Go­ing neg­a­tive on en­ergy pric­ing

Houston Chronicle - - BUSINESS - CHRIS TOM­LIN­SON

In the spring and fall, the wind blows so hard at night that wind tur­bines sup­ply all of the power that Texas needs in the wee hours of the morn­ing.

More sur­pris­ing is that all of that wind means the price of elec­tric­ity turns neg­a­tive. That’s right, elec­tric power is not just free, but gen­er­a­tors have to pay the grid oper­a­tor to take their elec­tric­ity.

Neg­a­tive pric­ing can oc­cur be­cause Texas and other states op­er­ate a whole­sale elec­tric­ity mar­ket, where the grid pur­chases the cheap­est elec­trons pos­si­ble first. So the day be­fore gen­er­a­tors bid to sup­ply the ex­pected de­mand and ERCOT, which man­ages most of the Texas grid, buys the cheap­est elec­tric­ity.

Prices then ad­just ev­ery 15 min­utes in real time based on ac­tual mar­ket and weather con­di­tions.

Wind is more pre­dictable than you might think, so Texas wind en­ergy gen­er­a­tors have bid neg­a­tive prices into the mar­ket for years now. But the new­est sur­prise comes from the U.S. En­ergy In­for­ma­tion Ad­min­is­tra­tion, which re­ports that the same thing is now hap­pen­ing in Cal­i­for­nia be­tween 11 a.m. and 2 p.m., but this time it’s so­lar power.

So­lar en­ergy plants have been gen­er­at­ing more than 40 per­cent of the state’s

elec­tric­ity needs in late win­ter and early spring this year, and it’s caus­ing neg­a­tive pric­ing in Cal­i­for­nia’s whole­sale en­ergy mar­ket.

How is it pos­si­ble for wind and so­lar power to gen­er­ate elec­tric­ity at neg­a­tive prices? Tax cred­its.

Fed­eral law grants a $23 pro­duc­tion tax credit for ev­ery megawatt-hour of elec­tric­ity pro­duced by a wind tur­bine or a so­lar ar­ray that did not col­lect an in­vest­ment tax credit. So­lar projects can re­ceive an in­vest­ment tax credit worth 30 per­cent of the cost of the project, which brings down the cost of the power plant.

The­o­ret­i­cally, wind and so­lar gen­er­a­tors can there­fore pay grid op­er­a­tors up to $22 a megawatt-hour to take their elec­tric­ity and still make a profit. Be­fore Cal­i­for­nia be­gan adding so­lar en­ergy, av­er­age hourly prices in March ranged from $14 a megawatt-hour to $45 a megawatt-hour. Now it’s less than zero.

That has com­pa­nies that own coal, nat­u­ral gas and nu­clear power plants fu­ri­ous, be­cause un­like re­new­able en­ergy com­pa­nies, they have to pay for their fuel costs and pol­lu­tion con­trol equip­ment to gen­er­ate elec­tric­ity. And coal and nu­clear plants can’t shut down and restart quickly, which means they have to keep spin­ning even when prices go neg­a­tive.

“Neg­a­tive prices usu­ally re­sult when gen­er­a­tors with high shut-down or restart costs must com­pete with other gen­er­a­tors to avoid op­er­at­ing be­low equip­ment min­i­mum rat­ings or shut­ting down com­pletely,” the EIA re­ports.

Coal and nu­clear plant own­ers say they can’t com­pete with tax cred­its and com­plain that they dis­tort what is sup­posed to be a free and fair whole­sale mar­ket.

Not so fast, says John Hall, clean en­ergy di­rec­tor at the En­vi­ron­men­tal De­fense Fund. When Texas switched to a com­pet­i­tive whole­sale mar­ket, and away from the old reg­u­lated mar­ket, the state gave tra­di­tional gen­er­a­tors $6 bil­lion in the early 2000s to make up for stranded re­sources. Fed­eral tax laws still give fos­sil fuel and nu­clear gen­er­a­tors all kinds of ad­van­tages, just not tax cred­its.

“We say let’s do away with all of the sub­si­dies for ev­ery­body,” Hall said. “We think bail­ing out coal again is bad pub­lic pol­icy and will have a huge eco­nomic im­pact on the state. The fact is that they can’t com­pete.”

It’s easy to blame the neg­a­tive pric­ing on wind and so­lar dur­ing the pe­ri­ods when they are most pro­duc­tive, but the truth is that the prices wouldn’t go neg­a­tive if coal and nu­clear power plants could shut down at night. Their in­abil­ity to switch on and off quickly is what cre­ates the sur­plus elec­tric­ity on the grid.

“The grid of the fu­ture will be flex­i­ble and com­posed of re­sources that can ramp up or down and still eco­nom­i­cally op­er­ate,” Hall said. “Large base-load plants where you sim­ply can’t shut them down quickly and can’t bring them on­line quickly, and that aren’t price com­pet­i­tive with nat­u­ral gas and re­new­ables, are des­tined to fail.”

We’re al­ready see­ing this trend in the mar­ket place. Nu­clear and coal plants are shut­ting down, nat­u­ral gas plants are more pop­u­lar than ever, and 80 per­cent of the world’s new gen­er­a­tion ca­pac­ity this year will be from re­new­able sources.

Two years ago, Congress voted to be­gin phas­ing out tax cred­its for wind and so­lar en­ergy. The tax cred­its start drop­ping next year and all new projects af­ter 2020 will re­ceive none at all.

The big ques­tion is whether the fos­sil fuel and nu­clear in­dus­tries will be ready to give up their tax ad­van­tages, too, or will they re­main de­pen­dent on gov­ern­ment hand­outs?

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