Wind energy is growing rapidly in Australia. South Australia leads the pack with wind power making up around 20% of its electricity generation capacity. But there is plenty of interest in other states.
There are three key questions for wind generation:
- Will it lead to lower carbon emissions?
- Will it lead to higher or lower power prices?
- Will it make the electricity system “less reliable”?
To answer these questions we need to consider a more fundamental issue. If wind makes up more generation capacity, how does this change our mix of other generation capacity?
For example, if wind generation pushes out coal-fired base-load power stations and is reliable in peak periods, then we would expect carbon emissions to drop with little change in reliability. But if wind generation pushes out mid-merit gas generation and is unreliable at the peak, then it may lower system reliability and possibly even raise overall emissions by encouraging oil-fired “super peaking” plant.
The Australian Energy Market Commission (AEMC) is clearly concerned about this issue. In a paper presented to the World Energy Forum earlier this year, the AEMC presented data showing that wind energy was not a reliable source of peak supply in South Australia. Indeed, as temperatures and demand for power rises in South Australia, the output of wind generators falls.
This negative correlation occurred as heating and cooling of the South Australian landmass at sunrise and sunset caused local winds to blow and then drop away during the day, in direct contrast to the periods of peak demand (p.29).
At the same time, the AEMC argues that:
Large volumes of wind generation entry have also contributed to a substantial lowering of the South Australian wholesale spot price (p.29).
The AEMC is probably noting a short-term phenomenon for prices. Given the sunk investment in existing base load capacity, additional wind generation will simply add to market supply and push down power prices. Wind usually bids into the National Electricity Market at a very low price. As the AEMC notes:
Such bidding places [wind generation] at the bottom of the merit order and can result in displacement of generation with higher variable costs (generators at the top of the merit order). The end result is that a lower cost generator becomes marginal, resulting in a lowering of the spot price (p.29).
The lower price, however, is likely to reduce investment in new gas-fired generation. This generation has traditionally been “mid-merit”. It supplies power as demand rises past the supply of coal-fired base-load generators and continues to produce as demand peaks.
It has grown rapidly in recent years, particularly in Queensland and New South Wales (p.20 of the AEMC paper). It is also relatively “clean” compared to coal-fired power stations (p.39 of the AEMC paper). If wind generation lowers the “mid merit” price in the electricity market, it makes new gas generation investment less profitable.
But if wind is unreliable in peak periods, this can have a “double whammy”. Not only could wind crowd out the lowest polluting fossil-fuel alternative; by lowering the amount of gas-fired plant for peak supply it could encourage high-cost, high-emission super-peakers, burning oil-based fuels.
Put simply, if in the short-term, wind generation crowds out gas-fired mid-merit generation then it could lower power prices, but also reduce reliability of power supply and have the perverse result of encouraging new dirty peaking plant.
In the longer-term, things look better for wind. As coal-fired base-load plant comes up for renewal and replacement, it is likely that gas-fired plant will be a cheaper, more efficient alternative. Wind generation will crowd out the coal-fired plant, which will be decommissioned. And the renewed investment in flexible gas-fired plant should improve reliability in the market.
Of course, prices are likely to return to their “pre-wind” level to make the investment in gas-generation viable.
So the perverse short-term effects of wind could be reversed in the longer term. But how long is the longer term?
Wind can only crowd out base-load plant when that plant has depreciated and needs renewal or replacement. And, this can be a long time; as The Australian says:
New AEMO modelling also reveals only 16 per cent of the current coal-fired electricity capacity will be retired or mothballed over the next 25 years, with the remaining coal-fired generation maintaining its competitiveness. Coal will still account for more than half of the energy produced in 2037.
What will reduce this time frame?
First, the carbon tax and carbon-trading scheme. A carbon price that reflects the social cost of emissions will reduce the economic life of coal-fired generation.
Second, lower gas prices. If gas, as a fuel for electricity, is cheaper then investment in gas generation will be brought forward. However, an alliance of environmental groups and the Nationals seem bent on preventing the exploitation of new “alternative” gas supplies.
So environmentalists need to ask themselves a question. Is coal seam gas worse or better than carbon emissions? Because the choices we make today will determine the trade off between gas and coal for electricity in the next 20 years.
Finally, the premise of this analysis, that wind is unreliable at peak times of power demand, could be wrong or altered. New technology, such as storage solutions could change the problem of availability as I have noted before.
Alternatively, the reliability problem may be unique to South Australia. For example, as the Herald Sun reports:
The performance of existing NSW wind farms “has been extremely good,” Professor MacGill said, adding high generating rates had often coincided with peak power demand, delivering good prices to owners.
Of course, if this is the case, then it suggests that we could have been building our wind generators in the wrong places. Which opens up a different can of worms for policy makers!
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