much in the reduction of emissions – two other accusations (other than price) that are often thrown at the wind industry?

Not according to another analysis conduct by Windlab, using data from the Australian Energy Market Operator of the South Australian market, which has the biggest penetration of wind anywhere in the world apart from Denmark.

There are more than 1150MW of wind turbines in SA, accounting for 21 per cent of nameplate capacity. Normally, that might be translated into around 5-10 per cent of overall electricity produced, depending on the wind conditions, because wind doesn’t blow all the time.

But in SA, wind also accounts for 21 per cent of energy production – mostly because it has been displacing brown coal energy that is imported from Victoria. The brown coal generators know this, which is why they fought so hard to water down Victoria’s renewable energy target and to argue against an upgrade for the interconnector linking the two markets – too much wind power is bad for fossil fuel profits.

The increased penetration of wind also helped the state record a dramatic reduction in carbon emissions. In 2005/06, when wind contributed just 5 per cent of the electricity produced, SA’s emissions from electricity were 9.8 million tonnes of co2e. In 2010/11, when wind contributed 21 per cent, the emissions had dropped to 8mt/C02e, even though overall electricity production had increased around 6 per cent over the period. Windlab says most of this reduction, which translates into a 23 per cent cut in emissions intensity from from 0.72 to 0.55 tonnes of CO2e, can be attributed to wind.

But don’t wind farms need massive amounts of back-up power from expensive and comparatively heavy-emitting open cycle gas turbine (OCGT) plants, also known as peakers?

Not in the case of SA. Windlab says 200MW of OCGT has been added to the state’s grid over the last five years, compared to 763MW of wind, but much of that new peaking capacity is designed to cope with rising peak demand – driven by the increased use of air conditioners – which has risen by 370MW, or 23 per cent, over that period.

And here’s another surprising statistic: the amount of electricity produced from peaking plants has actually fallen in the past five years, from 501GWh to 325GWh, despite the increased capacity and the rising peak demand. Not only has wind reduced imports of brown-coal generation from Victoria, it has also, counter-intuitively, reduced the need for peaking plants for much of the year – although not, it should be noted, at times of the highest peaks caused by extreme heat waves, when wind has mostly absented itself.

Wind has not needed anything near like-for-like backup, as some of the more absurd analyses from the anti-wind brigade pretend. Indeed, some of the peaking plants last year were used less than 1 per cent of the time – little changed from before wind’s arrival.

There is no doubt, that a high penetration of wind energy like that which has occurred in SA is challenging to manage. But it can be done. In SA this is helped because there is a large amount of gas, baseload and otherwise, which offers more flexibility; and because there has been accurate wind forecasting (thanks to Windlab), which helps manage wind’s variability. And the wind industry says there are demonstrable benefits: wind energy does reduce emissions, it cuts the pool price (sometimes by more than the cost of the original subsidy), it reduces transmission loss factors, and, of course, it brings in investment and jobs.