by David Bradley and Bob Ciesielski
Recent data confirm that wind energy is viable and is saving New Yorkers money.
By the end of 2010, several wind farms had at least a full year of commercial operation under their belt, and one of them (Wethersfield 1) has been in operation for 10 years. Thus, it is possible to test if renewable energy “price suppression” or the “merit order effect” (MOE) occurred, saving ratepayers money, as studies by NYSERDA and the NYS Public Service Commission have predicted.
Using data from NYISO—New York’s grid operator—we estimate that customers in NYISO’s Zone A saved $31 million on their 2010 electricity bills as wind replaced expensive gas in the region’s mix of generation sources. Zone A covers Western NY, where most of the state’s wind farms are located.
The MOE comes into play when renewable energy sources submit low bids and replace high-priced energy for a given time period. (See below, "When wind works best.")
The bidding system to secure electricity for the grid in most deregulated states and nations is a “uniform clearing price” (UCP) auction. Under a UCP auction, the price is set by the bid of the highest-cost fuel source that is needed to meet demand. This price is then awarded to all the fuel sources that are used for the time period in question. When the UCP is very high, as when expensive natural gas generation is needed to meet demand, the result is that lower priced sources such as hydro, wind, coal, and nuclear, are paid substantially more than their bid.
Since wind and solar plants use free fuel created by nature, they have very low marginal costs. They have an incentive to submit a very low bid, knowing it will cover their marginal costs, while winning them a spot in the fuel mix. This guarantees they will be paid the uniform clearing price, which usually will more than cover their marginal costs.
How it works
Bid prices vary, but let’s take a typical example where wind and hydro generators might bid at 1 cent per kilowatt hour (kWh), coal and nuclear bid at 4 cents per kWh, and natural gas generators bid at 8 cents per kWh. The MOE takes place when the amount of wind electricity generated makes it unnecessary to use the gas-generated electricity. In that case, wind, hydro, nuclear and coal generators would all get 4 cents a kWh for the electricity they generate. If the gas-generated electricity had been needed, they would all have been paid 8 cents per kWh.
As you can see from this example when wind is able to knock natural gas out of the fuel mix, it can provide major savings for consumers on the “supply services” portion of their bill. By carefully looking at NYISO data, we are able to estimate this happened enough in 2010 to reduce bills in Zone A by a total of $31 million.
The MOE in Europe
The MOE is well documented in Europe, where in some cases it has resulted in negative prices. That is, for some time periods, polluters generating coal or nuclear electricity actually have to pay people to take their electricity rather than undertaking an expensive plant shutdown.
In 2006, German customers had a net savings of Euro 4.98 billion due to the MOE. These savings roughly canceled out the cost of the feed-intariff under which Germany has led the world in renewable energy development, creating over 367,000 jobs in the process. In addition, the use of renewables in Germany resulted in about E2.9 billion in avoided imports of gas, as well as E2.7 billion saved from needing less coal (a fuel that is largely imported from other nations to Germany, and from other states to New York).
The MOE is essentially carved out of the extraordinary profits that polluters can make whenever demand has to be supplied by higher priced “peaker plants” fueled by gas or oil.
As you can imagine, the owners of coal burners, nukes and natural gas suppliers are not happy with wind turbine installations. While there are legitimate concerns to be worked through when a wind farm is sited, the next time you hear about opposition to a wind development it is worth wondering if the source of some of that opposition can be traced back to these interests.
And just what does it mean to scrape off the extraordinary profits that, in WNY, would have gone to the three major coal burning plants (NRG Huntley, NRG Dunkirk, AES Somerset) if wind turbines had not replaced expensive natural gas generation? Odds are, a lot, since without extraordinary profits, there is far less motivation to keep burning coal to make electricity.
Sierra Club members are concerned about the greenhouse gas and health impacts of burning coal and the water pollution and other impacts of hydrofracking for natural gas. By investing more in wind and other renewables, we can cut into the financial viability of coal plants while reducing the demand for natural gas and the pressure to hydrofrack. That’s a two-for-one deal that should appeal to everyone but those whose interests are opposed to the common good.
David Bradley is a wind activist and blogger for the Wind Action Group in Buffalo. Bob Ciesielski chairs the Niagara Group.
When wind works best
Editor’s note: Merit order, which counteracts the effects of peak demand, is a way of ranking available sources of electrical generation in ascending order of their short-run marginal costs of production— those with the lowest costs are the first brought online.The wholesale price for electricity therefore has to go up to make it worthwhile for the next most expensive generator to run. This benefits renewables because they have no fuel (wind and sun is free) to raise marginal costs.