In discussions of the pros and cons of the wind production tax credit—in the interests of candor, you can put me on the “con” side—I’d never heard of, or even conceived of, “negative real-time energy prices.” Then I attended a session at the ELECTRIC POWER conference and trade show, with which this publication is affiliated, in the Chicago suburb of Rosemont in May. There I heard Joseph Dominquez of Exelon describe how wind is bankrupting nuclear in some markets, an entirely unintended consequence of policy initiatives at the federal and regional levels.
Exelon operates in the two biggest “organized” wholesale markets in the U.S., MISO in the Midwest and the PJM Interconnection in the Middle Atlantic region. In those giant markets, generators bid into the market on a day-ahead basis and are able to supply electricity based on their bids. That’s a great idea, and it mostly works.
Now, ask yourself, would any sensible business offer to pay the market for the privilege of supplying it with a valuable commodity, electricity in this case? The commonsense answer is “of course not.”
But the federal wind Production Tax Credit (PTC) skews that commonsense response. According to Dominquez, who is Exelon’s senior vice president for governmental and regulatory affairs and public policy, the PTC is so valuable to the large, profitable businesses that own wind projects that they are able to bid negative prices into MISO and PJM markets under conditions where there are lots of low-cost resources bidding into the market. They are offering to pay the market for the privilege of supplying wind energy.
Dominquez told the meeting that wind generators can bid into the organized markets at negative prices of some $30/MWh and still make money. The key is that the wind generator only gets the federal tax credit if the wind turbine actually produces electricity. So the wind generators are paying grid operators to take their power in order to be able to claim the PTC.
This is entirely logical behavior on the part of the wind generators, who are also in business to make money. It is the same thing as Apple organizing its businesses, using offshore subsidiaries, to avoid paying U.S. corporate income taxes (for which the company got slimed unfairly in Congress recently). It’s all legal and entirely moral, given that businesses have a duty to maximize benefits to their shareholders.
But in the case of the PTC, as Dominquez explained, it has the unexpected result of harming nuclear generators in the organized markets. That’s because, as a matter of Nuclear Regulatory Commission policy and the design of the machines, nuclear plants can’t follow load. So in periods of excess supply, nuclear plants can’t reduce power levels or take plants offline to reduce costs. When wind bidders win supply contracts with negative bids, the nuclear plants have to operate and “sell” into the market while paying the market for supplying power.
Dominquez told the ELECTRIC POWER meeting that Exelon’s two-unit Quad Cities nuclear station in Illinois has to operate for more than a month each year while losing money. “We can’t operate nuclear plants against the headwind of negative prices,” he said. Dominquez added that Exelon, which had planned to refurbish and upgrade its large nuclear fleet, is considering shelving the plans in the face of the negative prices. He added that Dominion’s decision to close its Kewaunee plant was driven in part by the negative price issue.
One might argue that the results harm Exelon’s shareholders, but benefit consumers, yielding a net benefit to society. Not so. A September 2012 study by NorthBridge Group, which raises many of the issues of negative real-time energy prices, concludes, “While the concept of negative prices might at first glance seem to be a money-saver for electricity users, or at best a harmless phenomenon, in fact these negative prices are (a) funded by taxpayers; (b) distorting wholesale electricity markets; and (c) harming conventional generation and imperiling reliability.”
Exelon’s aversion to negative pricing caused it fund the NorthBridge Group study and lobby last year against extension of the PTC. As a result, the company got expelled from the American Wind Energy Association, although Exelon is itself a large wind producer (but its nuclear capacity dwarfs its wind investments).
Said Dominquez, “It’s not surprising that we see plants closing and decisions not to upgrade nuclear plants in the face of negative prices. This is a bad problem. We’ve got a problem here that we need to fix.”
Amen. I’m not arguing that there is some sort of special dispensation that ought to be applied to nuclear plants. They should be required to compete in the wholesale markets along with all other forms of generation. But non-market twists that favor wind over nuclear aren’t sound policy. Let the markets decide.
By the way, the fix is not to provide a production tax credit for nuclear units (and those are in the law, but are not yet a prominent factor in the market as they apply to new units, which don’t yet, and may never, exist).
—Kennedy Maize is MANAGING POWER’s executive editor.