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Low Natural Gas Prices, Not Wind Energy, Primarily Responsible for Coal’s Troubles

A repost from “Into the Wind”, blog of the American Wind Energy Association (AWEA)
by Michael Goggin

As we’ve observed previously, a common tactic when an energy source is facing market headwinds is to blame wind energy for its problems.

Just as some nuclear power plant owners previously tried to blame wind energy for their market struggles, some in the coal industry are now attempting to say wind is responsible for their challenges. Just as the previous attacks were debunked and dismissed as a “distraction,” the latest attacks on wind distract from the main market-driven challenges facing those industries.

The reality is that wind has a minimal impact on the economics of other power plants, particularly relative to low natural gas prices and stagnant electricity demand. This is because wind energy rarely sets the market price paid to all generators. Moreover, any impacts wind projects have on competing energy sources are due to market-based outcomes (i.e. wind energy’s lower costs) that occur with or without the renewable Production Tax Credit. Other sources of energy with a low fuel cost, like coal, nuclear, and hydropower, have the same impact on market prices.

The market-driven impact of wind on electricity prices is beneficial for consumers. In fact, utilities, large corporations, and others are buying wind energy precisely because it allows them to diversify their energy portfolio with a low-cost, stably priced source of energy.

Some of the clearest evidence that wind is not the main factor driving other energy sources’ market woes can be seen just by looking at where coal and nuclear power plants are retiring. Most retiring nuclear plants are in areas that have little to no wind generation, like Florida, Vermont, Wisconsin, Massachusetts, and New Jersey.

Similarly, the following maps show that the vast majority of coal power plant retirements (top map) have occurred in the eastern US, where there is relatively little wind generation (bottom map). At the same time, the wind-heavy interior region of the U.S. has seen few coal retirements, even though coal provides a larger share of the electricity mix in that area.

Rather, the primary factor driving coal power plant retirements appears to be that new shale gas production in the Marcellus region and other parts of the Eastern U.S. has undercut coal power plants operating on relatively high cost Appalachian coal.

Fossil, not wind, sets electricity market prices

Wind energy almost never sets the price received by other power plants in the electricity market, while fossil fuel power plants almost always do.

The following chart, which students of economics will recognize as the typical shape of the supply curve in any market, explains why. Power plants are listed in order of increasing operating cost, and grid operators move up the supply curve to meet electricity demand at any point in time, ensuring the lowest-cost resources available are used. Because they have no fuel cost, wind plants and other renewable resources are on the far left side of the curve, followed by nuclear, then coal, then gas, and finally oil-fired power plants. As indicated by the vertical lines, electricity demand almost always falls in the range where coal or gas power plants are the last ones needed to meet demand, and therefore the cost of operating those plants sets the market clearing price. In contrast, the wind plants on the far left side of the curve almost never set the electricity market price.

Data from grid operators confirm this is true. In the MISO (MidContinent Independent System Operator)  grid operating area, natural gas power plants set electricity prices 76 percent of the time, coal power plants 23 percent, and wind plants only 1 percent of the time (page A-6).

Data for the PJM grid operating area (page 133) show that lower natural gas prices have accounted for 68 percent of the decline in power prices since 2008, low coal prices 28 percent, and dropping oil prices 3 percent of the decline. In contrast, wind setting the electricity market price only accounts for 0.2 percent, or 1/500th, of the electricity price decline over that time.

Because fossil fuel resources set the market clearing price, low natural gas prices and subsidies for fossil fuels are directly factored into electricity market prices. In contrast, tax credits for wind energy are not incorporated into electricity market prices because wind plants almost never set the market clearing price. Therefore, a wind plant has the same impact on electricity market prices regardless of whether or not it receives the Production Tax Credit. This impact is essentially zero, as wind almost never sets the clearing price paid to all generators.

Negative prices are rare, and typically not caused by wind

Occasionally transmission constraints force a wind plant to reduce its output, as there is not enough transmission capacity for the full output to reach customers. When this occurs power prices can go low or negative on the isolated section of the power grid between the wind plant and the transmission constraint.

However, because most wind capacity is located in remote areas, there are typically no other power plants on this section of the grid, so there is little to no impact on other power plants. Fortunately, long-needed upgrades to the transmission system have greatly reduced these localized occurrences of negative prices, and further upgrades will minimize them even further (the chart on page 41 shows the downward trend of wind curtailment, which is a close proxy for trends in localized occurrences of negative prices).

