Wind Power: lowering electricity prices

Increased wind energy can cut the power price by as much as €23 per Megawatt hour, reveals the latest Wind Directions. Wind power has priority access to the electricity grid, and so when the amount produced goes up, it pushes out more expensive fuel sources like gas, and brings spot prices down.

The Wind Directions investigation is based on a review of material recently published on the issue, commissioned by EWEA, launched at EWEC 2010 and available on EWEA’s website.

Anne-Franzkiska Sinner from Pöyry, which carried out the review, points out that “the overall amount the price goes down depends on the power mix in the country, and how much more expensive the fuels are that the wind is replacing”. However, it appears clear that customers stand to benefit from lower power bills in areas with more wind in the power mix.

Poul-Erik Morthorst from the Risoe DTU Institute summarises the point: “In a country with a lot of wind power, customers will have lower power bills, relatively speaking, than in a country where there is little or none.”

Of the many often cited advantages of wind power – it emits no CO2, it creates jobs, it will never run out, it does not have to be imported – perhaps the least well-known is its effect on power bills.

EWEA information often contains the claim that wind energy “can help lower electricity prices,” but what exactly does this mean? What does wind do to affect prices, and how?

“When we say wind farm lowers power prices, we are referring to the fact that – in a nutshell – when more of a less expensive power source like wind comes into the power supply, it pushes more costly sources out, and so brings down the overall spot market price,” explains Nicolas Fichaux, EWEA’s Head of Policy Analysis.

Up until a few years ago, wind turbines was still a maturing technology and there hadn’t been enough large-scale wind projects to get a clear picture of its impact on power prices. However, now that wind power provides a large share of power in many areas, a study of the way it pushes more expensive technologies out of the power mix – known as the ‘merit order effect’ – can be carried out.

Accordingly, EWEA commissioned Pöyry to conduct a review of some of the studies published on the subject so far in order to get a broader overview of the phenomenon.

“We took 15 studies on the merit order effect from a range of different countries, all in Europe, that were published no later than 2005 and summarised their results. They all show that adding more wind energy can make the power price go down, according to one study by as much as €23 per MWh,” explains Anne-Franziska Sinner, from consultants Pöyry, which carried out the review.

But how exactly does the effect work? “In a normal power market, the spot price is determined when supply and demand are equal”, explains Poul Erik Morthorst from the Risø DTU institute in Denmark.

“On a typical supply and demand graph, this is where the two lines – one representing the power supply and one the demand – meet.”
The supply curve on the graph is determined by the marginal cost – that is, the additional cost of producing one more unit of electricity – of the different power generating technologies, such as renewables, gas and coal, into the energy mix.

“Power-generating technologies that have a low marginal cost go into the power mix first and appear on the left of the graph, while technologies like combined heat and power have a higher marginal cost, and will appear to the right of wind energy on the curve, followed by condensing plants and gas turbines which have the highest marginal costs,” says Morthorst.

Because renewable electricity has priority or guaranteed access to the electricity market (as stipulated in the 2009 Renewable Energy Directive) it must be purchased before other power sources. In parallel, price changes have very little impact on power demand, as even if prices go up we still use a similar amount of electricity. This is illustrated by the almost vertical line representing demand on the graph below.

Consequently, more wind power coming onto the power market – onto the left handside of the supply curve – reduces the amount of the power demand remaining to be purchased on the spot market, and shifts the supply curve to the right. As the demand line roughly stays where it is, it intersects with a lower point in the supply curve and the power price goes down.

As a general rule, additional wind farm replaces coal during hours of low power demand and gas during hours of high demand, but “the overall amount the price goes down depends on the power mix in the country, and how much more expensive the fuels are that wind power is replacing,” says Sinner. “In our literature review, we had a range of effects, with power prices dropping between €3 and 23 for each MWh.”

Morthorst found in his research on Denmark that, “In 2005-2008, the cost of power to the consumer (excluding transmission and distribution tariffs, taxes and VAT) would have been approximately 5-10% higher in Denmark if wind power had not contributed to power production”.

He notes that while Danish power consumers pay a premium towards wind power, the merit order effect makes the cost lower. The merit order effect also depends on the size of the market. In a larger power market, wind energy will have an impact on more consumers’ power bills, but to a lesser extent than in a smaller market as the savings will be spread out.

So far, there is no formula or equation that can be applied to a power system to fi nd out instantly what difference more wind will make, but Morthorst is certain that “in a country with a lot of wind power, customers will have lower electricity bills, relatively speaking, than in a country where there is little or none”.

This is also shown by the new literature review. “All of the studies we looked at show a downward movement of spot power prices due to increased wind power penetration, and sometimes due to wind, the spot price went down to zero,” says Skinner.

The trend seems clear from the studies so far, and could be consolidated by new, up-to-date research looking at merit order effects across Europe. “From the literature, the merit-order effect is clear and proven. It means wind energy reduces power market spot prices, and replaces CO2 and fuel intensive production technologies, thus saving CO2 emissions and fuel cost,” says Fichaux.

“The remaining question concerns the merit order effect at European level, that is, how much the average European consumer will save in the coming years. EWEA will focus on this aspect in the coming months.”

By Sarah Azau, Editor, Wind Directions,