Resource Documents: Economics (208 items)
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Author: Renewable Energy Foundation
2019 was the tenth year in which British wind farms have received constraint payments to reduce their output because of electricity grid congestion. There has been a total of £649 million paid out over the decade for discarding 8.7 TWh of electricity. To put this in context, this quantity of energy would be sufficient to provide 90% of all Scottish households with electricity for a year.
Because of a rapid growth in wind farms, particularly in Scotland, the total paid has tended to increase year on year in spite of grid reinforcements and new grid lines such as the £1 billion Western Link from Hunterston to Deeside, which was built specifically to export wind power from Scotland to English and Welsh consumers. Figure 1. displays this trend, showing payments rising from £174,000 in 2010 to a new record cost of more than £139 million. The quantity of electricity discarded in 2019 was also a new record at 1.9 TWh.
Scottish onshore wind farms are far and away the largest beneficiaries of constraint payments, receiving 94% of the total in 2019, and approximately the same proportion averaged over the last ten years (see Figure 2). Scottish onshore wind received nearly £130 million in 2019, and more than £607 million over the decade. The remaining 6% of payments has largely gone to English offshore wind farms, with smaller fractions for Welsh onshore and Scottish and Welsh offshore wind farms. No English onshore wind farms have received constraint payments via the Balancing Mechanism.
The number of Scottish windfarms receiving constraint payments has increased from three in 2010 to sixty-eight in 2019. The largest increase in wind farm numbers occurred in 2017, when eighteen new windfarms received constraint payments for the first time.
Of the sixty-six onshore wind farms in Scotland receiving constraint payments over the decade, two large windfarms – Whitelee and Clyde – received nearly a third of the decade’s total, taking £108 million and £80 million respectively. The animated bar chart (Figure 4) shows how the costs of constraints to windfarms have accumulated over the decade from a slow start in 2010 when payments were made on only three days, increasing to eighty-two days in 2011, with a peak in 2017 when constraint payments were made on 244 days of the year. Wind farm constraint payments were made on 229 days of 2019.
It is perhaps unsurprising that Whitelee, being the largest UK onshore wind farm and one of the earliest entrants into the constraint market, has received the largest constraint payment total. However, recent years have seen newer and smaller wind farms overtaking Whitelee, suggesting that the sites currently being chosen for wind farm development are in locations with poorer grid connection. Whether this is a deliberate choice, designed to maximise average earnings per MWh generated, is open to debate.
The animated bar chart below shows how constraint costs grew in 2019 and reveal that Kilgallioch, which was built in 2017 and is less than half the size of Whitelee, has received more in constraint payments in 2019. Similarly, Stronelairg, built in 2018 and also less than half the size of Whitelee, has risen immediately to fourth in the annual league table of constraint payments.
In 2019, six wind farms were responsible for 50% of the constraint payment receipts, namely Clyde, Kilgallioch, Whitelee, Stronelairg, Fallago Rig, and Dunmaglass. It is particularly notable that of these six highly constrained wind farms:
a) Stronelairg received planning permission in spite of being behind a grid bottleneck and was subject to a Judicial Review due to its impact on wild land. Moreover, there are currently two further neighbouring applications in process for Glenshero owned by the GFG Alliance, and Cloiche, which is proposed by SSE, the operator of Stronelairg.
b) Whitelee, which opened in 2007 with a capacity of 322 MW, and was one of the first wind farms constrained off in the Balancing Mechanism, has been extended very significantly, with a further 217 MW entering service in 2012.
c) Clyde was completed in 2009, but permission to extend the site with an additional 74 (172.8 MW) turbines was granted in July 2014 and completed in 2017.
d) Fallago Rig is currently seeking an extension to add a further 12 turbines.
e) Kilgallioch is also seeking an extension.