Regarding recent complaints from the coal industry in North Dakota, data from the MISO grid operator confirm that wind almost never sets the electricity market price in North Dakota, with only 0.27% of prices in the range that would be set by a wind plant. In almost all hours, the electricity market prices received by North Dakota’s coal power plants are set across the 15-state MISO market footprint. With 175,000 megawatts (MW) of generation competing to determine market prices and fossil power plants almost always setting the market clearing price, North Dakota’s 2,746 MW of wind capacity, or even the total MISO wind fleet, have little impact on electricity market prices in North Dakota.

The trend in North Dakota electricity generation, shown below, confirms that in-state wind generation has a small impact on in-state coal generation in this broader market. North Dakota coal generation has remained steady while wind generation has increased to meet demand for exports and growing in-state electricity consumption, indicated by the black line.

It should also be noted that other energy sources are a leading cause of negative prices on larger sections of the grid. Data from the PJM grid operator show that wind generation is not the largest driver of negative prices at nuclear power plants in Illinois. More recent data from the Quad Cities nuclear plant in Illinois continue to show that most negative price events happened during time periods of low wind output, while most periods of high wind output do not correspond to negative price events.

From mid-2015 through mid-2016, PJM wind generation averaged only 1,845 MW during negative price events, compared to a maximum wind output of 5,021 MW and an average output of 1,681 MW across all hours. The primary factor causing negative prices at those nuclear plants still appears to be the inability of nuclear plants to reduce their output during periods of low electricity demand.

Low natural gas prices have also caused a new phenomenon that is leading coal power plants to cause negative prices. At least some coal plants have decided to continue operating at a loss as power prices go low or even negative to avoid paying contract penalties for not taking enough coal under long-term supply and delivery contracts with mines and railroads. For many coal power plants that no longer have space to add to their record coal piles, these contracts have created an out-of-market incentive to continue operating and drive power prices negative simply to burn coal to avoid contract penalties.

Data that was inadvertently publicly disclosed as part of the Peabody Coal bankruptcy further confirms that these inflexible long-term coal contracts are common; for a specific power plant in New Mexico, “The 19-year coal supply contract, originally signed in late 2005, calls for delivery of 3.7 million tons to 4.3 million tons of coal annually between 2010 and 2024, with smaller amounts provided in preceding years. The contract includes a provision that allows Peabody to collect a ‘shortfall’ payment of $7.35 per ton if the plant owners do not take the minimum contracted tonnage.”

The owner of a typical coal power plant would subtract around $8/MWh from its electricity market offers to account for the cost of that contract penalty. In addition, the large and ongoing subsidies for fossil fuels and nuclear generation also have a significant impact on electricity market prices, as discussed in the final section below.

Wind’s impact on prices is market-driven and beneficial for consumers

Wind does benefit consumers by reducing the cost of producing electricity and allowing electricity demand to be met by more efficient power plants. This market-driven impact of wind on electricity prices is beneficial for consumers, and occurs for any source of energy with a low fuel cost, such as nuclear, coal, or hydropower. In fact, utilities, corporations, and others are buying wind energy precisely because it allows them to diversify their energy portfolio with a low-cost, stably priced source of energy.

While at times wind has significantly reduced electricity prices through this market-driven phenomenon, that impact is quite small at current gas prices. Returning to a supply curve chart similar to the one introduced above, the supply curve for a power system is shown below under 2008 and 2015 fuel prices. While in 2008 natural gas power plants were significantly more expensive than coal power plants, at today’s low gas prices many natural gas power plants can operate at a cost that is comparable to the operating cost for most coal power plants. As a result, today’s supply curve is much flatter.

The slope of the supply curve determines the impact of wind on the market price. The impact of wind is to push the supply curve to the right as wind output is added to the left side of the supply curve. In 2008, adding wind energy did have a significant impact on electricity market prices by allowing electricity demand to be met using cheaper coal plants rather than more expensive natural gas power plants. For example, moving left on the supply curve from 70 GW to 65 GW of demand from conventional power plants because of the availability of 5 GW of wind energy would have reduced power prices by $35/MWh in 2008, but at today’s low gas prices that 5 GW of wind only reduces market prices by around $0.70/MWh.

Stepping back, one can also see that fossil fuel prices have a much larger impact on electricity market prices. 70 GW of demand in 2008 would have corresponded to a market price of $64/MWh, but under 2015 fossil fuel prices the electricity price is only $27/MWh, based solely on the price of natural gas. In this example, low natural gas prices have a 50 times larger impact on the electricity market price than the full impact of wind. 5 GW of wind output is quite high, roughly comparable to the average wind output in one of the U.S. electricity markets with the most wind, like MISO, Texas, or the Southwest Power Pool.

