Production Tax Credit: High Cost Subsidy for Low Value Power

by Marlo Lewis on October 29, 2012

in Blog, Features

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In Wind Intermittency and the Production Tax Credit: A High Cost Subsidy for Low Value Power, economist Jonathan Lesser finds that “the vast majority of the Nation’s wind resources fail to produce any electricity when our customers need it most.” He also cautions that the wind energy production tax credit (PTC), which would add $12.2 billion to the federal deficit if Congress extends it for another year, adds billions of dollars in hidden costs to ratepayers “while undermining the reliability of the grid.”

Lesser’s analysis is based on nearly four years of data from three interconnection regions that account for over half of total U.S. installed wind capacity: Electric Reliability Council of Texas (ERCOT— over 10,000 MW of wind capacity), the Midwest ISO (MISO — almost 12,000 MW of wind capacity), and PJM Interconnection (PJM — over 5,000 MW of wind capacity).

In all three regions, over 84% of the installed wind generation infrastructure fails to produce electricity when electric demand is greatest.

In MISO, only 1.8% to 7.6% of wind infrastructure generated power during the peak hours on the highest demand days. In ERCOT, 6.0% to 15.9% of installed wind generated power, and in PJM, between 8.2% and 14.6% of wind produced power.

Demand for electricity is highest in the summer, especially during heat waves. But that is often when the wind stops blowing. The July 2012 heat wave is a case in point:

The July 2012 heat wave in Illinois, where temperatures soared to 103 degrees in Chicago, provides a compelling example of wind generation’s failure to perform when needed most. During this heat wave, Illinois wind generated less than 5% of its capacity during the record breaking heat, producing only an average of 120 MW of electricity from the over 2,700 MW installed. On July 6, 2012, when the demand for electricity in northern Illinois and Chicago averaged 22,000 MW, the average amount of wind power available during the day was a virtually nonexistent 4 MW.

Comparisons of the “levelized cost” of different electric generation technologies can make wind look more competitive than it is. “Levelized cost represents the present value of the total cost of building and operating a generating plant over an assumed financial life and duty cycle, converted to equal annual payments and expressed in terms of real dollars to remove the impact of inflation,” explains the U.S. Energy Information Administration (EIA). But in the case of wind, there are additional costs that aren’t factored in. Those may include the cost of building and operating fossil fuel generation for backup when the wind doesn’t blow, and the cost of building new transmission lines to bring electricity from mountain passes or other wind rich areas to distant load (demand) centers.

Moreover, as the EIA acknowledges, since load and supply ”must be balanced on a continuous basis, units whose output can be varied to follow demand generally have more value to a system than less flexible units or those whose operation is tied to the availability of an intermittent resource,” such as wind. That the PTC subsidizes an underperforming, low-value source of electric power is the main thrust of Lesser’s analysis.

Electricity is the ultimate “just-in-time” resource. Because electricity cannot be stored cheaply, the power system requires resources that produce electricity when called upon. Conventional power plants — nuclear, coal, gas — as well as hydroelectric dams that store water, are the backbone of the electricity system because they share two critical characteristics: predictability and reliability. Absent rare equipment failures, they run reliably whenever needed. In stark contrast, as previously described, wind generation is neither predictable nor reliable. The evidence demonstrates that wind is not available when customers need electricity and no one can predict whether or when the wind will blow a week from today, let alone a year from today.

An electric power station that fails to produce during a heat wave is like metro service that’s available except when you need to get to work. Neither is of much value, regardless of how ’competitive’ the rates may seem. Lesser finds that ”both on an hourly and seasonal basis, wind generation follows this adverse, low value pattern, displaying a strong negative relationship between hourly load and hourly wind generation, that is, the greater the load, the less wind generation.” The chart below shows the gaps between load and wind generation during July 1-8, 2012 for PJM, a region encompassing all or part of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.

In all three regions over the four-year study period, “the highest relative amount of wind generation occurred when loads were lowest, and the smallest amounts of wind were available when loads were greatest in Summer,” though the Summer “load — wind gap” was particularly pronounced in PJM.

The PTC is an egregious case of government waste. It “forces taxpayers to spend billions of dollars for a generating resource that produces the least amount of electricity when it is most valuable and most needed. That is like asking someone to pay for a taxi that does not show up when it’s raining.”


Jon Boone October 31, 2012 at 4:02 pm

Enjoyed reading Dr. Lesser’s paper, particularly because of the section ingenuously exposing how wind output does not “suppress” the overall “price” of electricity. As he points out, there’s a front end of this Trojan horse–and a back end.

I wish he would reconsider using the term “intermittency,” however, as it applies to wind performance. Truth is, intermittence is a condition of all electricity generation, occasioned by a number of understandable factors. The intermittence of conventional generation is overwhelmingly predictable and controllable, though; if it weren’t, the problematic unit(s) would be summarily withdrawn from the grid.

If wind output were merely intermittent, even unpredictably intermittent, it might actually do some good as a “fuel saver,” which is what most wind engineers ultimately state as the ultimate rationale for their “technology.” Controllable intermittence would certainly not impose nearly as much inefficiency on wind following generation as the real wind problem does. Most vehicles today have intermittent windshield wipers that nicely complement a safe driving experience, for example.

The real wind problem, the one that turns wind machines into the lemons they are, is the relentless fluctuating volatility of its output. It is wind’s continuous, second by second variability caused by performance at the cube of the wind speed that perverts its integration into a grid system, subverting fuel savings and increasing costs, including, as he states, costs for new, virtually dedicated transmission lines and voltage regulation. Moreover, wind projects don’t require “back up” akin to the way conventional units are sometimes replaced by other conventional units, mostly on a temporary basis. Rather, wind output must be entangled by conventional generation at all times throughout the entire range of its installed capacity.

So why not replace the word intermittence (an actual word) with the word variable? Or, perhaps better, with the phrase “unpredictable and highly variable?” And why not desist using the term back up when in fact he means to convey the idea of comprehensive prosthetic support for its variability?

Although I appreciate the way he documented wind’s capacity credit with ERCOT, MISO, and the PJM, this is rather old news. Or rather, it is consistence with wind performance virtually everywhere. It is a general truism that wind, in the best wind areas, produces an annual average capacity factor of 30%. However, around 60% of the time, it produces less than this. And about 10% of the time, it produces virtually nothing, often at times of peak demand. Conversely, wind projects typically produce most when demand for it is least. Whatever wind does produce is continuously changing, minute-by-minute–which has substantial implications for any wind-induced fossil fuel savings or overall reductions in CO2 emissions.

Perhaps he would consider building upon my own work in looking at wind in Texas and Colorado, investigating whether there is evidence for any overall reductions in coal or natural gas production CAUSED by wind performance. In looking at year to year fuel use over the last decade, and accounting for imports/exports, level of demand, and changes in other fuel generation, I can’t even find a correlation, let alone a causal link, between wind output in MWh and the output of coal or gas in MWh. Wind of course must replace existing generation essentially 1:1 as it enters the grid; however, as it bounces around on the back end of its performance, it imposes such substantial inefficiencies on mainly thermal plants that any “savings” evidently disappear over time. This seems the most plausible explanation for why the historic generation mix doesn’t seem affected by wind.

Pretending to do credible levelized cost comparisons between variable unfirm wind capacity and firm conventional generation is an exercise that should embarrass good economists. And while I understand the use of low value as a literary balance with high cost, the phrase does a real disservice, implying that wind has some benefit. When in fact, at so many levels of consideration, it is only dysfunctional.

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