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Renewables and the Law of Unintended Consequences

As with any big and complex undertaking, like the worldwide movement to integrate substantial amounts of renewable power resources into the grid, there are unintended and adverse consequences.   This is proving especially to be the case with wind facilities in Europe and the United States.

One of the underlying themes at an inaugural two-day workshop, “Wholesale Electricity Markets – Hurdles to Overcome,” hosted by Northwestern University’s Kellogg School at the end of January was that the natural intermittency of wind velocities, combined with tax credits, produces two important unintended adverse results.

First, because the wind does not blow on schedule and therefore is not a “dispatchable” resource that can be called upon as needed, wind capacity needs conventional generation as back-up.  This means that there can be a duplication of capital investment in capacity that can increase overall system costs and may result in higher greenhouse gas emissions than predicted as plants continue to burn fuel in order to be ready to feed power to the network if wind production decreases.

Second, the wind is often blowing during low demand periods such as late at night or when we have mild temperatures.   High summer time temperatures are partly the result of a lack of wind.  This means an increasing number of hours of the year with “negative” market prices for electricity.   Negative pricing, quite literally, requires a generator to “pay” customers and grid operators to take the power being generated during low demand periods.   Wind facilities, unlike conventional generation, can afford to operate when prices are very low or negative because they receive a federal tax credit for each kilowatt hour produced, whether the energy is needed or not.

The result is that other electricity generators, such as base load units that have low production costs cannot realize revenue during the very periods for which they were intended to function.  Base load plant operators may not invest in facility life-extension and capacity improvements if negative pricing hours continue to increase as wind subsidies encourage more wind development.

While the full implications of these two unintended consequences have yet to fully play out, there are already some indications that pressure is building to address the resulting problems.   In Europe, for example, EURELECTRIC (a European electricity industry association) has proposed that regulatory distortions should be removed to ensure that correct price signals incentivize the necessary flexibility and backup generation investments.  In Spain, where the European financial crisis is especially acute, the government has dramatically reduced what had been generous subsidies to the wind industry.

The Kellogg workshop brought together industry experts, professionals and academics from around the world to discuss current and future challenges with competitive wholesale power markets.  There are two other themes that came out of the workshop that I plan to share with you in upcoming posts.  Please stay tuned!

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