Update: New Estimates and Insights into Renewable Energy’s Cost-Saving Potential

A couple of weeks ago I posted what I had intended to be a pretty innocuous quick discussion about new numbers from Austin Energy showing that renewable energy investments have saved Austinites a significant amount of money.  I was pretty surprised (and flattered) at all of the thoughtful responses.

Most flattering was a comment from Ross Baldick, even if he took issue with my post. Ross Baldick, though he didn't mention it in his comment, is a professor of Electrical and Computer Engineering at UT and gives a class at ERCOT on the economics of locational marginal pricing. (You might think it sad that a comment from Dr. Baldick is the highlight of my blogging career, but I make no apologies for being an energy geek.)

He pushed me to consider an additional scenario about how the mix of wind, coal, and natural gas affects Austin’s energy costs.

Wind energy is starting to impact coal plants
That Dr. Baldick had taken the time to read and respond to my post was great, but I was more than a little disheartened that he felt my comparison of wind offsetting gas was misleading. I have heard him speak a number of times and taken his ERCOT class (which I highly recommend – he really knows what he's talking about). One of the things Dr. Baldick has been talking about for some time is his research showing that wind prices have driven ERCOT clearing prices very low and will continue to do so, and why that makes new "baseload power" like coal plants a bad investment.

During our discussion, it became clear that our differences are less in the numbers than the short and (admittedly) simplified discussion around the numbers I presented. Dr. Baldick pointed out that although historically in Texas wind power has primarily offset gas, as I assumed in my original post, wind is beginning to impact coal as well.  It wasn't until my conversations with Dr. Baldick and his colleague Dr. Webber, who heads up the Webber Energy Group, that I began to realize how just how much coal Austin Energy might be avoiding by using wind energy.

Dr. Baldick has been studying the growing amount of coal power being replaced by wind energy for some time; a presentation based on his studies finds that any investment in new coal plants is financially unsound primarily because of wind energy driving clearing prices down. Leading the way, Austin Energy has stated that they have begun to use wind energy to offset its coal plant when it makes good business sense to do so.

A more detailed analysis accounts for replacing coal power, not just natural gas

Because utilities don't provide the kind of hourly data needed to study this stuff thoroughly, I decided that the simplest approach would be to look at a scenario where wind offsets coal 50% of the time and gas 50 % of the time. Everyone that I've talked to about this agrees that the amount of coal power currently replaced is much lower than that, so this provides us with a good conservative floor for how much Austin Energy is saving. Now we can look at two scenarios: one from my original blog post (in which 100% of wind energy is used to offset gas) and this new scenario, which I'll call "high coal.”

These two scenarios give a kind of "sensitivity analysis" or an idea of the range of impacts that Austin Energy's investment in wind energy has had over the past two years. I originally estimated that wind energy has saved Austinites almost $50 million over the last 2 years.  The "high coal" scenario shows smaller but still substantial savings of almost $10 million dollars for Austinites over two years. Still, this is making the best of a very limited dataset, and it would be very interesting to see ERCOT follow up on its wind studies to see how wind is impacting different generation resources.

It's important to note that these two years represent a sort of "sensitivity" on gas prices as well, since the highest gas prices in history were in 2008 and lowest gas prices in the past 8 years were seen in 2009, and are likely the lowest prices in the foreseeable future.  That fact also highlights an important benefit of renewable energy to a utility: providing a hedge against volatile fossil fuel prices. As natural gas prices and market purchases recover to more sustainable levels, Austin Energy will be saving money through their long term contracts with wind generators.

In any case, investment in renewable energy is a key cost-saving measure

To the extent that Austin Energy uses wind to offset coal generation those savings will be somewhat less for the time being, as the tables from my last post demonstrate.  Dr. Baldick was quick to point out in our discussion that this is in large part due to the fact that CO2 emissions from power plants have not been properly priced yet.  Not for long, though: at the beginning of this month the EPA took the first step by regulating greenhouse gasses from light duty vehicles as required by the Supreme Court's 2007 decision.  This sets the stage for the EPA to begin regulating power plants, which they plan to start in 2011.

