Saturday, September 23, 2017

Who’s to Blame for Negative Prices?

Wind Generators: We’re Not Nukes’ Problem

Exelon Corp. owns 1,300 MW of wind generation, a portfolio dwarfed by its 22,000-MW nuclear fleet.

So when company executives decided in 2012 that the interests of wind and nuclear power had diverged over the renewal of wind’s Production Tax Credit, Exelon called on Congress to let the subsidy expire.

The American Wind Energy Association, which spends much of its time lobbying for continuation of the PTC, responded by kicking Exelon out of the trade group. The wounds haven’t healed since.

Last month, AWEA released a study in response to Exelon’s claims that wind farms subsidized by the PTC are responsible for negative prices that are hurting the revenues of the company’s nuclear plants.

At last week’s Federal Energy Regulatory Commission meeting, Commissioner John Norris said the AWEA study provided “very compelling evidence” that “the PTC and negative pricing … are having none or negligible impact on nuclear facilities.”

“If that’s not a factor [in nuclear’s woes], as the AWEA study would seem to indicate, let’s get it out of our rhetoric,” Norris said, calling on Exelon to respond to the analysis.

AWEA’s report is intended to bolster its case for renewal of the PTC, which expired Dec. 31. On April 3, the Senate Finance Committee approved a two-year PTC extension, retroactive to Jan. 1, sending it on to the full Senate.

Exelon has been lobbying Illinois state legislators, warning that the company may shutter as many as three of its six nuclear plants in the state. The company has cited low natural gas prices and flaws in PJM’s capacity market as causes of its plants’ declining revenue. (See Exelon in Lobbying Push to Save Ill. Nukes.)

It also blamed the PTC, which pays wind generators $23/MWh of output, the equivalent of $37/MWh before taxes.

With no fuel cost and with revenue from the PTC and renewable energy credits (RECs), wind farms can profitably generate even when prices are negative.

On that, AWEA and Exelon agree. AWEA, however, takes issue with being blamed for causing negative prices.

The AWEA report, authored by analyst Michael Goggin, says that wind projects have the same impact on real-time and day-ahead prices with or without the PTC.

A generator receiving the PTC and selling RECs would offer at -$20 to -$40 per MWh, says Goggin.

“A wind project that does not receive the PTC will offer into power markets at just above $0/MWh, based on wind’s zero fuel cost and very low variable O&M [operation and maintenance] costs,” the study says. “This offer will always be lower than almost all other offers.”

Northbridge Group analyst Aaron Patterson, co-author of a 2012 Exelon-sponsored report critical of the PTC, does not question AWEA’s data but does disagree with the conclusions.

Wind “may set the price in certain hours. It has a much broader effect in all hours of pushing the dispatch curve out,” Patterson said in an interview. “That manifests itself in some hours in negative prices but in other hours in positive prices that are lower than what they would otherwise be.”

“We can work with AWEA on a clean energy future but we can’t deny the truth,” said Joe Dominguez, Exelon’s senior vice president for governmental and regulatory affairs and public policy, in an interview. “We didn’t pick a fight with the wind industry for the fun of it. We’re trying to save plants and jobs.”

Below is a summary of the major points of the AWEA report and Exelon/Northbridge’s response.

PTC Corrects for “Market Distortion”

AWEA: “The PTC is correcting for market externalities that are not currently accounted for, such as the cost of carbon emissions and the other major environmental and human health costs of fossil fuel consumption. As a result, the PTC is actually countering the market distortion that occurs on an ongoing basis because market pricing does not account for these factors.”

Exelon has complained that zero-emission nuclear power also gets no credit for its contribution to meeting climate change goals.

But Patterson notes that the PTC subsidy typically represents more than half of the per-MWh revenue of wind plants.

“I think it’s fair to say that to the extent that carbon reduction is a goal that it’s more efficient to price carbon rather than selectively subsidizing some sources and not others,” he said.

Pretax carbon prices in California and the Regional Greenhouse Gas Initiative range from $4 to $12 per ton, equivalent to $2 to $6/MWh, Patterson said. “$37 [per MWh] doesn’t strike me as an appropriate level of compensation given the carbon markets we have today,” he said.

As wind’s growth has depended on the PTC, nuclear power has benefited from the Price Anderson Act, which limits nuclear plant liability in an accident.

