1Center or American Progress | Wind Power Helps to Lower Electricity Prices
Wind Power Helps to LowerElectricity Prices
Richard W. Caperton October 10, 2012
Introduction
Here’s somehing ha shouldn’ surprise anyone: A company ha benes rom highpower prices is lobbying or policies ha would raise power prices or consumers. Whashould surprise everyone, however, is he sheer audaciy o heir eor: using a deeply awed sudy o argue ha ax incenives or wind power are “disorionary” while argu-ing or he exac same incenives or heir preerred echnologies.Earlier his summer Exelon Corporaion, a large U.S. power generaor and uiliy opera-or, began quiely lobbying agains exending he producion ax credi or wind energy.Is eor gradually became more public, and has now eruped ino a ull-scale war on he wind indusry.
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In ac, he American Wind Energy Associaion erminaed Exelon’s mem- bership in he associaion.
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And Exelon is now ouing a sudy by he NorhBridge Group,an economic and sraegic consuling rm, ha purpors o show ha he producion ax credi is deeply harming consumers by—ge his—saving hem oo much money.
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Exelon’s argumen is srange bu has gained some racion among wind energy oppo-nens on Capiol Hill. Sen. Lamar Alexander (R-N) and Rep. Mike Pompeo (R-KS),or example, jus penned an ediorial in Te Wall Sree Journal parroing NorhBridge’sclaims.
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Forunaely, hough, he acs are on he side o wind power.Tis issue brie will show how he wind producion ax credi benes our economy, while also shedding ligh on Exelon’s eors agains he wind indusry by:
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Explaining he aniconsumer moives behind Exelon’s aniwind argumens
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Describing how nuclear power—Exelon’s primary power source—could be subsi-ued or wind in Exelon’s argumens, which shows ha heir concern is really windpower and no marke disorionsLe’s begin wih he benes or consumers.
2Center or American Progress | Wind Power Helps to Lower Electricity Prices
Consumers benefit from cheap power but Exelon doesn’t
I’s criical ha we keep Exelon’s undamenal moivaions in mind. Exelon is in he busi-ness o selling power, and would preer ha power o be expensive.Sudies show ha wind energy lowers power prices in wholesale markes,
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so i’sperecly raional or Exelon o oppose wind power. Bu Exelon’s argumen abou heproducion ax credi huring consumers is deeply misleading. Beore digging ino heirargumen, however, we need o review how wind power drives down prices.Much o Exelon’s power is sold in compeiive wholesale power markes, which allow power generaors (like Exelon) o sell power o local disribuion uiliies, which in urnsell ha power o businesses and homeowners. Compeiive markes all operae on a“single clearing price” basis, which means ha all generaors ge paid he same amounor heir power, no mater how much i coss o produce. Tis aucion mehod ensuresha every generaor bids in he lowes price hey’re willing o accep or heir power. While he deails are exremely complicaed—he rules or he marke ha operaesin he mid-Alanic area are more han 2,000 pages long, or example
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—he basics areairly sraighorward. Every generaor in he marke ells he marke operaor how muchpower hey’re willing o provide and a wha cos. A he same ime, every disribuionuiliy ells he marke operaor how much power hey need o buy. Te marke operaorhen sacks up he generaors rom lowes o highes bid.Ten, saring a he lowes bid, he marke operaor adds up all o he bids unil hey have enough power o mee he disribuion uiliies’ demands. Te las bid acceped becomes he “clearing price”—he price he disribuion uiliies pay or all o heirpower, and he price ha every generaor receives.o see how wind impacs power markes, consider he hypoheical examples displayedin Figure 1. Say a marke has ve dieren generaors: a wind arm, a nuclear reacor, acoal-red power plan, an efcien and modern naural gas power plan, and an olderand less efcien naural gas plan. Each o hese plans will oer o sell power a heprice ha covers heir operaing cos. On he oher side o he marke, disribuion uili-ies need o buy 3,000 megawats o power. Tis means he marke operaor will hensack up he bids rom lowes o highes and hen add up he bids unil enough powercan mee he 3,000 megawats o demand.In he rs example he marke will clear a $50 per megawat-hour o elecriciy. Now,consider wha happens o his marke i someone builds a new 500-megawat wind arm,as shown in he second example. Te need or power hasn’ changed a all, so he cheap-es 3,000 megawats will sill deermine he clearing price. In his case, he marke now clears a $30 per megawat-hour o elecriciy.
3Center or American Progress | Wind Power Helps to Lower Electricity Prices
Tis eec o wind power driving down wholesale prices is known as “price suppres-sion” or he “meri order eec,” and is benes are well known. gA recen sudy o heMidwes Independen Sysem Operaor, or example, ound ha large amouns o windcould save consumers $200 per year.
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While he benes or consumers are clear, exising generaors lose some pros. In heoriginal scenario, he nuclear reacor—le’s say i’s owned by Exelon—was making $40per megawat-hour more han heir operaing cos. (Tis isn’ echnically “pro,” sincesome o his $40 goes oward covering xed coss.) In he later scenario, he reacor isonly making $20 more han heir operaing coss.O course, while Exelon makes $20 less, consumers save $20 on heir power bill.
The production tax credit is not “distortionary”
Exelon knows ha saying wind power is bad because i saves money or consumers ishardly a winning argumen, so hey’ve made a slighly dieren argumen o avoid hereal issue. Tey are now ouing a Sepember repor by he NorhBridge Group, whichconcludes ha “[producion ax credi]-driven negaive prices direcly conic wihhe perormance and operaional needs o he elecric sysem and wih ederal energy policies supporing well-uncioning compeiive wholesale markes.”
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Wha hey mean by his: Wind arms are paying grid operaors o ake heir power, which is reporedly disoring elecriciy prices in wholesale markes.
Note: This is a hypothetical example for illustrative purposes and is not intended to represent any particular power system.
$50/MWh$30/MWh$20/MWh$10/MWh$0/MWh3,000 MW500 MW
Wind
900 MW
Nuclear
600 MW
Coal
500 MW500 MW
Old gas
$30/MWh$20/MWh$10/MWh$0/MWh3,000 MW500 MW
Wind
500 MW
Wind
600 MW
Coal
500 MW
New gas
500 MW
Old gas
900 MW
Nuclear
FIGURE 1
Adding more wind power reduces prices in electricity markets
In the frst example (on the let), the market clearing price is $50. In the second example (on the right), more wind pushes the mostexpensive plants out o the mix, and the clearing price is reduced to $30.
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Wind Power Helps to Lower Electricity Prices
Allowing the wind production tax credit to expire will hurt consumers and workers, as wind power is driving down electricity prices and helping put people back to work.
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