An Argument Over Wind

Source: By MATTHEW L. WALD, New York Times • Posted: Friday, September 14, 2012

With the wind industry facing the expiration of a production tax credit at the end of the year, the sector’s main trade association is facing off against Exelon, the big power generation company, over whether the tax break should be renewed. Last week, the Wind Energy Association expelled Exelon as a member because the company opposed a renewal of the credit.

The association says that if the tax credit expires, some 17,000 jobs will be eliminated next year and that deliveries of new turbines will spiral to zero.

But Exelon says the tax credit is distorting energy markets because the credit itself is larger than the average value of electricity produced in the Midwest. Surges of wind energy late at night during periods of low electricity demand are driving the market price of electricity below zero, according to independent statistics.

Exelon complains that in that circumstance, its nuclear plants actually have to pay grid operators to accept their electricity. The wind farms in that region do as well, but they remain profitable because they earn the production credit.

The issue of the tax credit and so-called negative pricing has emerged in the presidential campaign, with the Obama administration favoring an extension of the credit and Mitt Romney opposing it. But the credit’s fate may be resolved by the November election, depending on Congressional action.

Exelon plans to release a study on Friday that says that distortions in the market are getting larger as more wind is added.

The company is not alone in its complaints. In Texas, the chairwoman of the state’s Public Utility Commission, Donna Nelson,told a state Senate committee last week that Texas had a shortage of generating capacity as a result of a market distortion in which wind energy drove the price of electricity into negative territory. When wind developers can make money even when prices are negative, she said, it discourages others from building other kinds of power plants.

The problem for Texas is that wind generation does not coincide with peak demand, which is on hot days that are mostly windless. State power planners estimate that for every 100 megawatts of wind machines installed in the state, only about 8 megawatts will be available on peak days.

The tax credit, which applies to projects that are completed by Dec. 31, is 2.2 cents per kilowatt-hour. Depending on the tax status of the wind farm developer, the credit can be worth as much as $34 per megawatt-hour.

Joseph Dominguez, Exelon’s senior vice president for governmental and regulatory affairs, said that in the last two years, the average price of a megawatt-hour at the Northern Illinois Hub , one of the main spots on the grid in eastern North America where electricity is priced, has ranged from $28 to $31.

There is a bit of a paradox in Exelon’s exile from the wind association; the company owns nearly 2 percent of the wind capacity in the United States.

Wind industry advocates say that negative pricing is rare and highly localized and simply points up shortcomings in transmission capacity. “It’s all driven by a lack of transmission,” said Michael Goggin, the association’s expert on integrating wind into the grid. “Negative prices are the market’s way of saying there is too much supply and not enough demand, and there’s a roadblock keeping that low-cost electricity from reaching consumers.” New wind machines are sometimes built faster than new transmission lines, he said.

The wind industry also argues that companies that burn coal and natural gas get a subsidy too, in that they are allowed to dump pollutants into the air without paying for the damage they cause.

Sometimes new transmission lines can alleviate the negative pricing phenomenon. In 2010 in the Chicago area, the occurrence of negative pricing peaked at 3.1 percent of all hours, according to the regional grid operator, the PJM Interconnection. That dropped to 2.1 percent the following year when more transmission capacity was added.

But across the country, wind farms are likely to be added faster than transmission lines.

The study sponsored by Exelon, prepared by the NorthBridge Group, which does extensive consulting for utilities around the country, found pockets where the number of negative hours reached 12 percent or more. While various types of electricity generation have received subsidies over the decades, said Frank Huntowski, one of the authors, “I don’t think we’ve seen something as dramatic as this.”

Part of the problem is also that wholesale electricity prices have declined because of an economic slump and a decline in the price of natural gas. Before the recession began, the subsidy for wind power production was smaller than the average price of a megawatt-hour.

Negative pricing occurs mostly on spring and fall nights when the wind is blowing strongly but offices, stores and factories are mostly closed and temperatures are so mild that there is virtually no demand for home heating or air-conditioning. The phenomenon existed before the surge in construction of wind machines, but the new industry is making it worse, some industry participants say, especially for companies with baseload plants that were built to run at a steady rate around the clock.

That is a special problem for Exelon, which runs many nuclear plants in the Midwest; nuclear plants cannot change their output quickly.

“Prices will go down for an hour and then come back up and a few hours later, go down again, and it’s very hard to maneuver the nuclear plants to work around that,” Christopher Crane, the company’s chief executive, said in an interview. “By the time you have briefed the crew to power down the plant, the price is up again,” he said.

The wind energy association argues that the production tax credit is an incentive to invest in a clean energy source and does not directly affect market prices. But opponents say that when new generation is added in a way that creates sudden surpluses, the market impact is clear.

Either way, low prices are a boon for consumers, said Peter L. Kelley, a spokesman for the wind association. “It’s indisputable that wind energy, with or without the production tax credit, drives down electricity prices,” he said. “Consumers receive massive benefits of billions and billions of dollars.”

Meanwhile, the wind business is already preparing for a slowdown. On Tuesday, a wind tower manufacturer, Katana Summit, said it would probably sell or close its two plants, in Nebraska and Washington State, because of the expiration of the tax credit. The two plants employ a total of about 300 people.