The American Wind Energy Association (AWEA) has just come out with an analysis highlighting the value of wind energy to the state of Texas, indicating that the overall societal benefits of the wind resource add up to about $3.3 billion annually. The gross annual savings to consumers are estimated at $1.2 billion.
As with any such analysis, the outcome depends upon specific assumptions that are made. However, whether the number is high or lower, the analysis – and its conclusions – is worth considering. Let’s break down the $3.3 billion number into its constituent elements so that we can better assess what is being put forth. The valuation is comprised of the following elements:
1) A reduction in the price of energy to Texas residents, since wind displaces more expensive resources on the margin, valued at $973 million.
2) A cut in sulfur dioxide (SO2) pollution, with an assigned cost of $652 million.
3) A reduction in nitrogen oxide pollution, valued at $71 million.
4) Minimized carbon dioxide emissions, to the tune of $1,008 million.
5) Hedges against fuel price volatilities, valued at almost $61 million.
6) Savings against expected increases in other fuel prices, estimated at over $491 million.
Likely, each of these valuations can be assessed at higher or lower values. For simplicity sake, let’s take these six categories and divide them into the two main topics: electricity prices and avoided pollution, and look at these assumptions.
With respect to prices, AWEA suggests value in three distinct areas: a reduction in overall power prices; a hedge against price volatility; and savings against future expected price increases.
1) Reduction in prices: Clearly, every kilowatt-hour of wind produced – and Texas has over 11,000 MW of installed capacity, with more on the way – displaces the more expensive power plant on the margin, thus reducing overall costs to Texas. Backcasting is no guarantee of future values, but it gives one a good idea of what the coming years will look like.
2) Price volatilities: Likewise, one cannot predict future price volatilities, which are driven by a combination of available generating resources, future load growth, weather, and resources reliabilities (among other aspects). But we do know that Texas has lifted wholesale price caps, so that future prices could shoot as high $9,000 per megawatt-hour, over 250 X the average price of 33.71 in 2013 (electricity markets are by far the most volatile commodity markets in the world).
3) Expected increases in future prices of other fuels: Whoever can accurately predict future electricity or other fuel prices should bet the farm, and also receive the Nobel Prize. On the other hand, it is more than likely that the long-term future trend will be to see future price increases, since natural gas (the fuel on the margin which generally sets power prices) is on the historically low side (currently Henry Hub natural gas spot prices sit at just under $4 per MMBtu versus a ten year high of over $15 and low of just under $2).
For this analysis, AWEA’s analysis used the Department of Energy’s fuel price forecast, which is commonly utilized by most and has – by its own admission, historically underestimated fuel price increases. But the assumption of higher prices probably makes sense. With more LNG export opportunities, a decrease in shale oil production (which will result in reduced gas produced as a byproduct), and increased pressure on the gas resource for future power production and petrochemicals, there is plenty of room for pricing to move to the upside.
Now let’s look at avoided pollutants: Analysts can disagree on the specific valuations regarding costs to society for various avoided pollutants. But there’s general agreement among the scientific community concerning the negative impacts of these unwanted gases. It’s clearly a societal benefit to avoid carbon dioxide (climate change), sulfur dioxide (increased asthma levels, emphysema, and bronchitis – leading to increased levels of hospitalization – as well as damage to crops and trees, and a precursor of acid rain), and nitrogen oxides (damaging to crops as well as a precursor to ground level ozone, which harms lungs, especially those of young children).
How we value those unwanted externalities is always open to question, but the methodology adopted by AWEA is certainly defensible. The carbon dioxide cost number used in the analysis is the mid-range estimate from the U.S. government’s Social Cost of Carbon working group, while the sulfur dioxide and nitrogen oxide cost numbers are the median values contained in a peer-reviewed journal article by Harvard School of Public Health researchers.
In summary, there may be some legitimate disagreement among reasonable people as to the exact values assigned to each of these six categories. Some numbers may be higher and others lower. Economic models are – and must be – predicated upon reasonable assumptions. But at the end of the day, it appears fairly clear: the economic value of wind resources to Texas is considerable. It is a lesson other markets should be mindful of as they plan for their energy futures.