A new attack piece by a Koch front group, Institute for Energy Research, recycles their familiar attack playbook of starting with an inflated cost for wind energy and then mischaracterizing how the power system functions to argue that the real cost of wind is even higher. Once the incorrect assumptions are corrected, this and other analyses clearly show that wind energy provides significant net benefits and is one of the lowest cost sources of electricity, particularly among low- and zero-emission energy sources.
Much of the report regurgitates previous Koch-funded attack pieces, using the same debunked arguments
Like the three other Koch-funded attack pieces before them, Thomas F. Stacy and George S. Taylor’s first trick in their paper “The Levelized Cost of Electricity from Existing Generation Sources” is using obsolete wind cost assumptions. Stacy and Taylor use an old government estimate to claim that the cost of wind energy is $80.30/MWh, or 8 cents per kWh, while more recent market data indicates actual wind energy costs are less than half that amount. Specifically, market data indicate the actual average purchase price for wind energy was $25.59/MWh in 2013, or well under $50/MWh if the impact of the Production Tax Credit (PTC) on long-term wind purchase prices is removed. As explained below, this cost is significantly lower than the benefits provided by wind energy, indicating that wind energy provides significant net benefits.
Stacy and Taylor’s cost estimate is even higher than the most recent government estimate, which puts the national average cost of wind at $73.60/MWh. Notably, this government estimate overstates actual wind costs because it assumes wind plants will be built evenly in all regions when in reality most wind plants are built in regions with wind resources that are far above average, and because it uses installed wind costs that are about 20 percent higher than the latest market data. As we’ve noted previously, it is strange that a group that claims to support free market principles relies on government cost estimates instead of price information provided by actual market data.
It adds a few new, seriously flawed attacks
With this already high, obsolete estimate of wind costs, the report then uses flawed assumptions and arguments to increase it with various cost multipliers and adders.
The EIA has already developed a quantitative method that accounts for all of the costs that Stacy and Taylor attempt to add to wind’s costs, and it comes up with a result that is a factor of 4 lower. EIA’s method accounts for differing levels of dispatchability (ability to change generation output) and capacity value (ability to meet peak electricity demand) among power plants. EIA’s calculation found that there is only a 10 percent difference, or a difference of about $7/MWh, between the value provided by a wind plant and a more dispatchable gas plant. This is much lower than the more than 40 percent cost adder that Stacy and Taylor attempt to add to their already inflated wind cost, and far less than the 100+ percent cost adder the other Koch reports have attempted to add to their inflated estimates of wind costs.
Most critically, EIA’s method shows that a MWh of wind energy has an average economic value of $64.60/MWh, much higher than the current cost of wind energy of under $50/MWh, indicating wind energy provides net benefits for consumers. Of course, this calculation ignores the many other benefits that wind energy provides relative to other energy sources, such as wind plants’ lack of fuel cost and fuel price risk, wind plants’ lack of air emissions, wind plants’ lack of water consumption and withdrawals, and others.
“Imposed costs” are actually “sunk costs”
While most of Stacy and Taylor’s attack on wind is based on rehashing previously debunked Koch pieces, they do try to introduce the novel concept of “imposed cost.” However, the likely reason no one has previously made this argument is that it runs afoul of basic economic principles and realities of power system operations. First, the concept of “imposed costs,” as put forward by Stacy and Taylor, runs afoul of economics principles. The addition of wind does not require the addition of new capacity, and almost all regions of the U.S. have more than enough generating capacity, so in almost all cases wind is primarily displacing the output of existing power plants. As a result, Stacy and Taylor’s “imposed cost” is what an economist would refer to as a “sunk cost.” Sunk costs are exactly that – sunk – meaning that they have already been spent and cannot be recovered and therefore should not be factored into rational decision-making for the future. Said another way, there is no cost to society for building a power plant that is already built.
Stacy and Taylor fail to apply an “imposed cost” on existing coal and nuclear generators, which “impose” a many times greater impact on the dispatch of other generators than wind (as does electricity demand variability). As national laboratory experts have explained, the presence of an inflexible baseload generator on a power system’s fleet is a primary factor forcing other generators to cycle their output and run at reduced capacity factors. In fact, one can see the same phenomenon in a nearly identical chart that appears on page 8 of Stacy and Taylor’s paper – if fewer baseload plants were present in their example, the mid-merit units could run at far higher capacity factors. Similarly, should “imposed costs” have been assigned to gas generators in 2012 when the fuel cost of many natural gas power plants dropped below that of many coal plants, forcing the coal plants to operate at reduced output? Stacy and Taylor’s argument that power plants that provide low-cost energy should be penalized for being too cheap while the more expensive power plants that are being displaced should be rewarded for being too costly is strangely perverse for a group that pretends to advocate for a “free market.”
Wind energy is backed up by all sources on the grid, just like all other energy sources
Stacy and Taylor’s analysis is also based on a fictional account of how the power system operates, as we explained when Taylor attempted to make that argument back in 2012. On the real power system there is no need to “pair” resources, just as there is no need to attach a battery or a gas combustion turbine to your house to manage the variability in your electricity demand. Ask any independent power system operator about pairing gas resources with wind, or pairing any two resources, and you’ll get a perplexed look.
