All power to the wind – it cuts your electricity bills  

TOD's Jérôme Guillet has an article on the superior economics of wind power in New Scientist - All power to the wind – it cuts your electricity bills.

ATTEMPTS to discredit wind power often claim that wind turbines need to be subsidised. A piece in British newspaper The Daily Telegraph last month asserted that each wind turbine in the UK receives, on average, £138,000 in subsidies a year, and that as a result wind-power investors are coining it hand over fist at the taxpayer's expense.

So are wind farms subsidised? In the sense of direct government support, very rarely. What they do enjoy in most countries, though, is a guaranteed right of access to the grid, and minimum prices for the electricity they produce.

These rights are imposed either directly - by so-called feed-in tariffs - or indirectly via an obligation on electricity producers to generate a certain proportion of their output from renewable sources.

The regime is designed to create an environment favourable to wind power, but it is not funded by the taxpayer. Feed-in tariffs are paid by the companies that transmit electricity, such as National Grid, while producers pay to meet their renewables obligation. In both cases the cost is eventually passed on to consumers. In other words, it is not your taxes that support wind power, but your electricity bill.

This may seem like cold comfort. However, it has an unexpected upside: you end up paying less for electricity when wind power is part of the mix.

This is because of the way the electricity markets in Europe and North America are set up. They are "marginally priced"; that is, the spot price of electricity is set by the highest price the transmission company must pay at any given time to meet demand.

As an analogy, imagine you need 100 apples. One grower has 60 apples on offer for $1 apiece, another has 30 on offer for $2, and a third has 20 on offer for $3. You buy the entire stock from the first and second growers, and 10 from the third - but must pay $3 for every apple you buy.

The very highest spot electricity prices are seen at moments of peak demand, when coal, nuclear and hydroelectric sources cannot meet the need. At these times extra "peaker" plants need to be turned on. Generally oil or gas-fired, peaker plants have high marginal production costs - generating each extra unit of electricity is relatively expensive because they have to buy oil or natural gas, which are more expensive than coal. Not surprisingly, peaker plants drive the electricity spot price up.

The addition of wind power, however, changes the dynamics of the market. Wind turbines don't burn fuel, so their marginal costs of production are very low - lower even than coal, nuclear and hydro. Being the cheapest, transmission companies buy from them first.

On windless days, wind power companies don't get paid, since they only receive money for the electricity they produce. But on windy days, their output ensures that peak demand is satisfied without the need to turn on the most expensive peaker plants.

In other words, when there is little or no wind, prices on the market are normal; when a lot of wind power is available, it has a moderating effect on prices. The result is that, over time, bills are lower than if wind power were not present, even taking into account the cost of the support regime.

This price-lowering effect is called the merit order effect (MOE), and the resulting savings can be significant. Its impact on prices in European countries with a fair amount of wind generation has been estimated at between €3 and €23 per megawatt-hour. One study by researchers at the Fraunhofer Institute for Systems and Innovation Research in Karlsruhe, Germany, found that it saved German consumers €5 billion a year.

So the MOE is good for consumers - but what about the big picture? We believe that, paradoxically, it spurs opposition to renewables among energy companies, and discourages investment in them.

Imagine you run a utility company with coal-fired or nuclear plants. From your perspective, wind power is causing you to lose out on the windfall cash previously provided by high spot prices at times of peak demand. Will you be inclined to look favourably on plans to increase the share of wind power in total electricity generation?

Insofar as there is a problem, it lies in handing control of industrial policy to marginally priced markets. Market-based decisions are not technology-neutral. They favour short-term profits, and that encourages the building of power stations with low capital costs and high marginal costs. That means gas-fired plants, which are tailored to make a profit whether the spot price is high or low.

In fact, hardly any nuclear or coal-fired plants have been built in the past 15 years, only gas-fired plants, along with renewables installed thanks to support mechanisms such as feed-in tariffs.

If those mechanisms had been ruled to be market-distorting subsidies and removed, leaving the market to make all the calls, we would see nothing but new gas plants built. This would leave us vulnerable, wondering where tomorrow's natural gas, on which we would be utterly dependent, would come from - a scenario that has only been prevented because wind turbines receive support.

It may be that the electricity market will evolve into one that offers long-term fixed prices to producers, as power distributors take into account the long-term stability of the cost of wind power. In that case, wind will need no special favours, since it will be cost-competitive with nuclear and coal. Until that happens, the framework in which wind operates - permitting investment while lowering prices for consumers - is not an abusive subsidy but simply intelligent market regulation.