Whether greenhouse gas regulations from the EPA or Congress, we now know that they are coming within the next year.  This fact makes past and future Austin Energy's investments in renewable energy an important cost-saving measure for Austinites as fossil fuel generation costs continue to increase for a number of reasons.

I admit I was happy to let out my inner wonk with these figures, but the real questions are still out there waiting for serious study by the organizations with the rich data, such as ERCOT or Austin Energy.

Texas is the national leader in wind, and that's something I love bragging about, but we need to be able to say why that is and what it really means in terms of environmental and economic impact. Based on what I've learned from the work Dr. Baldick and Dr. Webber are doing I think we'll have a lot to say about that, and the sooner the better.

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4 Comments

  1. Joe Indvik
    Posted April 14, 2010 at 10:41 pm | Permalink

    Excellent post! It's good to see wind displacing the most carbon-intensive fuel type.

    Speaking of that, it would be interesting to compare the greenhouse implications of your scenarios above. In the "high coal" scenario, Austin Energy saves less money than in your original scenario because coal is cheaper. However, it should also reduce greenhouse emissions by a greater amount in "high coal" because coal is more carbon-intensive than natural gas. Correct?

    Keep the wonkish stuff coming!

    Joe

  2. Posted April 15, 2010 at 11:40 am | Permalink

    Very interesting post, thank you. Looking a little bit further into the future, you will see the savings in cost and emissions compounded due to the heavy wind and transmission investment in Texas. Furthermore, if we consider that there may be a carbon tax, your 50% figure doesn't look quite as conservative.

    I apologize in advance for the shameless plug, but my company has done very detailed hourly analysis on the exact performance of every generator in the ERCOT system for 2011 and 2014 and have quantified these effects quite precisely. Some insight can be gathered from our website: http://www.energyonline.com, but I'm afraid our business model involves selling the results… I can, however, confirm the general gist of your analysis.

  3. Warren Wilczewski
    Posted April 21, 2010 at 9:23 am | Permalink

    Colin,

    While the overall premise of your argument is correct, the nitty-gritty details need a bit more working out. It is absolutely true that renewables offset fossil fuel power generation when "on". It is also true that electricity generated from wind is free of both CO2 emissions and fuel costs. Nevertheless, all these "frees" come with caveats.

    For wind to displace fossil fuels on a one-to-one basis, we would need wind to hold steady for predictable periods of time. This in unfortunately not the case. Rather, intermittent wind resources demand that grid operators continue to pay for what are called spinning reserves – essentially fossil (usually gas) fueled turbines that are spinning, but not connected to generators. Then, when wind dies down, the generators kick in instantly to supplant the now-reduced flow of electricity from the wind farms.

    Coal is a different animal altogether. Because most coal plants provide base load power, and because their start-up is slow, they cannot be all that readily shut down when the wind is blowing hard. Instead, less carbon-intensive gas is taken off first, or worse, wind turbines are simply disconnected because the grid is not capable of handling the extra load, and gas and coal had reserved capacity.

    Assuming that gas prices will ratchet up to 2008 levels may also be a gamble. 2008 was in general a strange year for commodity prices, and as the markets went into overdrive oil futures took natural gas for the ride up. Since then, the two indexes have parted ways, with btu's from gas now trading at a third or less of their energy equivalent in oil. Futures markets, and nearly all analysts, see this trend continuing. I wouldn't be surprised to see natural gas at the Henry Hub trading in the $3 range late summer, as storage fills to capacity early again. Consensus expectations are for gas to stay below $6/MMcf for the next two years.

    The takeaway from this is that while the renewables story is true, and their impact on electricity prices has the potential to be positive, we are not there just yet. For the time being, the costs of rebuilding our grid, introducing commercial-scale storage, and building-in appropriate demand management systems for those times when the wind either picks up beyond forecast or dies down unexpectedly, will be high. Our best cause for cheer, therefore, is not that intermittently abundant wind is displacing gas or coal from time to time, but that wind power's growing capacity is making the construction of new coal plants uneconomical – regardless of whether there is a price on carbon emissions or not. While this may not be the silver lining you've been looking for, it is certainly a faint light at the end a very long, smoke-filled tunnel.

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