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Cash Crop on the Wind Farm: A New Mexico Case Study of the Cost, Price, and Value of Wind-Generated Electricity
MAIN FINDINGS
 1. Wind electricity generated at very favorable locations in large wind farms is economical today. Consumers would not see increases in electricity bills with far greater use of wind-generated electricity, even without taking any credit for avoided water use orgreenhouse gas emissions.
2. U.S. wind energy resources are enormous and can accommodate much faster growth in wind-generated electricity. The United States has the physical wind resource base, with much of it concentrated in the region of the Western Governors’ Association, to achieve high and economical penetration of wind capacity. The wind energy potential in the twelve windiest states of the continental United States, most of them members of the Western Governors’ Association, is equal to about two-and-a-half times the entire electricity generation in the United States in 2003.
3. A policy mandate is essential if high levels of wind integration are to be achieved in a reasonable time. Three regions in Europe (one in Denmark, one in Germany, and one in Spain) have already achieved 27% penetration of wind capacity. This is in part because there is a strong political and policy consensus in Europe, including from industry, that reduction of greenhouse gas emissions and increasing renewable energy use are essential. Three western states (California, Nevada, and New Mexico) have also moved in this direction. But, in the absence of an economic and political mandate, such as a Renewable Portfolio Standard, wind energy development in the United States will lag far behind its potential.
4. The transmission and institutional infrastructure needed for large-scale wind energy development is inadequate. Wind energy development in the United States is lagging far behind Europe mainly because the transmission infrastructure and the economic and policy consensus to develop exists it in Europe to a far greater degree than in the United States.
5. Prices of wind energy in typical Power Purchase Agreements (PPAs) appear to be considerably lower than the price that the same electricity would fetch if sold to the final consumer. The average price of wind-generated electricity in many PPAs is in the $25 to $30 per MWh range. However, the price that the final consumer could pay, without an increase in electricity bills, is considerably higher. In other words, the implicit final price of wind (after taking into account transmission and distribution costs and grid integration costs) is considerably higher than wind developers are receiving. This gap between final price and wind developer revenue increases the need for tax credits. If wind developers could actually recover the implicit price being charged, development of wind power could be greatly accelerated.
6. With the right policies and with investments in wind and efficiency, a large reduction in greenhouse gas emissions is economically feasible. Since wind energy does not emit carbon dioxide, and since it is economical today, given the right conditions and policies, it follows that a large reduction in CO2 emissions is possible without increases in electricity cost. This is currently being achieved in Europe. While credits for CO2 reductions play a role these are modest.
7. Federal and State Production tax credits are essential under present conditions. In the absence of a national or uniform regional mandate and adequate transmission and other infrastructure for wind integration, federal and/or state production tax credits are essential for continued wind energy development.
8. Given natural gas prices of $5 per million Btu or more wind energy can economically displace natural gas generation on a marginal avoided cost basis. The cost of wind-generated electricity at favorable locations, including $3 per MWh for grid integration, ranges from $38 to about $45 per MWh for five New Mexico sites we looked at. The marginal avoided cost of natural gas in terms of fuel cost alone for combined cycle plants is about $38 to $40 per MWh. Wind also provides the benefit of avoided water use (a few dollars per MWh) and as a hedge against natural gas price volatility (also a few dollars per MWh). Wind-generated electricity can displace duct fired combined cycle electricity or peaking electricity from single-stage gas turbines even more economically, since the avoided costs in these cases are about $50 and $60 per MWh, respectively.
9. Wind-generated electricity should get some credit for capacity and not only electricity generation. Statistical methods can be used to commit wind energy in advance: Wind is not completely unpredictable. It can be estimated, with some error, on an hour-ahead, day-ahead, or seasonal basis. Statistical analyses can be used to plan wind capacity’s availability in the grid. The size of the error, and hence costs can be reduced by
(i) improved forecasting, (ii) diverse sources of wind energy supply geographically separated by large distance being integrated into the same grid, (iii) a transmission infrastructure and grid integration arrangements. Greater capacity credit for a given level of cost and reliability can be achieved if new wind capacity is planned so as to reduce natural gas use for electricity generation
10. The economics of wind energy would improve if wind developers could realize a reasonable capacity credit. In the examples we have studied, wind capacity credits could amount to $2 or $3 a MWh, which is a significant portion of the gap between the price in a PPA and the cost of wind energy (the difference being made up today by tax credits). Such capacity credits are more appropriate and feasible if day-ahead forecasting has reduced errors.
11. Integration of large amounts of wind energy without the extensive use of tax credits is feasible. If the necessary policies are put into place, and the infrastructure is built, the West can achieve high penetrations of wind energy comparable to the highest levels in Europe. There is no inherent technical obstacle to this; nor is there a reason to anticipate significant increases in cost of electricity. The following are needed to accomplish this goal:
- regional transmission infrastructure with wind integrated into it
- geographic diversity in wind development so as to reduce uncertainty and increase capacity credit
- equitable rules for grid integration and transmission access
- systematic connection of wind energy development with reducing natural gas use in power plants
- reasonable capacity credit for wind power plants
12. Wind-generated electricity can be used to make natural gas available for vehicles (indirectly). Earth source heat pumps, combined heat and power systems, and wind energy can be joined to eliminate the need for using natural gas for space and water heating in buildings. This natural gas, in turn, can be used in vehicles as compressed natural gas to displace gasoline and reduce oil imports. This type of arrangement would lead to significant CO2 reductions both in buildings and in cars, as well as lower urban air pollution.
