Flexibility, Fuels & the Future

This week, Energy Fairness presented energy policy updates to the American Coal Council and conducted a workshop for state leaders at the American Legislative Exchange Council’s annual meeting.

You can see some of the content and ideas we shared here. Download the presentation PDF.


The Long Shadow of Negative Pricing


Top Takeaways:

  • Renewable energy plays a valuable role in the nation’s generation mix.
  • But when renewable energy flows into the wholesale market at prices below zero, the generation mix is distorted over the long haul.
  • There really is no such thing as “free electricity.”

Like many people, I love free stuff. Tote bags and coffee go-cups top my list of free energy conference swag. So, I can understand why renewable energy enthusiasts enjoy discussing “negative pricing” and the benefits for consumers’ electricity bills. Some trumpet “free electricity” in a manner that calls to mind cell phone advertising.

However, sometimes you get what you pay for, and that’s certainly the case with “free” electricity. It may be more accurate to say that free electricity is always paid for by someone else. Last week, we discussed the long, hot summer in Texas, where wind resources have boomed, thanks to receiving significant federal tax subsidies as high as $24/MWh and state incentives as well.

The excess of wind generation causes many episodes a year of negative pricing, meaning these plants can and do, set the market price for generation, making many coal, gas and nuclear plants too expensive to operate. Negative pricing also deters investors from building new generation. “Free” electricity has helped cause a Texas reserve margin crisis and the sudden extreme spikes in wholesale and retail electricity prices.

The phenomenon of negative pricing deserves more discussion so that policymakers can sift through myths and facts about “free electricity.” In 2012, the U.S. Energy Information Administration (EIA) commented on negative pricing, explaining some basics: “wholesale electricity markets sometimes result in prices below zero. That is, sellers pay buyers to take the power.” Put another way, “generators may seek to maintain output by offering to pay wholesale buyers to take their electricity.”

EIA further explained that “[t]echnical and economic factors may drive power plant operators to run generators even when power supply outstrips demand. … “Eligible generators can take a 2.2 ¢/kWh or $22/MWh production tax credit (PTC) on electricity sold. This means that some generators may be willing to sell their output for as low as -$22/MWh to continue producing power. Typically, wind generators are the largest such group in any region.”

EIA makes it clear that wind isn’t the only resource paying a buyer to take power. It can happen for any resource that either cannot control its fuel inputs or operates best when continuously running full-steam ahead. However, the wind industry frequently touts its ability to lower costs, and the American Wind Energy Association released a map last week highlighting wind’s contribution to annual generation.

Texas weighed in at 14.8 percent overall, which dovetails with the relatively low contribution it has made to power generation this summer in Texas. How can wind set the market price when it isn’t on that often? The answer can be complex, and indeed, this topic deserves detailed study. A great place to learn is a 2017 article, “Growing Evidence of Increased Frequency of Negative Electricity Prices in U.S. Wholesale Electricity Markets” on the Energy Forum page of the International Association for Energy Economics.

But the answer can also be fairly simple – so far, in markets around the nation and the world, even relatively few hours of negative pricing go a long way, dragging down, on paper, the wholesale cost of power, and pushing baseload resources out of the market. Negative pricing is an illusion but it casts a long shadow over the energy landscape and stands in the way of consumers’ access to reliable, affordable power. Ultimately, it also harms renewable energy, which cannot contribute to power flows without the backup provided by coal, gas and nuclear.

Wind plays a valuable role in our generation portfolio. But the negative prices that often blow in with it distort reality, play favorites with resources and ultimately harm consumers.


A Record-Setting Summer in Texas

Many eyes are on Texas this summer. Some are watching the Houston Astros to see if a repeat of the 2017 season is possible; currently they are leading the American League West by 6 games and occupy the number 2 spot in USA Today’s Power Rankings. I cannot report similar good news for the Atlanta Braves, although hope springs eternal.

However, those lucky enough to have a professional or avocational (yes, that is a word) connection to the energy industry are collecting a different set of stats by following the state’s roller coaster of summer peak temperatures and power prices. Some notable records have been set. For example, last week in Dallas, day-ahead spot prices for electricity hit $841/MWh. Normally, wholesale prices across the state range from $10 to $50/MWh.

Even last year, experts at ERCOT and across the state flagged some concerns about reserve margins. As the Houston Chronicle reported, “ERCOT in 2010 adopted guidelines calling for the grid’s generating capacity to exceed demand by at least 13.75 percent.” ERCOT’s December 2017 forecast estimated 2018 summer reserve margins of less than ten percent. A key reason was the pending retirement of three coal plants and one natural gas plant that formerly supplied 4,300 megawatts.

On Monday, peak demand topped out at 71,444 MW between 5 and 6 pm. Luckily, no brownouts have occurred, but at times in this long, hot month, the actual reserves have fallen to 2,000 MW. That’s one or two power plants away from trouble. You can follow ERCOT on Twitter (I’m guessing their tweet stream has set a summer volume record) or, if you are wondering if there will be enough power to watch major league baseball on TV, check their daily reserve margin report.

How can this be? After all, Texas is the Saudi Arabia of wind! It has an enviable and ample transmission system. But, supply and demand still matter, and so does the dispatchability (if it’s not a word, it should be) of resources.

During some of the hottest hours and at times of peak demand, the Texas wind became a slow, fickle breeze, often contributing less than ten percent to the power flow. That means the state’s coal, nuclear and natural gas units have once again carried Texans through a precarious period. And while this summer has been notable, it really is just continuing a long-standing trend. Non-wind generation provides most of the power Texans need on summer and winter peak days.

What do high spot prices, low reserve margins and marketplace drama mean for consumers? Low-cost deals, often touted as the driver for retail deregulation, are disappearing like the wind. In June, the Houston Chronicle reported that “[c]onsumers hoping to find better deals when their electricity contracts expire are in for a shock as retail prices have soared in anticipation of hot weather, potential power shortages and spikes in wholesale electricity prices. The low teaser rates for consumers available just a month ago have disappeared.”

Why are traditional baseload plants disappearing – and being replaced by wind – when there is clearly a need to keep them?  The answer is longer than a major league double-header and more complicated than one PACE blog can accommodate. Look for more baseball tie-ins and answers to these questions next week and in several presentations we’re making across the country this summer.