Wind farm owners charge more per unit to reduce output than they earn through generating. For wind farms subsidised under the Renewables Obligation (RO) the income foregone when instructed to reduce output is the value of the Renewable Obligation Certificates (ROC). Typically, wind farms ask to be paid much more than the lost income, and in the early days of wind farm constraint payments, the premiums charged for not generating were very high indeed. For example, in 2011, Crystal Rig 2 charged £991 per MWh to reduce output compared to the value of the ROC at that time of £42 per MWh. Kilbraur, Millennium, Farr, An Suidhe were charging between £200 to £320 per MWh constrained-off in 2011.
This was regarded as an abuse of market power, and the Government introduced the Transmission Constraint Licence Condition (TCLC) in 2012, which sought to prevent excessive bid prices in the event of a constraint. While there can be no doubt that the TCLC resulted in a reduction in prices, they are still well in excess of the subsidy foregone in 2019 as Figures 6 and 7 demonstrate.
Figure 6 shows the five onshore wind farms which received the largest premiums above the subsidy forgone and the five which received the smallest premiumin 2019. It is interesting to note that Andershaw, Blackcraig, Beinneun, Cour and Sanquar, which are receiving a high premium over lost income, are newer wind farms accredited after the ROC banding for onshore wind was reduced such that they receive 0.9 of a ROC per MWh in subsidy. Assuming the 2019 ROC value will be approximately £55, these wind farms would receive £49 per MWh if generating but ask for and receive £96-£98 per MWh not to generate and thus get a premium of £47–£49 above the subsidy when constrained off. The five wind farms with the lowest constraint prices are older wind farms which receive 1 ROC per MWh. In 2019, they were setting constraint prices of £64-£69 per MWh to reduce output, thus getting a premium of £10-£15 per MWh.
The RO-subsidised offshore windfarms which received constraint payments fall into various subsidy bands: 1, 1.5, 1.8 and 2.0 ROCs per MWh. Taking these variations into account, it is again the newer wind farms that are charging higher constraint payments with the most expensive five offshore wind farms making £52 – £74 per MWh more than the site-specific subsidy forgone. The five least expensive received £20 – £38 per MWh over their subsidy.
It is difficult to see any justification for compensation over and above the subsidy lost, and indeed REF has suggested, as many economists would argue, that constraints are a normal and entirely foreseeable commerical risk and should not be compensated at all. Indeed, REF infers from the data presented above that constraint payments are actually encouraging the siting of onshore wind farms in grid constrained areas. This is clearly not in the public interest, and entails a significant cost to electricity consumers, who ultimately fund constraint payments through their bills.
Finally, it must be remembered that the cost of mislocating wind farms in areas with weak grid connection or behind constraints is much greater than the direct payments to wind farms themselves, large though these are. When a wind farm is constrained off the grid on one side of a grid bottleneck, National Grid as the system operator is required to make up the short fall in electricity by paying other generation (usually gas-fired) to increase generation on the other side of the bottleneck. Over the last ten years, the overall cost of constraints has risen by nearly 400%, from £165 million in 2010 to £636 million in 2019, reflecting the expense and difficulty of integrating a large wind fleet, and increasingly a large solar fleet, into the GB electricity grid.
Author: Thompson, Gene
[Editor’s note: The doctrine of correlative rights limits use of a common groundwater source to a share in proportion to the landowner’s property above it. Many states apply the doctrine to oil and gas fields as well. Gene Thompson argues here that it should also be applied to the extraction of wind power.]
Producing energy for everyday use has been a necessity for a long time. Oil Exploration and Production companies (E&Ps) have been at it for over 150 years. Wind farm companies have been at it for around 20 years. There are some regulations and laws still in the making that will guide both industries as they become more sophisticated and thus more productive. However, as of today, there is at least one big difference in the way the that the two industries operate. Unlike the wind industry, the oil companies are mandated to follow the doctrine of correlative rights. The wind companies are not.