The reality is that all sources of supply and demand variability are combined on the power system, and many cancel each other out so that the total variability is far less than the sum of its parts. As a result, the job of balancing supply and demand is far more cost-effectively done by a central grid operator through an electricity market than by pairing individual resources. As we’ve explained previously, the main beneficiaries of having all resources backed up by all other resources are actually large fossil and nuclear power plants, which can fail instantly and without warning and therefore require far more expensive, fast-acting backup than the slower-acting reserves used to accommodate gradual and predictable changes in wind output. The massive cost savings for all resources from this approach is the primary reason why we built a power system in the first place. Stacy and Taylor throw that all away to create a far more costly fictional power system that massively inflates the cost of integrating wind (while ignoring the fact that conventional generators would need an even more costly 1:1 backup under that fiction).Compounding the flawed assumption that wind must be “paired” with other sources of energy, Stacy and Taylor make several additional errors when they assume that any lack of capacity value in wind resource must be made up for by pairing with another resource. First, as mentioned above, the reality is that wind only adds to power system capacity value, and never subtracts from it, so adding wind does not create a need for capacity. Second, their assumption is based on the typically false premise that new capacity is needed, and third, the similarly false assumption that gas combined cycle generators are the most cost-effective way to obtain capacity. As mentioned above, all U.S. capacity market prices are currently at a fraction of the cost of a new combustion turbine, which is lower than the cost of a new gas combined cycle plant, sending a clear market signal that the economic value of new capacity is far lower than Stacy and Taylor assume. This low market price accurately reflects that these power systems do not need new capacity due to flat or declining electricity demand, that resources like energy efficiency and demand response are providing capacity at a far lower cost, that capacity costs constitute a small share of total power system costs (energy costs account for 70+ percent of total wholesale power costs in PJM, capacity costs are around 13 percent), and that new capacity is primarily being built to provide low-cost energy with the accessory benefit of providing capacity.
Stacy and Taylor further compound this error by using a flawed method to arrive at an unrealistically low estimate of wind plant capacity value that is roughly 5 times less than the valuation used by almost all grid operators, and nearly 6 times less than that calculated by PJM’s renewable integration study using the most accurate method for quantifying capacity value.
Wind’s impact on prices is market-based
Stacy and Taylor’s report also repeatedly references the myth that the PTC has a significant impact on electricity market prices or the viability of existing generators, even though that claim has been thoroughly debunked, including being dismissed by former FERC Commissioner John Norris as a “distraction.” The reality is that the PTC is not reflected in electricity market prices because wind plants almost never set the market clearing price, while many instances of negative prices are caused by other generators. Any isolated occurrences in which wind plants do set the market clearing price typically happen on sections of the grid where they do not affect other generators. Regardless, occurrences of negative prices are extremely rare and quickly declining. The impact of wind generation on market prices is entirely market-driven, and identical to that caused by other low-cost sources of generation like nuclear and coal, yet Stacy and Taylor ignore the far larger impact of these resources on the economics of existing generators. Stacy and Taylor also misleadingly focus on incentives for wind energy production, even though other energy sources benefit from incentives that are many times larger, both ongoing and cumulative.
Wind energy provides many services to the grid
Stacy and Taylor do correctly point out that different energy sources have different characteristics and provide different services to the grid. While they correctly note that no resource excels in providing all services the grid needs, they miss the fact that wind plants are superior to other resources in many regards, such as wind plants’ lack of fuel cost and resulting fuel cost stability. With regard to services such as dispatchability (the ability for a power plant to change its level of output on command), wind plants can have their output readily dispatched down when it is economic for them to do so, as Stacy and Taylor note. Additionally, wind plants can and do provide upward dispatchability once they have been dispatched down, and in fact they provide dispatchability in either direction more quickly and accurately than almost any other type of generator. Wind plants are more dispatchable than the many baseload power plants that cannot change their output, which are the only truly non-dispatchable and unpredictably intermittent resources (as explained above, the output of wind plants varies slowly and predictably, while large conventional power plants fail instantaneously).
Coal plant retirements are largely based on economic factors, not environmental policies
Stacy and Taylor’s argument about the relative cost of new versus existing generation ignores the fact that market forces are the primary factor driving most retirements of existing coal power plants. With persistent low natural gas prices and declining or flat electricity demand, many coal plants facing increasing O&M costs are no longer economic. The inexorable long-term market trend is towards renewable and gas generation displacing old coal generators that have reached the end of their service lives. Environmental policies are only accelerating that shift, so the incremental cost to the power system of those policies is relatively small. Of course, those policies have large net benefits once the negative environmental externalities of existing fossil power plants are accounted for, externalities that other fossil-funded groups have acknowledged are large. Regardless, the decision about whether to keep existing plants operating is almost entirely unrelated to the use of wind energy.
Stacy and Taylor do make a few valid points, though those only underscore why wind energy is a cost-effective resource for reducing emissions
Stacy and Taylor make the valid point one should use actual capacity factors, rather than ideal “best case” capacity factors, when calculating the levelized cost of generation, particularly for natural gas generation. Notably, Stacy, his allies, and others they cite to have previously used best-case gas capacity factor assumptions to argue that wind generation is not competitive with natural gas generation as a carbon reduction tool.
Setting that aside, in this paper Stacy and Taylor correctly point out that EIA’s best-case assumptions for gas plant capacity factors cause EIA to understate the levelized cost of gas generation. Stacy and Taylor use real-world gas power plant capacity factors to arrive at a significantly higher gas combined cycle LCOE of $73.40/MWh. Considering that the average PPA price for wind energy in 2013 was $25.59/MWh, and the fact that wind energy is a zero emission resource, this only drives home the point that wind generation is one of the lowest-cost options for reducing carbon pollution.