Wind accounts for less than three percent of federal energy incentives

Subsidies for fossil energy have a far larger impact on electricity prices than incentives for wind energy. Fossil fuels account for 65 percent of total federal energy subsidies, versus less than 3 percent for wind energy. Moreover, because fossil resources almost always set electricity market clearing prices, subsidies for fossil fuel production and use are directly factored into electricity market prices, unlike wind incentives.

Clearing the Air: Lamar Alexander, You’re Wrong About Wind Power

by Dr. Stephen A. Smith, Executive Director, Southern Alliance for Clean Energy

The Plains and Eastern Clean Line project could inject large quantities of high-value, low-cost wind power directly into the Tennessee Valley region from western Oklahoma. Recently Senator Lamar Alexander (R-TN) spoke on the senate floor in opposition to the project, and wind energy. We are disappointed that Sen. Alexander continues to use outdated information regarding wind energy. He has a responsibility to support the best interests of his constituents; however, his personal opposition to wind power is clouding the interests of Tennesseans.

Sen. Alexander says that wind power is unreliable. However, Oklahoma’s regional grid operator (the Southwest Power Pool, or SPP) recently reached a record wind power penetration level: at one point, the entire region generated 52% of its electricity from wind power. SPP is eyeing perhaps 75% wind energy penetration levels in the long-term. As shown by Oklahoma’s example, wind power can provide low-cost, reliable energy.

Sen. Alexander says that wind power is expensive. However, his information is outdated. With its considerable wind energy resources, Oklahoma had the lowest electricity prices in the country last year. Tennessee ranked #28.

Sen. Alexander would have Tennessee turn its back on the single energy resource that is arguably doing the most to drive energy prices down all across the country.

Clean Line will have a small but beneficial impact on TVA rates. TVA’s fuel costs could be reduced by $136 million per year, reducing rates by about 0.05 – 0.1 cents per kWh. High natural gas prices would increase the savings. Click the graph above to download the full analysis by SACE.

Sen. Alexander says that a long-term contract would put TVA’s low cost power at risk. In the US Department of Energy’s Environmental Impact Statement for the Clean Line project, Leidos Electrical estimated that the Plains and Eastern Clean Line project is likely to drive down electric prices in Tennessee, Arkansas, and beyond. Our team has studied the impacts on the actual rates TVA charges its customers, and concluded that the project would drive down TVA’s costs and electric rates. This benefit increases when the revenue TVA would earn from its fees for use of the existing TVA transmission system to “wheel” low-cost wind power to power-hungry neighbors.

Sen. Alexander criticizes wind energy, based on historical information from the Buffalo Mountain wind farm in Tennessee. That project became operational 13 years ago (in 2004), and wind turbine technology has advanced significantly since then. While the Buffalo Mountain project achieves capacity factors of approximately 20% per year, as expected, the LBNL study also shows new turbine capacity factors already exceeding 50%+ in high wind speed areas. Western Oklahoma wind farms could achieve 55%+ capacity factors. With oversubscription on an HVDC transmission line, capacity factors could go even higher.

Sen. Alexander says that the Tennessee Valley Authority’s integrated resource plan shows it does not need new baseload power plant capacity. On this point, we agree. We participated heavily in TVA’s most recent integrated resource planning process. TVA found that new baseload power plants, such as new coal and nuclear units, are not needed.

Raising this point is a red herring because wind power is not a baseload capacity resource. The Clean Line project delivers most of its potential value as an energy resource. Low-cost wind energy, when available, reduces costs by helping TVA further minimize its highest cost power plants. This is exactly how the high levels of wind power in Oklahoma have pushed its electric rates to the lowest levels in the country.

What Sen. Alexander did not mention in his floor speech is that he advocates for massive subsidies for untested, unproven and costly small-modular nuclear reactors – a baseload power resource, which Sen. Alexander says (with respect to wind) that TVA doesn’t need.

Sen. Alexander claims that the federal production tax credit for wind energy is a “wasteful” incentive. However, the PTC is phasing out, despite the fact that fossil fuel and nuclear industries still receive massive federal subsidies. The PTC has broad bipartisan support; even Sen. Alexander has voted for legislative packages that contained PTC extensions. Wind farm development companies need to sign contracts soon to qualify for the highest level of this important tax credit. Wind energy projects may up to four years to finish construction, after qualifying for the PTC. Projects that qualified in 2016 would have until December 31, 2020 to deliver power and retain their qualifying status. Project development firms need some level of assurance that projects have buyers. As the PTC begins to phase out, TVA – and its customers – will lose the opportunity to save tens of millions of dollars in savings if nothing is done.

Senator Lamar Alexander’s bluster against wind energy relies on outdated misinformation, that ignores current realities. TVA, and other electric companies throughout the region, should contract for wind energy on the Plains and Eastern Clean Line project, soon.