The process of building a large oil drilling unit is very different than building a wind farm. When the oil company begins, they must gather leases, analyze plat maps, and then determine the best chances of finding a group of adjoining properties with a high percentage of neighbors that want to be part of the drilling unit. Before production can begin, the unit will need to contain 100% leased land. If not, the E&P must either reshape, relocate the unit boundaries or attempt to negotiate with any remaining unleased landowners. Sometimes it doesn’t work out and the holdouts are left outside the production zone. Essentially, the E&P sand the government legislators have both come to realize that not everyone wants to participate in a large-scale unitized drilling unit. When 50 to 100 landowners are asked to come together and cooperate with the development of a unit, it is inevitable that some landowners will hold out for varying reasons. More money, environmental concerns, and loss of peaceable enjoyment of the land are a few of the reasons. However, there are some instances where unleased, yet essential, land can be force pooled. That is a process wherein a landowner is forced to accept their just and equitable share of production. Additionally, prior to any force pooling, the holdout will have many opportunities to lease with competitors. This drives competition and is a win for the landowner. Ultimately, the State and E&P reserve the option to utilize rules of capture (correlative rights) and force pooling to bring the unit to completion. All states recognize that capturing our natural resources is for the greater good and is essential. Our laws consider it unfair for one unwilling landowner to have control over natural resource production that will ultimately benefit our society. And so, the majority claims correlative rights. Conversely, 95% of wind farm owners have zero correlative rights. Additionally, wind farm residents have no force pooling rules.
With that in mind, it is important to note that If the residents of a proposed area of development are heavily divided on oil production, the towel gets thrown in early on and the oil company keeps looking for clusters of landowners that want to participate. Lands that are chosen for development must pass EPA surveys and observe established rules for the industry. As a unit nears completion, the correlative rights doctrine comes into play as a tool to guarantee the rights of the majority. Generally, when landowners become informed of their rights and the value of their resources, development gets much easier. Better informed people are more willing to sign leases and participate in the production of oil. That is yet another difference between wind and oil production. Although similar, both industries encumber large clusters of acreage to capture a resource. Unfairly, yet with the government’s blessing, the wind industry pays disproportionately to very few. The oil industry pays proportionately to all.
The success of energy development either succeeds or fails depending how the rules are applied. In Ohio, wind energy is getting tremendous opposition because the industry is held to an entirely different set of standards. Perhaps that has something to do with legislators that do not have enough experience to understand the old drilling rules (150 years in the making) versus the relatively new rules for wind (20 years in the making). It’s no secret that noncompensated landowners in wind farms feel cheated and bullied. The absence of correlative rights for wind farm members is extraordinary.
Comparing wind to oil, the rules for wind farms dictate that profit be paid only to turbine hosts, and the majority of landowners will receive not one nickel. The majority will never be able to sign a lease with a competitor. They will never have a “cash-generating turbine” on their land. The only sharing aspect for wind farm inclusion is that the majority will share equally the burden of any ill effects. Their right to capture is worthless and is totally lost. The noncompensated wind farm resident has no voice as the state conveys our tax dollars to the wind company for support along with the exclusive right to capture. Hence, thousands of acres become stranded from any future production as one company monopolizes the production zone with the blessing of ill-informed or misguided state regulators. Consider this: If every person that lies within the bounds of a wind farm wanted to build their own industrial turbine, they could not because of setback rules. In contrast, the government would never consider allowing an oil company an exclusive right to drill and to then pay only to the landowner that hosts the wellhead. The wind turbine host enjoys that exact scenario to their exclusive benefit. If legislators can see fit to ensure fairness to every landowner that is encumbered in an oil drilling unit, then why not have similar protective rules for the wind farms?
The rule for force pooling in the oil industry wasn’t created until 1965, after 100+ years of drilling. After years of abuse and inappropriate interpretation, public awareness worked to drive a change. Since we now live in the information age, it shouldn’t take us 100 years to wise up to the wind companies. Our legislators must be aware of the inconsistent rules for energy production. The rules for wind farms need to be updated to keep pace with the changes in technology and rapid development. If the wind industry and our government expect landowners to go green and buy into the turbine idea, then they both need to take a lesson from the rules set forth in the oil industry and then consider the upside of sharing the profit fairly.
