The Production Tax Credit — the key federal incentive for wind power — is a success story. Since the PTC was first enacted in 1992, the cost of wind power has fallen 90 percent, 75,000 people now work in the wind industry, and wind power is booming.
Yet, some people still think the PTC should be eliminated. Most interestingly, Exelon — the large Midwestern utility and power plant operator — has made ending the PTC its number one lobbying priority, claiming that the credit distorts markets. This would be scary. Fortunately, it’s not true.
The truth is that Exelon hopes to slow or halt expansion of wind power projects that can affect the bottom line of their nuclear power plants in the Midwest, and to achieve that objective they’re blaming wind and the PTC for market phenomena like negative pricing that are almost always caused by inflexible generation technology and transmission constraints.
This post will summarize Exelon’s position on the PTC, show where it falls short, and then point out that Exelon is more concerned about competition from wind power, in general, than the Production Tax Credit.
Why does Exelon say the PTC is distortionary?
Exelon’s argument hinges on two fundamental ideas. First, that the PTC causes negative prices; and second, that negative prices are bad for wholesale electricity markets.
Digging into this argument requires a little knowledge of how power markets work. In much of the country — including where Exelon’s nuclear plants are located — power is sold in competitive markets, at a “clearing price” set by an auction process. In general, the clearing price is set by the most expensive marginal resource needed to meet demand at a given time. This price is then given to all the generators providing electricity at that time. (For more on this, see Wind Power Helps to Lower Electricity Prices.)
Importantly, all power plants bid prices that reflect not just their fuel expenses and other operating costs, but also forgone revenues. For example, coal plant owners can sell the coal ash for industrial uses, and they take these lost sales into account when deciding how much they should charge for power from the plant. Wind power is exactly the same, only one of its lost benefits is a tax credit.
The Production Tax Credit offers eligible wind generators a tax credit worth $23 per megawatt hour for the electricity they produce. Since the fuel costs for wind power are zero and operational costs are low, wind turbines can theoretically offer to sell their power at a negative price (that is, they can make money even though they’re paying someone to take their power).
Where Exelon goes wrong is when they draw policy conclusions from these facts. Exelon believes that these negative prices are bad for wholesale electricity markets because they discourage investment in new generation. And, because all power plants operating get the same price, a negative price can force nuclear power plant owners to pay someone to take their power.
Where Exelon loses the plot
Exelon’s explanation of negative prices is generally correct, but it’s also incomplete. First, we need to look at how often wind is setting the power price.
Exelon’s nuclear power plants are located in the PJM Interconnection, which covers parts of 13 states and the District of Columbia. In the PJM territory, there are actually two electricity markets resources compete in, the “day-ahead” market and the “real-time” market. The vast majority of transactions occur in the day-ahead market, since forecasts for the following day’s electricity are generally accurate enough that grid operators can gauge what they need and when. Real-time markets are where transactions occur to account for the differentials that may arise in the course of the day, and they account for a much smaller percentage of total transactions.
Day-ahead markets are where the vast majority of baseload power — like coal and nuclear — compete. And rightly so; because they cannot ramp up and down as easily, they need a predictable schedule instead of relying on real-time market signals. Revenue from the day-ahead market is the bread-and-butter of these power plants.
So how often did wind set the clearing price in the day-ahead market, thereby usurping potential revenue from these baseload providers? Not once (see page 62). Wind never set the clearing price in the day-ahead market in 2012. So, even if wind power was bidding a negative price, and if negative prices were bad, it still wouldn’t matter to Exelon’s nuclear plants. The real-time market is a slightly different story, but still nothing to raise alarms. In this market, wind that could bid below $0 only accounted for 0.5 percent of all dispatchable offers in 2012 (see page 55). Coal and gas, on the other hand, accounted for 89.2 percent of all clearing prices. The idea that the PTC has contributed more to changing market dynamics than, say, cheap natural gas is unsupported by any of the available data.
And yet, negative prices do show up in the day-ahead market. So if not from wind, where do they come from?
One possible answer is that when you have generation that cannot ramp down located far away from users, negative prices occur.
This is particularly true in the region that Exelon points to most frequently, the Northern Illinois Hub. What you see there is lots of generation (Exelon’s nuclear plants and then a few wind farms) that are isolated from demand by limited transmission. Since nuclear plants cannot just “shut off” they have to run with or without demand. This is called being “non-dispatchable.” Making matters worse for Exelon, now those nuclear plants are joined on the “island” by wind plants that further cut into their profit margins. The problem isn’t that wind is setting negative prices; it is that cheap wind power is taking revenue from more expensive nuclear power plants.
The second part of Exelon’s argument is that negative prices are inherently bad. Is this right? No. Negative prices are actually sending the right economic signal about market conditions at that time. When there are excess, non-dispatchable resources in one place and high demand in another — it is time to build transmission to relieve that condition. Alternatively, you could have less generation on the island, which is essentially the tact that Exelon is taking.
The real story is that Exelon doesn’t like competition from wind
Exelon is obviously a sophisticated company, so they likely understand all of this. And, they’re likely not arguing against the PTC for the fun of it. In fact Exelon owns some wind plants themselves, and it is very probable that what they are really opposed to is cheap wind power owned by other companies located in regions where it hurts the bottom line of their power plants. Our conclusion is that Exelon is much more concerned with competitive wind power than the alleged market distortion from the PTC.
First of all, Exelon is not opposed to all Production Tax Credits — just those for wind. The Production Tax Credit for nuclear, for example, is totally fine by them (see if you can spot their opposition to the $18 per megawatt hour production tax credit for nuclear here, but don’t look for too long). They also aren’t opposed to the other kinds of credits that power plants cash in, such as coal plants selling ash. The only difference between these power plants and wind power is that wind has zero fuel costs, while these others do not.
Second, the arguments above clearly show that the clearing prices in day-ahead markets where nuclear power is making their money are not influenced by wind, and that in fact the combination of cheap natural gas and transmission constraints are probably to blame. And yet, Exelon is focused on the PTC instead of focusing on transmission or natural gas. The massive stake Exelon now holds in cheap natural gas generation through its acquisition of Constellation; combined with the money they make off transmission constraints driving prices up elsewhere, probably explain part of their choice. It is an easier target to take wind out of the competition than it is to help pay for the transmission to accommodate it.
To understand how misguided these attacks on the PTC are, it helps to go through a little thought experiment. Given the arguments above, imagine the PTC expires tomorrow. What would happen? Day-ahead prices would still occasionally be negative, since power plants would still be islanded away from users who need energy. Prices in the real-time market would still occasionally be zero, since wind can set the clearing price when demand is very low. Cancelling the PTC wouldn’t address any of the concerns Exelon put on the table — the only difference is that less wind would get built next year, and the year after that. Less wind being built means that the Exelon generators already in existence have less competition from cheap alternatives.
When you look at it this way, Exelon’s argument actually supports what CAP has long argued: The PTC is effective in getting more wind power built. The difference is that we think this is a good thing, while Exelon disagrees. Given the economic and environmental benefits of wind power, we’re confident that we’re on the right side of that argument.