The Great Lakes Zephyr - Wind Energy & Hydrogen Journal

News from Alt Power Digest:

Date: Wed, 21 Apr 2004 07:02:41 -0400
From: Tom Gray tomgray@igc.org
Subject: IEER Report on Wind

The full report is available from the IEER Web site at www.ieer.org .

Tom

Cash Crop on the Wind Farm:
A New Mexico Case Study of the
Cost, Price, and Value of Wind-Generated Electricity
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

Table of Contents

Preface...............................................................................................................................................5

Main Findings and
Recommendations...............................................................................................7

Chapter 1: The Wind Energy Resource: An
Introduction...............................................................11
Chapter 2: Wind Electricity Costs and Present
Prices.....................................................................15
A. Assessing the cost of wind-generated electricity ? general
considerations........................15
B. Grid Integration
Costs.........................................................................................................16

C. Current Wind-generated Electricity Pricing: Avoided
Cost...............................................24
Chapter 3: Wind-Generated Electricity ? A Model for a Spot-Market
Contract.............................28
A. Evaluating the Degree of Market
Development.................................................................29
B. The Unpredictability
Discount............................................................................................34

C. Credit for wind
capacity......................................................................................................41

Chapter 4: Integrating wind energy into a distributed grid system with fuel
cells and purchased
power...............................................................................................................................................46

A. Reduction of greenhouse gas
emissions..............................................................................49

B. A distributed grid
example..................................................................................................50

C. Displacement of natural gas for use in
transportation.........................................................52
Chapter 5: Wind Energy and Natural
Gas.......................................................................................57

Appendix A: Assessment of the Cost of Intermittent Wind Output Using
Spot-Market Prices......62
A. Optimal Sale Policy of Wind energy Output for a Future Time Period
(Day-ahead,
hour-ahead)......................................................................................................................................62

B. Autoregressive Models for
Output......................................................................................63

C. Example: Sale Prediction for April 2000 at New Mexico site
604.....................................64


Main Findings and Recommendations
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.

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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