US: What Texas knows, and other states are finding out, about carbon-cutting wind power

ERCOT, the grid operator for most of Texas, recently released analysis concluding that wind energy will play a critical role in cost-effectively complying with EPA’s Clean Power Plan (CPP). In ERCOT’s lowest-cost compliance solution for the carbon dioxide price scenario, 8,400 MW of new wind capacity provide nearly 80% of the incremental power plant additions. This result is consistent with DOE’s May 2015 analysis of the proposed Clean Power Plan, which also found wind energy accounted for the majority of the generation additions in the lowest-cost compliance solution.

Wind’s expanded role resulted from ERCOT updating modeling assumptions to factor in recent wind energy cost reductions. As we noted last year, ERCOT’s earlier analysis of the then-proposed Clean Power Plan underestimated the opportunity for expanded wind energy because its wind cost assumptions were about 36 percent too high. ERCOT’s revised assumptions better account for the nearly 66 percent reduction in wind energy purchase prices that has occurred over the last six years.

The recent report also notes that transmission upgrades will likely be needed under any future scenario to meet a variety of power system needs. According to ERCOT, expected coal power plant retirements are a primary driver of the need for transmission improvements, as the removal of those generators can cause local reliability problems. This reinforces previous ERCOT findings that transmission upgrades provide widespread benefits to all power system users.

Specifically, ERCOT previously found that transmission built to provide consumers with access to the most cost-effective wind resources provided the additional benefit of alleviating local reliability concerns, caused by fossil fuel power plant retirements (pages 33-35). Others have noted that these grid upgrades also solved reliability concerns resulting from the rapid growth in electricity demand from oil and gas production in West Texas.

These widespread transmission benefits underscore the sound reasoning behind Texas’s long-standing policy of broadly allocating transmission costs, recognizing that a strong transmission grid is critical for maintaining a competitive electricity market, and ensuring efficient and reliable electric service for all users.

Several of ERCOT’s additional CPP findings have been misinterpreted in the initial coverage of the report. For example, some outlets reported ERCOT retail power prices could increase as a result of fossil fuel power plants purchasing allowances to cover their carbon emissions. However, as noted by others, this interpretation ignores that revenue from the sale of those allowances could be allocated back to ratepayers, offsetting potential price increases.

Another finding was that around 4,000 MW of fossil fuel power plants could be at risk for retirement under the Clean Power Plan. However, an under-appreciated benefit of wind energy is that it provides compliance flexibility, which can reduce the need to retire existing power plants and therefore allows for more cost-effective compliance solutions.

For example, because one megawatt-hour (MWh) of gas generation emits nearly half as much CO2 as one MWh of coal generation, nearly twice as many MWh of coal generation must be displaced by gas to achieve the same level of emissions reductions that a zero-emission option like wind would displace. Thanks to the flexibility provided by wind energy, DOE’s May 2015 analysis of the proposed Clean Power Plan found that the regions using the most wind energy for CPP compliance saw the fewest retirements of existing power plants.

The ERCOT report also notes that greater use of renewable energy could increase the need for flexible operating reserves, which have always been used to accommodate all sources of variability in electricity supply and demand. However, this finding should be put into the appropriate context by examining the relative impact of wind sources on the need for operating reserves compared to other energy sources.

Analysis based on previously released ERCOT data indicates that the effect of wind plants on the need for operating reserves has been trivially small, accounting for only four percent of all operating reserve costs. This amounts to about four cents on a typical Texas household’s electric bill. In contrast, the fast-acting reserves primarily used to accommodate abrupt failures of large conventional power plants account for 67 percent of operating reserve costs, or about 76 cents per bill.

On a per-MWh basis for the amount of generation provided by each resource, the cost of operating reserves to accommodate conventional power plant outages is nearly twice the total cost of reserves for wind plant output variability. This occurs because changes in wind output happen gradually and predictably as weather systems move across the ERCOT power system. However, outages at conventional power plants occur instantaneously and without warning, requiring expensive fast-acting reserves to be held 24/7. Additionally, many changes in aggregate wind output are canceled out by the random fluctuations in electricity demand that occur constantly.

Finally, it should be noted that stably-priced wind energy plays a critical role in protecting consumers from uncertainty in future natural gas prices. ERCOT’s analysis assumes natural gas prices that may or may not be accurate; in reality there is large uncertainty about what the price of natural gas will be seven to 15 years from now, and a significant chance that volatile and increasing fossil fuel costs could make wind energy even more beneficial for consumers.

The very fact that the zero-fuel-cost wind energy can be locked in at a stable price for a period of 20 years or more, while fossil fuel prices are volatile and uncertain, makes wind energy a valuable tool for protecting consumers against fuel price spikes. Just as a fixed-rate mortgage better protects consumers from interest rate fluctuations than a variable-rate mortgage, fixed-price wind energy plays a key role in building a stable and diverse energy portfolio that protects consumers.