Wind dialogue important as state tackles shrinking energy supplies

By on September 20, 2012
Wind farm

The recent back and forth between CPS Energy CEO Doyle Beneby and Tom “Smitty” Smith, the director of Public Citizen’s Texas office, about wind energy’s effect on the electrical grid, was instructive — and the type of dialogue CPS Energy welcomes.

“Smitty is one of the smartest guys in the industry, and the entire state always benefits when he lends his voice to a discussion,” said Beneby.

Beneby’s op/ed shone a light on an unintended consequence of this clean, low cost power source, while Smitty’s served as a reminder of how wind has kept Texas’ lights and air-conditioners going on hot days when supplies have been tight.

The discussion also serves as a reminder that all forms of energy have benefits and challenges.

Beneby, in the Sept. 9 edition of the San Antonio Express-News, wrote about the impact of wind on the economics of building new generation capacity: “While many factors play into this situation, including regulatory uncertainty and the future of fuel prices, the sizeable wind resources in Texas are a contributing factor not often discussed.”

Because the “fuel” for wind energy is free, it’s always used before more expensive forms of power, and so has the effect of driving down energy prices. This is good for the consumer, but not for a company considering whether or not to build a new power plant in Texas, since low power prices can mean not enough of a return on investment to justify building a new power plant.

Smitty, in his rejoinder published on Sept. 17, wrote that Beneby “blamed wind power plants for creating problems by producing such cheap power it made it hard to build new gas plants or profitably operate the ones we have.”

He suggested that it is the historically low price of natural gas, thanks to new discoveries in the Eagle Ford and elsewhere across the country, and not wind, that have depressed prices to the point that building new power generation has become uneconomical.

But Beneby hardly laid the blame for Texas’ shrinking reserve margins — the amount of additional power the state’s grid operator believes is necessary to deal with spikes in demand — at the feet of the wind industry. Nor has he lost faith in the importance of wind in CPS Energy ‘s diverse generation portfolio. In fact, he has gone on record as being supportive of an extension of the federal tax incentives for wind.

CPS has long led the nation in the amount of wind energy it purchases — it currently has 1059 megawatts of West Texas and coastal wind under contract.

And indeed, current low natural gas prices do play a role in the calculations power companies are making not to build new plants in Texas. Even the design of the Texas energy market has come under scrutiny. When it deregulated the power industry a decade ago, Texas created an “energy-only” market that pays generators only for the power they produce.

Much of the rest of the country (and the world, save Australia) operates a capacity market, which also pays a flat fee on top of the cost of power; the idea is that this additional fee will be enough to incent building new plants. Generators like the guaranteed payments, but they’re also passed on to consumers, raising energy prices.

The Public Utility Commission of Texas, which regulates the industry, recently raised the price caps on wholesale power, and is actively looking for other ways to incent the construction of new plants. As part of its effort, it recently commissioned a study on ways to shore up the state’s resource adequacy.

The resulting study by the Brattle Group looked at the causes of the potential shortage as well as possible policy solutions. In this passage, it lays out the issue:

Since deregulation, ERCOT’s energy-only market has successfully attracted substantial investment without the need for regulatory intervention to maintain resource adequacy. In the early 2000s, investors added more than 20,000 MW of efficient gas-fired combined-cycle (CC) plants. Toward the middle of the decade, investors began developing approximately 4,000 MW of coal plants that are now online or about to come online. Additionally, more than 9,000 MW of wind capacity was developed over the past half-decade. Now, however, no other major new generation is under construction. The handful of permitted projects that were planned to begin construction has been postponed. Developers state that prices are not high enough to support new generation, due to the combination of low gas prices, an efficient fleet, and the recent influx of wind generation.

Low gas prices, an efficient fleet of power plants and an increase in clean, low-cost wind energy are good for consumers, and good for Texas as a whole. But they’re also, as the Brattle Group study states, considered reasons why power companies aren’t investing in new plants. No one is suggesting that the alternatives — high prices, an inefficient fleet and less wind — are the answer to the challenge of resource adequacy.

(Here is a release from the Electric Reliability Council of Texas, which runs the state’s grid, about the study, and the steps ERCOT and the PUC have taken thus far.)

It is important, as CPS Energy and other utilities add wind and other renewable resources to their portfolios, that not only the benefits but also the challenges of each fuel type — including traditional coal, natural gas, and nuclear generation — is acknowledged as well as how they impact each other from a system perspective.

“CPS Energy is very much committed to wind as part of our diverse generation portfolio,” said Cris Eugster, CPS Energy’s Chief Strategy and Technology Officer. “At the same time it’s important to analyze and discuss all of the different pieces of the puzzle and how they fit together.”

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