Natural Gas and Renewables, A Partnership With Which Coal Can’t Compete

By Jeffrey Clark

In an ugly weekend for Texas football fans, the Longhorns were defeated by the West Virginia Mountaineers.  Sitting in the stadium, I reflected on our just-ended Presidential election in which energy issues – particularly the promise of a coal renaissance – played a major role.  I was struck by the bigger battle between these two states currently unfolding off the gridiron.  That competition is for the future of American electric power generation and, campaign rhetoric aside, it is one in which natural gas, wind, and solar from states like Texas and Oklahoma will resoundingly defeat the dirtier and increasingly more expensive coal from the mines of states like West Virginia.

Peaking in 2007 when it was used to generate half of the United States’ electric power, coal use has been declining steadily while the use of low-priced natural gas has been on the rise.  By 2015, coal’s share had fallen dramatically, with each fuel then providing about one-third of our nation’s power generation.  In coal country, this shift is often blamed on environmental policies, overregulation, and the growth of renewable energy.  In reality, the causes are more complicated.  While new regulations reducing harmful emissions from coal power plants have increased their cost of operations, the reduction in our use of coal is driven by economics, attributable primarily to the arrival of inexpensive and abundant natural gas.

Fuel switching by power generators is becoming common, with low natural gas prices the primary driving force.  A study by BTU Analytics concluded that natural gas priced near $2.50/MMBtu provides sufficient economic justification for shutting down coal plants and replacing them with newer gas generation.  This switching is also driven by the flexibility of natural gas generation, which allows it to work in concert with other low or no emission generators, especially renewables.

Unlike coal power plants which cannot be efficiently started and stopped, new gas generation units can ramp quickly, meaning that they can serve to balance generation fluctuations from variable generation resources like wind and solar.  A recent study published by the National Bureau of Economic Research found that a 1% rise in fast reacting natural gas generation was associated with a 0.88% rise in renewable generation.  The authors, analyzing data from 26 OECD countries, concluded “that renewables and fast-reacting fossil technologies appear as highly complementary and that they should be jointly installed to meet the goals of cutting emissions and ensuring a stable supply.”

That “highly complementary” relationship is a simple one. Natural gas power plants provide power with reduced emissions, high reliability, and some price volatility; while renewables offer emission-free, low cost, fixed-priced power with variability in generation output.  Married together, they offer high reliability, lower prices, moderate price stability, and reduced emissions.

There is irony in the fact that many of America’s most energy-rich states import the fuels currently essential to powering their lives and economies.  The symbiotic partnership between natural gas and renewables is helping these states, including Texas, break their addiction to imported coal bringing wide-ranging economic benefits including energy independence, consumer savings on power, emissions reductions, rural economic development, and new tax revenue for governments and schools.

President-Elect Donald J. Trump has promised much to energy producers, leaving constituencies in the natural gas and coal producing communities hoping that their fortunes are about to rise.  But, unlike the annual battle that plays out on the football field, the contest between West Virginia coal and Texas natural gas is already in the fourth quarter and fans are walking out of the stadium.  Coal is not clean enough, affordable enough, or flexible enough to compete in the clean energy market of the future.  Instead, the future will be dominated by a new group of states harnessing new technologies, their infinite renewable energy resources, and their vast supplies of cleaner-burning natural gas.

Other Reading:

How Renewables Can Save Natural Gas – Bloomberg

Wind Coalition Formally Responds to Texas Comptroller’s Biased Attack on Wind Energy

On Friday, The Wind Coalition formally responded to Texas Comptroller Susan Combs’ recently released report on wind energy in Texas. Rather than be considered a research piece, her report is better labeled an opinion on wind.  A long-time, outspoken opponent of wind energy development, Susan Combs is taking advantage of her final days in the Comptroller’s office using the power of that agency to push her anti-renewables agenda.  The report is error filled and deliberately distorts the facts to portray wind energy in a negative light.

Fortunately, the public and the press can see through the propaganda and the politicking. Combs’ report is a tired rehash of the arguments made by anti-wind groups and the dirty energy companies that she has so often promoted.

She’s wrong on technology, she’s wrong on subsidies, and she’s wrong on policy.

She’s also wrong on key economic issues affecting Texas, pushing ideas that would keep us hooked on imported coal instead of powering our states with the abundant resources with which we have been blessed.  Texas natural gas, Texas wind, and Texas solar can get the job done.  Texans Powering Texas.

Our response is lengthy but it says what needed to be said in response to her poorly researched, biased attack on a key Texas industry.  Please take time to read and share.

You can read The Wind Coalition’s formal response to the Comptroller here.

Wind Coalition Letter to Susan Combs – September 26, 2014