Brian R. Zelenak, Manager, Regulatory Administration, Xcel Energy, February 8, 2011 – re: Nobles Wind Energy Project, Minnesota, 1.5-MW turbines. [download]
A conservative estimate for a decommissioning expense is approximately four-hundred forty-five thousand dollars ($445,000) per turbine (2009 dollars).*
*Includes allowance for salvage value and based on total dismantling cost estimate for the project of 8.7% of the total plant balance of $510,965,406, equaling an estimated dismantling cost [of] $44.5 million or $445,000 per turbine. [NWW note: The Nobles project consists of 134 1.5-MW turbines, not 100, which would make the assumed 8.7% decommissioning cost $332,000 per turbine (2009 dollars).]
[$445,000 in 2009 is equivalent to $533,000 in 2019, $332,000 to $397,000.]
Wenck Associates, April 2017 – re: Palmer’s Creek Wind Farm, Minnesota, 2.5-MW turbines. [download]
The estimated cost to decommission Palmer’s Creek Wind Farm was provided by Fagen, Inc., construction contractor, in a letter dated November 16, 2016. The estimate is considered to be the current dollar value (at time of approval) of salvage value and removal costs. The estimated salvage value of each turbine will be based upon the worst-case scenario assuming the only salvage value of the turbine is from scrapping the steel. The estimate was based upon the total weight of one turbine, which is 275 tons consisting primarily of steel. Because it does not separate the scrap value of all the constituent materials, the estimate is very conservative. Also, it is highly likely that there would be opportunities for re-sale for reuse of all or some of the turbines or turbine components. Based on the current estimate, the cost of decommissioning is $7,385,822 with a potential scrap return value of $445,500 [net cost of $385,573 per turbine, $403,881 in 2019 dollars].
Henry Blattner, Senior Estimator, Blattner Energy, to Ryan Pumford, Nextera Energy, 2017 – re: Tuscola Wind III, Michigan, 2-MW turbines. [download]
To mobilize a crew and equipment, take down a GE wind turbine and haul off site the cost would be $675,000.00. Assuming a salvage value of $150 per ton and weight of 188 tons for the steel in the turbine and tower we [would] be able to reduce this cost by $28,200. The total price minus the salvaged steel would be $646,800.00.
Author: Northern Indiana Public Service Company
Indiana Utility Regulatory Commission: Cause 45159 [link] —
Verified Direct Testimony of Andrew S. Campbell, Director of Regulatory Support & Planning, Northern Indiana Public Service Company (NIPSCO) [link]
Q18. How will reliability be maintained when the wind isn’t blowing?
A18. NIPSCO will continue to dispatch its steam and gas fleet and other available wind generation, as well as purchase power from MISO, to meet customer demand and reliability needs throughout the term of the Roaming Bison Wind Energy PPA. This ensures that when the wind is not blowing customers will continue to receive reliable service every hour of every day.
Verified Direct Testimony of Benjamin Felton, Senior Vice President, NIPSCO Electric [link]
Q23. Do reductions in the dispatch of NIPSCO’s coal units impact the cost to operate those units?
A23. Yes. NIPSCO’s coal units were engineered to be used as base load units that run consistently over long periods of time, and they were not designed to ramp up and down in response to short term market signals. As those units become less economical, the cost to operate them increases because in addition to the increased maintenance required of older units, the added expenses to ramp the units up and down are incurred more frequently. NIPSCO must remain mindful of how that added expense to customers balances against the impact on reliability. In spite of the cost control efforts NIPSCO has undertaken as I have referenced above, the operational characteristics of these plants dictate that some increases in costs cannot be avoided when the plants are operated outside of the parameters for which they were designed.
[This was the same Cause in which the Sierra Club asserted their interest, which was for an arm of the energy industry, not the environment: “Sierra Club seeks full intervention in order to ensure that its interests in lower cost and cleaner energy options are fully represented, and to bring to this proceeding its expertise in electric utility matters.” (link)]