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Is Maryland’s Offshore Wind Energy Discussion Missing a Key Value Stream?

April 2nd, 2012 · 4 Comments

When it comes to offshore wind, one of the most exciting Thanet Offshore Wind Farmdevelopments is in Maryland, where the House of Delegates last week approved a modified version of Governor Martin O’Malley’s proposal for offshore wind development (pdf). Much of the battle in Maryland has centered on ‘cost’, with opponents decrying the ‘high’ cost of offshore wind and the monthly charges (reduced to $1.50 month for homeowners and a 1.5 percent increase for commercial customers, to start after the wind turbines begin producing power in 2017). To counter this clear price hike, the Governor O’Malley and proponents have been eloquently and strongly laying out offshore wind energy’s co-benefits beyond electricity production.

As laid out in the Maryland Offshore Wind Energy Act of 2012 Facts & Figures (pdf):

  • Jobs:  About 6500 jobs years (1300 / year for five years) in manufacturing and construction for this facility with roughly 250 continuing jobs afterwards. (Also, by taking a leading role in offshore wind, Maryland would likely be exporting offshore wind systems and otherwise supporting other East Coast offshore wind projects.)
  • Homegrown Energy:  Maryland currently imports 30 percent its electricity, this project will reduce that and reduce trandmission costs (and problems).
  • Healthier Economy:  Due to reduced fossil fuel pollution, Maryland could Offshore Wind Works for maryland Healthsave something between $27-$100 million per year.
  • Price Stability:  From 1999 to 2009, Maryland’s electricity prices roughly doubled — once built, wind power prices are stable as operating costs are marginal compared to the capital costs.  The price can be essentially fixed because the fuel cost is zero (beyond the fuel costs to support operations and maintenance).
  • Clean, renewable power:  A 310 MW project would reduce Co2 emissions by 586,000 tons per year. (At a low Social Cost of Carbon value stream of $40 per ton, that would be over $23 million / year in value.)
  • Significant Economic Impact:  The total economic impact, over five years, will be nearly $2 billion and will drive $8.7 million in additional state tax revenues.

While some might say “you had me at hello’ for a clean-energy project, this is a pretty substantial set of benefits without even talking about the reality of the thousands of gigawatt hours the project will generate through its lifecycle. What is intriguing, however, is that this laydown of project benefits might be leaving out one of the most significant benefit streams:  the existence of fixed price electricity sources with minimal (to no) fuel price issues (like wind, solar, geothermal, and even nuclear power) will end up driving down total prices.  This reality is somewhat counter-intuitive as these low Co2 power sources come onto the market at what seems to be much higher individual unit (kilowatt hour or megawatt hour prices).  Even proponents will discuss how offshore wind costs more and its “high cost”.

For any economically viable offshore wind proposal, “there’s a massive subsidy from the ratepayers involved,” said David Wisowaty, CEO of Fenimore Partners, a New York-based consulting firm that specializes in wind energy. “It’s always the same issue — the very high cost of offshore power. It just requires some way of getting a high price per kilowatt hour” from consumers.

Wisowaty — as with so many others — is caught in a stove-piped discussion of “price per kilowatt hour” as contracted.  While a systems-of-systems discussion will include the sort of items outlined by the Maryland Energy Administration (the bullets above) that are ‘co-benefits’ outside the utility bill, there is a significant co-benefit within the utility bill structure that seems utterly absent from the Maryland offshore wind discussion: the impact on peak pricing. Significant European experience has shown that those ‘high unit cost’ fixed-price electricity sources have ended up having a suppressing effect on peak hour prices, especially variable sources like wind.  If high wind power periods coincide with periods of peak demand, the fixed wind prices put a ceiling on the cost of electricity. Writ large, the number of hours of prices peaking beyonOffshore Wind and Electric Vehiclesd the “FIT” (Feed-In-Tariff, that set price for electricity generated by the wind turbines) are reduced.  The German experience, for example, is telling.

