Texas Wind Boom Cutting into Fossil Generator Profits

Can wind turbines actually reduce the amount of fossil fuels consumed? A Wall Street Journal analysis concludes that ERCOT utilities will begin to feel the squeeze in their profits this year and to expect the amount of fossil fuels used to generate electricity to be reduced.

In an eye-popping illustration of the impact of the growth of wind generation on state and national power markets, a new Wall Street Journal analysis concludes that the deployment of new wind capacity in Texas alone from 2009 through 2011 will “markedly” reduce the growth of gas and coal consumption nationwide, while trimming the profits of two of the state’s biggest generators.

The July 31 analysis by BernsteinResearch, an affiliate of global investment firm AllianceBernstein LP, estimates that the growth of wind in the Electric Reliability Council of Texas (ERCOT) over the next three years will reduce the growth in gas consumption nationwide by an amount equivalent to 12.5% of the average annual growth in U.S. gas consumption over the last five years.

U.S. coal consumption will be cut by an amount equivalent to 2.3% of its annual growth over the past five years, BernsteinResearch said.

The growth of Texas wind will have a more modest impact on the growth in generation from U.S. coal and gas plants, slowing the annual growth in gas-fired generation by 7.6%, and in coal-fired generation by 4.2%.

The report said two of Texas’ largest generators, Energy Future Holdings and NRG Energy Inc., will be most adversely affected by the growth of wind energy in Texas.

“We estimate that in 2008 the wind generation capacity in ERCOT reduced NRG’s generation gross margin by an amount equivalent to 3.2% of its last [12] months’ EBITDA [earnings before interest, taxes, depreciation and amortization],” the analysis concluded. “Over the next three years (2009-2011), we expect the growth of wind power in ERCOT to erode NRG’s generation gross margin by a further 1.5% of [last 12 months’] EBITDA.

“Energy Future Holdings, we estimate, suffered a loss of generation gross margin in 2008 equivalent to 1.9% of [last 12 months’] EBITDA due to wind, while the growth of wind over the next three years should further erode gross margin by 1.7% of EBITDA.”

The impact of the growth of wind in Texas had different impacts on other generators, BernsteinResearch concluded.

When comparing the actual level of wind generation in Texas in 2008 against a hypothetical scenario that assumed no wind generation, the analysis found that Calpine Corp. suffered the most, with the impact of the 2008 wind reducing Calpine’s gross generation margin by the equivalent of 4.1% of the company’s [last 12 months’] EBITDA.

However, the research firm estimated that Calpine, FPL Energy, and PSEG would suffer a much smaller impact in 2011 than in 2008.

“This can be attributed to the fact that natural gas prices are expected to be much lower in 2011 than in 2008, reducing power prices and thus the impact on gross margins of the loss of production due to wind.”

The analysis builds upon an October report by BernsteinResearch that concluded that a strong increase in wind and other clean energy generation over the next decade to meet state renewables mandates has the potential to drive down wholesale power prices by reducing the amount of natural gas generation needed to meet peak demand.

Last year’s report also found that the green energy building boom driven by state renewable electricity standards (RES) may wind up hurting U.S. vertically integrated utilities because most of the new investments in clean generation will be made by non-utility generators and foreign utilities, while U.S. utilities likely will bear most of the risks.

The October report concludes that the rapid growth in renewables likely will limit growth in new conventional generation, an outcome BernsteinResearch said would slow revenue growth both for unregulated and regulated generators whose revenues remain tied to electricity sales.

Because renewables are fueled by wind, sun, and other free resources, and thus have no variable costs of operation, when they are available they will be dispatched ahead of coal and gas plants, resulting in lower power prices than would prevail in the absence of the renewable resources, BernsteinResearch said.

“Conventional generators thus face the risk that renewable capacity additions over the next decade will mitigate the power price increases that otherwise would result as demand growth forces the dispatch of incrementally more expensive generating units,” the report said.

In addition, the October report noted that the rapid growth of renewables may limit growth of conventional resources. While the North American Electric Reliability Corp., which monitors the U.S. and Canadian electricity grid, forecasts U.S. electricity demand growth at 1.8% per year through 2020, the new analysis concludes that conventional generation will grow at 1.3% per year—two-thirds of expected demand growth—due to the rapid growth in renewables.

Over the last two years, wind capacity in Texas has nearly tripled, rising from some 2,500 megawatts at the end of 2006 to 6,900 MW at the end of 2008. Today, wind capacity is equivalent to 9.4% of ERCOT’s total capacity.

—Chris Holly ([email protected]) is a reporter for COAL POWER’s sister publication, The Energy Daily.

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