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Why fossil fuel generators hate wind energy

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Wind energy has a significant impact on wholesale prices, particularly in those peak demand events when fossil fuel generators used to make most money.

New research from the University of Queensland has added more understanding about why fossil fuel generators hate wind energy, and why they are seeking to bring the renewable energy target to a halt, or at least have it greatly reduced.

The research from the Energy Economics and Management Group in the School of Economics shows that wind energy – particularly in South Australia and Victoria – has a big impact on wholesale prices, but not just at night-time when wind energy blows the most, and demand is normally lowest.

It has the most dramatic impact on pricing during those peak events that usually occur during the day or early evening.

It has long been recognized that fossil fuel  generators make a large part of their revenue and profits during those peak events, when expensive peaking plant is brought into production. Prices can soar above $10,000/MWh, and even the “cheap” coal fired generators get that price.

The university research shows that these peak event prices have been sharply reduced by the impact of wind energy.

In Victoria in 2011, its modeling showed that without wind, and using only thermal generation to meet the peak demand, cost $338 million. That is almost 20 per cent of annual revenue from just 6.5 hours of peak demand.

But when wind energy is included, the cost of those peaks is reduced to just $126 million. The impact on fossil fuel generators should not be underestimated, because the finance of some coal generators had been heavily geared with debt on the assumption that these revenue events would provide funds to meet interest payments.

In a one hour peak period  on January 31, 2011, from 10.30am, the heavy demand required the most expensive forms of generation to dispatch, which raised the price to the maximum and a wholesale cost of $45.6 million when only thermal generators could respond.

But the inclusion of wind power and its very low marginal cost reduced that half hour to just $1.4 million of wholesale cost.

victoria wind costs

A similar impact was experienced in South Australia, which has the highest penetration of wind farms, with some 1,200MW of capacity accounting for more than a quarter of generation in the 2012/13.

The modelling done by the university showed again that the impact was greatest at times of highest demand – without wind generation the spot prices ranges from $1,000 to $6,000/MWh, but with wind they ranged from $200 to $1600/MWh. (See table below).

wind prices

The research shows that states that have the highest penetration of wind farms generally experience the greatest reduction in prices.  The impacts in NSW and Queensland were more muted because of the relatively small number of wind farms.

 

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  • Blair Donaldson

    Giles, thanks for the excellent article. If the PUP keep to their word and allow the RET to exist at its current level, would it be fair to assume that every new windfarm that comes online between now and the next election will be another nail in the coffin for fossil fuel fired generators and, could see the demise of some generators? There must be a tipping point not far off that will force investors to pull the plug on coal-fired electricity?

    • http://www.reneweconomy.com Giles

      What you would expect to see is the permanent withdrawal of one or more plant. But that may not happen quickly because they holding out for government exit payments, if only for the “rehabilitation”. once a few generators leave, that might rebalance wholesale price a little before more wind farms force more out etc etc. in meantime, coal and gas fired generators will be pleading for capacity payments, which is essentially a fixed tariff that guarantees higher prices. Germany further along track than us and don’t see the need for more fossil fuel subsidies..

      • Blair Donaldson

        Could the federal government set capacity payments without legislation? It does sound like a house of dominoes, after the first couple fall, momentum will tidy up most of the rest with any luck. Also, if electricity prices fall after coal-fired generators close up shop, that would help convey the message to the community that electricity from fossil fuels has been responsible for keeping prices higher than they should be. I would have thought that would be a good selling point in favour of renewables?

        Whatever the next 12 months or so demonstrates, I think I would rather be with the renewables folks than with the fossil fuel crowd.

        • http://www.reneweconomy.com Giles

          Im not sure, id imagine that changes to the NEM rules to include capacity payments would need to go through council of ministers etc. if coal generators leave, it would likely mean prices stabilise, maybe even go up, as it removes some surplus, but then they will go back down again as more solar and wind is introduced.

        • Alen

          Capacity payments would be political suicide after this budget and the government’s constant cry of ‘a budget crisis’. The FF generators put too much effort in gaining a favourable outcome from the RET review, but now that Palmer fatally interrupted their scheme I do not think they have too much left to push for more ‘favours’. The government has already attacked the RET and the carbon tax (ETS) and I just cannot imagine anymore pro-FF policies if they want to retain even a slither of non-biased appearance. Then again the government hasn’t made that many recent politically smart moves.

          • Sean

            never underestimate what will be done when someone in perceived authority deems that it must be done. see Milgram experiment

          • Alen

            Not too familiar with Miligram experiments but my little understanding is that it shows that an authority figure can persuade someone to do something even if they do not necessary wish to. However,as with Labor and Greens previously, the LNP has to compromise to a degree with PUP causing a division of this authority. Now Palmer is eager to point out flaws in the government and win voters (conservative especially) by highlighting any policies that may not directly benefit the public. In other words, the government will be very careful in their policies as now they do not only have to compete with Labor for marginal seats, but also with the increasingly popular Palmer for the traditionally safe conservative seats/voters. Well it’s my thinking either way and I do hope this is the case, as I do not wish to hear about yet another method being announced protecting FF interest.

  • Sean

    It would seem that the only time wind energy need show up is early evening and night time. Solar PV will undercut it during the day so why bother looking for sites that have most wind during the day. 4pm to 10pm would be the only time of day that you would be interested in.

    • David Osmond

      we also need it during winter, particularly during the cloudy overcast weeks. Thankfully wind produces more in winter than the other months