renewable energy (mostly wind, plus some solar) injections into the German electricity system caused, on average over the year, prices to be reduced by about 8 euros/MWh - about 15%. That translated into savings of 5 billion euros over the year for electricity buyers (utilities and other wholesale consumers), or 95 EUR/MWh of renewable energy injected. With a feed-in tariff of, on average, 103 EUR/MWh (which includes the high price for solar; wind tariffs are around 85EUR/MWh), the net cost of renewables is thus under 10 EUR/MWh, to be compared to a average wholesale price of 40-50 EUR/MWh. Thanks to the feed-in tariff, a wind MWH costs one fifth of a coal MWh! In other words, by guaranteeing a high price to wind generators, you ensure that they are around to bring prices down. And that trick can only work with low marginal cost producers, thus not with any fuel-based generator, which would need to pay for its fuel in any case, and might end up requiring a higher price than the guaranteed level to break even, if fuel prices increased (as they would if such a scheme came up and encouraged investment in such plants) . So we get an glimpse of the fact that there is value in wind power for consumers which is not reflected directly through electricity prices, and is only remotely related to the actual cost of wind.

By having fixed renewable enegy prices — even if seemingly higher than the average kilowatt hour price — the average wholesale price was driven down significantly. As Scarecrow John put it in an email to me,

The spot clearing price paid in these ISOs is set by the marginal cost — which is set by the units on the margin of the dispatch — the last units/increments of energy added to supply to balance demand (more or less). If you add wind to the dispatch, it’s marginal cost is at/near zero, so it goes in at/near the bottom of the dispatch supply curve.  That pushes every more expensive unit to the right, up the curve, and eventually pushes the move expensive units off the dispatch, because they’re not needed now to meet demand.  That lowers the marginal cost that sets the spot price, which is now set by some less expensive plant than the  one displaced. Shorter: when you add wind, you displace something else that’s more expensive, e.g., push an old coal plant or inefficient gas plant off the dispatch, which lowers the spot price.

The developing Cape Wind offshore project in Massachusetts has looked at this value stream. As discussed by Tom Konrad at Forbes,

How much lower? A 2010 Study by Charles River Associates [pdf] found that Cape Wind would lower prices on the New England wholesale market by 0.122 ceMiddelgrunden_wind_farm_2009-07-01_edit_filterednts on average. Since Cape Wind itself would be producing about 1% of all power on the New England market, the extra 14 cents per kWh on that power would be offset by a savings of .122 cents per kWh on all other power. By my calculations, the combination of price suppression and the increased direct price of power from Cape Wind, the net effect on the average price of power in New England of Cape Wind would be an increase of only $0.0002 (0.02 cents) per kWh, assuming the Charles River Associates study is accurate. Put another way, even if customers pay a 12.2 cent per kWh premium for power from Cape Wind, the net effect on utility bills would be zero because of price suppression.

That last sentence bears repeating: “the net effect on utility bills would be zero because of price suppression.”   In other words, when it comes to Massachusetts and all the sorts of ‘co-benefits’ that are outlined for a Maryland offshore wind energy projects, those benefits might come at a net zero cost to the average consumer — even with the monthly bill surcharge — due to the suppression of peak pricing periods. A recent update suggests that the situation is even better than that, with the report concluding that “Cape Wind will reduce wholesale electric prices for the New England region by $7.2 billion over 25 years.” That is $286 million in savings, per year, for New England utility customers through the addition of one offshore wind project into the grid. All too often, proponents of clean energy action make a far too conservative case — underestimating the value of action — while opponents exaggerate costs and understate (ignore) benefits.  Governor O’Malley and other proponents of offshore wind have done a good job in working to increase understanding of co-benefits.  Even so, they just might have left out one of the most significant co-benefits that would ameliorate — if not eliminate — the difficult dilemma of seemingly paying for these co-benefits via increased utility bill costs.  The European experience and analysis of other U.S. offshore projects suggests that offshore wind is one of those arenas where we can have our cake and eat it too.

Photo credits.