13. Integrating fuel cells into the renewable energy mix will require improvements in fuel cell and hydrogen production efficiency as well as reduction in fuel cell costs. Integrating hydrogen production and fuel cells into the electricity system as part of a strategy to increase renewable energy can help increase the capacity credit for wind. It is, however, not economical today due to high fuel cell costs and low overall efficiency of converting wind-generated electricity into hydrogen and fuel cell electricity. Optimization via use of combined heat and power systems and efficiency improvements can also help reduce costs.
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Prepared for presentation at the
North American Energy Summit
Western Governors’ Association
Albuquerque, New Mexico, April 15-16, 2004
Arjun Makhijani, Ph.D. President, Institute for Energy and Environmental Research
Peter Bickel, Ph.D. Professor of Statistics, University of California, Berkeley
Aiyou Chen Graduate Student, University of California, Berkeley
Brice Smith, Ph.D. Project Scientist, Institute for Energy and Environmental Research
Recommendations:
1. The Western Governors’ Association should formally adopt a renewable energy goal of 20 percent of electricity supply for the region. Given that wind energy is both plentiful and, in the right circumstances, economical, a decision to get 20 percent of the region’s electricity from renewables, with an emphasis on wind energy penetration, is highly desirable for reasons discussed in the findings. The Operational Rules Committee of the Western Renewable Energy Generation Information System has already produced draft rules for tracking renewable energy generation. Ten to fifteen years would be a reasonable time frame to achieve such a goal. Each state would, of course, set its own regulations for enacting and achieving the 20 percent Renewable Portfolio Standard. The WGA should urge the National Governors’ Association and the federal government to adopt the same Renewable Portfolio Standard.
2. Wind energy development should be integrated with planning for reduction of natural gas price volatility. Since wind-generated electricity costs at favorable sites are often lower than avoided costs of natural gas at current prices, regulatory bodies and independent system operators should examine the benefits of using wind-generated electricity to displace single stage gas turbine peaking unit use including having some of the same units as standby units, as part of an overall approach for achieving high wind capacity penetration at modest cost. A regulatory framework for such integration needs to be created.
3. The WGA should charge the Western Interstate Energy Board to examine large scale wind energy integration in the entire region. A committee, created as part of the Wind Evaluation Team of the WEIB, should be set up to examine the technical and economic requirements of large-scale wind energy development in the Western Interconnect region (20 to 40 percent penetration), including:
• diversity of supply and demand that can be accomplished via integration of wind source in different states onto a single grid, as well as the reduction in cost of wind-generated electricity via increased capacity credit that geographic and demand diversity can bring
• the cost and financing of regional transmission lines designed to serve large-scale wind energy development, including HVDC lines
• enhancing existing meteorological capabilities to serve the purpose of reducing errors in wind forecasts, thereby increasing the value of wind power plants
• ways in which some of the benefits to the economy in terms of saving water can be realized by wind farm operators
• creation of financing mechanisms for infrastructure that will allow bundling to reduce financial risk and reduce cost at the same time.
• integration of wind energy development with reduction of natural gas use in power plants (relatively)
• policies that would result in cost internalization for CO2 emissions and water use so that the collateral benefits of wind energy to society can be reflected in the marketplace.
4. New regulations are needed for equitable access to final consumers. In states where electricity is regulated, rules to enable utilities to recover reasonable costs (including return on investment) can be created as part of the implementation of a Renewable Energy Standard. We estimate that if wind energy is developed at suitable sites, this is not likely to significantly affect the final cost of electricity to consumers.
5. Harmonized internalization of water and greenhouse gas emission costs should be carried out throughout the region. Today, states are in the leadership of renewable energy as well as in the area of reduction of greenhouse gas emissions. An approach to cost internalization for CO2 emissions and water use by thermal power plants would accelerate the development of wind power considerably. The price of wind-generated electricity in typical PPAs might increase on the order of $5 per MWh as a result.
6. New Mexico should create a demonstration project to combine wind, fuel cells, solar photovoltaics, efficiency, and the use of compressed natural gas in motor vehicles. This combination of measures holds large potential for both environmental and security benefits, but is not economical today. A demonstration project in which the benefits could be carefully assessed, along with the costs, would be of immense value in evaluating the prospects and difficulties of the road to a renewable energy future in which hydrogen, natural gas, and renewables are the main energy sources, while the use of oil is much reduced. While we did not study the question, it may be desirable to integrate some direct use of solar photovoltaic electricity into such a demonstration project, to assess reduction in peak loads on the grid and increased capacity credit for wind. New Mexico is well placed to provide leadership for such a project in the WGA and also the entire country since it has excellent scientific and technical resources available in the form of national laboratories, and NASA (at White Sands), and a state government that has already made the policy commitment to renewables and has much of the legal infrastructure in place.
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