Friday, September 14, 2012

New US Study on PTC Demonstrates Market Damage of Wind Subsidies

Exelon, the USA's 5th largest generator of electricity was kicked out of the American Wind Industry Association (AWEA) last week, for the crime of opposing the Production Tax Credit.  Today came the release of a study commissioned by Exelon: Negative Electricity Prices and the Production Tax Credit: Why wind producers can pay us to take their power - and why it is a bad thing.  The study has a message for the current 'stakeholder' initiatives being played out in the realm of Ontario's Independent Electricity System Operator (IESO):  Wrong Way.

Exelon, long a champion of a carbon tax, generates approximately the same amount of electricity as the total IESO market, and it does so with the lowest CO2 emissions of any of the top 25 generators in the United States (pages 27 and 28 here).  The emissions intensity of Exelon's production is about half of Ontario's, and Ontario's is about one-quarter of Germany's.


A section from the study's conclusion describes the impacts of the Production Tax Credit on the rest of the participants in the market:
...it is apparent that the distortionary incentives and bidding practices caused by production-based wind subsidies, in particular the PTC, have caused high prevalence of negative prices in recent years. These PTC-distorted price signals create a range of near- and long-term problems for electricity markets. The PTC subsidy for wind generation artificially dilutes the incentives for conventional generation – generation that is critical for maintaining reliability. While the PTC was originally intended twenty years ago to jump-start a nascent wind industry, the wind industry today is a full-scale global industry and the PTC’s primary effect in the current environment is to distort and disrupt incentives for the electricity industry as a whole.
The description of the impacts of the PTC indicates the same damage as the feed-in tariff has had on the Ontario market - but in Ontario we simply moved onto the incentives for conventional generation and without debate or foresight handed out net revenue requirement guarantees to new, and existing, conventional generators.  In that, we are the warning sign for other markets.

Regulated Price Plan Reports, filed with the Ontario Energy Board (OEB) for Spring 2006 and Spring 2012 shows the percentage of supply capacity from 'Market-based' generators dropping from 17% to 9%, and the percentage of total supply cost for the market-based generators falling from 20% to 3%.  After the decision was made to subsidize natural gas-fired generation, the market in Ontario essentially shrunk to 1/6th the size.

From Page 12 of the report
In Ontario, negative pricing hours comprised about 2% of all hours in 2011, and they have remained at that level thus far in 2012.  While this is essentially equal to the lowest incident of negative pricing shown in the Exelon report, for PJM's Northern Illinois Hub,  US jurisdictions, the IESO also recently noted, "Since the start of 2012, out-of-market control actions were required approximately seven per cent of the time to mitigate SBG [surplus baseload generation]."  
The incidence of negative pricing is therefore likely to be artificially low.



I queried the Ontario data to reproduce a chart showing the percentage of negative hours (on the Y axis) at different percentages of wind production as a share of total market size (the X axis).  The Ontario data, for 2011, is similar to the MISO Iowa Zone data.  The report notes that for the entire MISO zone, summer peak demand is 23% higher than annual average demand while wind production at that time is 44% less than average wind production; Ontario's figures for July and August are similar, with daily peak demand 25% above average and wind production, during those hours, 55% below the average.

Considering Ontario's plan is to contract approximately 5 times it's current wind capacity, and the similarities to MISO figures, it is clear that Ontario will, all other things remaining equal, experience many more periods of negative pricing.

The American Production Tax Credit likely does do a better job of limiting the negative pricing amount than Ontario's Feed-In Tariff has been doing, but Ontario's IESO is taking some steps towards that in addressing floor prices.

Last week the IESO board temporarily banned exports at negative pricing, which will eliminate some embarassing stories of payments to other jurisdictions to take our exports, but limits the ability of the market to function.
The US study notes a role for negative pricing:
Some electric generators cannot vary their output from hour to hour, so rather than submit a positive supply bid, they merely specify to the market operator that they must be kept online at a particular level, regardless of price. As a rule, nuclear units, for example, are scheduled in this “must-run” fashion because normally they operate at a set level of output, regardless of market price, due to low marginal fuel cost, equipment limitations and stringent safety guidelines for operation. Many fossil units are flexible within a range of output, but cannot be cycled down below a certain minimum level without shutting the unit off completely, creating an operationally inflexible minimum block of output. In an hour when a system operator has more “must-run” or zero-bid supply than it has demand, it will post a negative price, to give generators a strong economic signal to curtail generation.
The IESO has restricted generators from taking a short-term loss, possibly for sound financial reasons, only until it implements minimum pricing for certain classes of generators: primarily nuclear and wind.  The suggestions for those prices indicate they are also primarily driven by politics, with wind being suggested to restricted to a minimum price of $-10/MWh, lower than nuclear's minimum bid, under the rationale that "some negative amount is seen as reasonable to account for renewable credits and wear and tear avoidance."  

It is unlikely the wear and tear avoidance is a greater issue for wind than for other generators.
It is likely that the IESO's proposal is driven by politics, and not good design principles to encourage a functioning market.




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