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Facts about wholesale electricity prices and the Production Tax Credit

Facts about wholesale electricity prices and the Production Tax Credit

Wind energy provides lower-cost electricity that helps keep consumers’ rates low.

That helps explain criticism from competitors, who may have sunk costs into higher-priced sources of power. However, their claims that the wind energy production tax credit (PTC) is causing so-called “negative” prices are misguided, as this extremely rare phenomenon occurs only 1 in 4,500 hours, would occur anyway even if there was no PTC, and actually shows the electricity market is working.
 
Wind energy is always going to enter the real-time electricity market as one of the lowest-cost sources of electricity.
 
Because wind energy has no fuel cost and extremely low variable operations and maintenance (O&M) costs, even without the PTC wind energy would enter into the market at low prices and be preferred by utility system operators who choose power based on its marginal cost (not up-front or other fixed costs). Thus, the PTC itself has very little effect on real-time electricity prices – it simply incentivizes private investment into making more of this affordable, homegrown power source.
 
Isolated cases in which surplus wind power exists will be addressed by long-needed upgrades to our power grid.
 
New transmission lines are on the way. Meanwhile, this unfounded criticism is coming from utilities that operate numerous nuclear plants, which cost far more than wind power to build and which have been subsidized – and producing surplus power — for decades.
 
Long before the large-scale introduction of wind energy, nuclear generation would often exceed electricity demand at night and nuclear plant operators were unable to turn down their plants’ output. Like wind, nuclear plants also bid into the real-time market at very low costs because their fuel and variable O&M costs are very low, even though their capital costs and fixed O&M costs are sizable. Wind with the PTC, wind without the PTC, and nuclear all have a similar impact on the electricity market.
 
Nuclear and fossil energy are both heavily incentivized by the federal government, including through sizeable taxpayer payments written into the permanent tax code, the omission of pollution costs from their price, and free disaster insurance provided by the taxpayer, in the case of nuclear energy.
 
Fossil-fueled power plants almost always set the real-time price of electricity. Because utility system operators decrease the output of the most expensive power plants first, wind and nuclear plants are usually the last power plants to have their output turned down. As a result, these plants seldom set the market price for electricity.
 
One could argue those incentives distort the market by allowing nuclear and fossil and energy to bid into the electricity market at lower prices than they would without those incentives. And because fossil-fired power plants typically set the marginal price of electricity, those are the policies have by far the greatest effect on distorting power prices.
 
Claims that wind is somehow causing too-low electric prices are unfounded and come from competitors with higher-priced power they would like to keep selling – even though consumers are benefiting from wind’s impact on lowering electricity prices by offsetting the most expensive fossil-fired power plants and lowering electric bills. 
 
Lower prices benefit consumers. Lower prices however mean less revenue for existing generators.  Recent reports claiming market "distortion" are simply confirming that prices are being reduced around the country by low-cost wind energy and by additions capitalized with the help of the PTC. We are proud that wind is providing ever more affordable electricity. And that's good news for consumers.
 
For more on the consumer savings benefit of wind energy, see this May 2012 report from Synapse Energy Economics, which finds wind power can save Midwestern consumers between $3 billion and $9.5 billion a year by 2020.
 
 
 

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Michael Goggin is Vice President at Grid Strategies LLC, a DC-area consulting firm working on grid and markets issues for clean energy clients including AWEA. He was previously head of Research at AWEA.

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