  1. Thanet Offshore Wind Project. 23 September 2010: Vattenfall opened the world’s largest offshore wind farm, Thanet Offshore Wind Farm, off England’s south east coast. The wind farm has 100 turbines and will generate electricity equivalent to the annual consumption of over 200,000 British households.
  2. Offshore Wind Works for Maryland Health: Nurses from around the state of Maryland came to Annapolis to make an urgent plea to Maryland elected officials to pass an offshore wind energy bill that will prevent hundreds of asthma attacks every year. Chesapeake Climate Action Network.
  3. Governor O’Malley at 2011 AWEA Offshore Wind Energy Conference.
  4. Middelgrunden wind farm, Baltic Sea.

Related post: Fighting Back against Cutting Electric Prices with Wind Power

Tags: Energy

4 responses so far ↓

  • 1 jam // Apr 3, 2012 at 10:52 am

    Jerome a Paris has written diaries on dKos explaining exactly this.

    The “renewable energy” link is to a long piece he did on The Oil Drum. (http://www.theoildrum.com/node/5354) He also had a good piece on this in The New Scientist which is now behind a firewall. From that piece:

    an unexpected upside: consumers end up paying less for their electricity when wind power is part of the mix.

    This happens because the liberalised electricity markets in Europe and North America are marginally priced; that is, the “spot” price of electricity is set at any given time by the highest price offer from an available power producer that a transmission systems operator needs to take up. All electricity generators receive this price regardless of how much it costs them to produce a unit of electricity.

    The very highest spot prices are seen at moments of daytime peak demand, when coal, nuclear and hydroelectric cannot cover all needs. At those times fast-reacting “peaker” plants need to be turned on. These plants are generally oil- or gas-fired and have high marginal production costs – generating each extra unit of electricity is relatively expensive because they have to buy oil or natural gas. Not surprisingly, peaker plants drive the electricity spot price up.

    The addition of wind power, however, changes the dynamics of the market. Wind turbines don’t burn fuel and their marginal costs of production are very low – lower even than coal, nuclear and hydro. Being the cheapest, transmission systems buy from them first. On days without wind, they don’t get paid, since they only receive the price of the electricity they produce. But on windy days, the output they deliver ensures that peak demand is satisfied without the need to turn on the most expensive of the peaker plants. In other words, when there is little or no wind, prices on the market are normal; when a lot of wind power is available, it has a moderating effect on prices. The result is that, over time, consumers’ bills are lower than if wind power were not present, even taking into account the cost of the regulatory regime supporting them.
    The savings can be significant

    Good to be reminded of the discussion point. Fixed price versus merchant plant pricing.

  • 2 John Howe // Apr 4, 2012 at 1:36 pm

    Excellent contribution. We, the people, can indeed have our cake and eat it too. But, of course, there is no free lunch; the “price suppression” effect comes out of someone’s hide. As it happens, it will tend to reduce rents to oil, gas and coal producers who would otherwise be able to charge higher prices. This is the central reason why the opposition to renewable energy development has stiffened in the past couple of years — notwithstanding the continuing progress of technology and decline of renewables pricing. The effect of price suppression is an important and true story that needs to be repeated often and forcefully.

  • 3 Romney-Ryan Seek to Raise Americans’ Energy Prices: (a) Electricity // Sep 27, 2012 at 9:04 pm

    [...] While it seems a Republican mantra that clean energy sources like wind and solar are expensive, this whine turns out to be based on a stove-piped focus on the direct unit prices rather than the system impacts. It turns that the introduction of renewable energy systems are driving down overall electricity prices through shaving…. [...]

  • 4 Romney/Ryan Seek to Raise American’s Energy Prices | The Truth Goat // Oct 4, 2012 at 7:06 am

    [...] While it seems a Republican mantra that clean energy sources like wind and solar are expensive, this whine turns out to be based on a stove-piped focus on the direct unit prices rather than the system impacts. It turns that the introduction of renewable energy systems are driving down overall electricity prices through shaving…. [...]

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