But that’s different, Patterson said. “It’s not production-based. It doesn’t affect how nuclear units operate in the market,” he said. “In my view, it’s not a distortionary subsidy.”

Negative Prices Overstated

AWEA: “Exelon has grossly overstated the frequency of negative prices at its nuclear plants, by a factor of at least 10 in most cases, and in some by a factor of 20 or more.”

AWEA cites a February 2013 statement by Exelon CEO Christopher Crane that the company’s Byron nuclear plant sees negative prices 16% of the time. In May 2013, Crane was quoted as saying that the Clinton nuclear power plant and the rest of the company’s nuclear plants face negative prices about 14% of the time.

Quad Cities Versus Northern Illinois Hub Around the Clock Prices (Source Exelon)

Between 2009 and 2013, Exelon says real-time and day-ahead prices at its Quad Cities nuclear plant were about $6/MWh less than at the Northern Illinois hub because of competition from subsidized wind. In 2012, the differential totaled $130 million. “That’s huge,” said Exelon’s Joe Dominguez.

AWEA says real-time prices at the Byron and Clinton plants were below zero only 2 to 5.5% of the hours between 2011 and 2013. In the day-ahead market, negative prices occurred in only 0.8 to 2.4% of hours over the same period, AWEA says.

Dominguez said Crane’s comments referred to only off-peak hours.

“In the off-peak hours wind tends to produce most of its output and it is also coincident with when our consumers use the least amount of electricity. And the combination of those two factors and transmission congestion leads to negative prices,” Dominguez said. “It’s an upside-down argument to criticize nuclear plants because they can’t ramp when windmills unpredictably run.”

Real-Time vs. Day-Ahead Prices

AWEA:Merchant nuclear plants almost exclusively sell their energy into day-ahead markets, so day-ahead data captures the true impact of negative prices on Exelon’s nuclear plants.”

Patterson responded: “To say that negative prices don’t matter because Exelon or any other nuclear generator sells their output in [forward markets] is not correct. Those prices are lower than they would otherwise be because of negative prices in the real-time market.”

Wind’s Blame for Negative Prices

AWEA: “Market price data and wind plant output data show that most instances of negative prices occurred when wind plant output was very low. … If Exelon were correct, and wind plants were the factor causing these negative prices, one would expect to only see negative prices during hours when wind plants were producing at nearly full capacity.”

Three incidents that appear to have involved localized transmission outages were responsible for most of the negative prices affecting the LaSalle, Braidwood, Byron, Quad Cities and Clinton plants in 2013, Goggin said.

Patterson agrees with AWEA that transmission outages play a role in negative prices — along with, he says, unexpectedly low load or unexpectedly high wind production. “Disentangling the specific cause for a specific negative price is very hard,” he said.

But he said the frequency of negative prices has grown since 2008, “which coincides with the expansion of wind capacity in Iowa and Illinois and surrounding regions. The nuclear plants were there [before]. The transmission was what it was. The load is what is was. What changed? The wind.”

Tx Upgrades Reducing Negative Prices

AWEA: “Instances of negative prices have rapidly dropped to near zero in all regions of the country. … Negative prices are being eliminated as long-needed transmission upgrades are completed and grid operating procedures are modernized.”

AWEA cites data showing the frequency of negative prices peaking in Illinois in 2009 and 2010 and falling since, consistent with the Northbridge report.

“It’s too early to tell whether we’re going to see a trend of reduced negative pricing,” responded Exelon’s Dominguez. “Transmission [expansions are] always trying play catch-up to the introduction of subsidized generation. The reality is we have seen many years of negative pricing. We can’t claim victory simply because one season it didn’t show up.”

PTC Discourages Investment in Conventional Generation

AWEA has noted the boom-and-bust cycle of wind capacity additions in response to cancellation and resumption of the PTC.

Northbridge says the PTC also discourages investments in conventional generation needed to maintain reliability. “In recent years, about 85% of total wind capacity has not operated during the peak hours on the highest demand days of the year, on average,” the Northbridge report says. “Controllable conventional generation is thus needed to backstop wind and ensure the lights stay on.”

Goggin said wind also contributes to reliability, noting it provided PJM more than 3,000 MW of generation during the polar vortex, when many coal- and gas-fired generators suffered forced outages.

“No resource is 100% reliable. This past winter was a very good example of that,” he said. “Every resource is backed up by all other resources.”


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