Wind power: sinner, or sinned against?

The Gulf of Mexico oil spill has meant a bad press for fossil fuels of late

"The Gulf of Mexico oil spill has meant a bad press for fossil fuels of late. Ironically, however, renewable forms of energy have also been attracting a lot of flak, and non more so than Wind Power. Comments such as šinefficient', šuncompetitive' and šsubsidised' have been directed at the renewable resource: the Daily Telegraph even claiming that, šeach turbine in the UK receives on average £138,000 in subsidies each year'….ouch! But is it true? Not if a recent article in the New Scientist is to be believed. What's more, the article claims that users also pay less for electricity when wind power is part of the energy mix.

So who is right: the supporters or the opponents of wind power? Well it appears that the supporters may have a valid point…and it's all to do with the spot price of electricity…!

Apparently, electricity markets in Europe and North America are marginally priced, meaning that the spot price of electricity is set by the highest price the transmission company must pay at any given time to meet demand. The highest spot prices are at times of peak demand when existing power stations - coal, nuclear and hydroelectric - cannot meet the immediate need. The remedy for this problem is so-called špeaker' plants - generally oil or gas-fired facilities. However, these plants have marginal costs, which means that generating each additional unit of electricity is expensive, because operators of the plants have to purchase oil or gas, both of which are more expensive than coal. The net result of this is that špeaker' plants drive-up the electricity spot price.

This is where it gets interesting, and probably explains why wind power is not everyone's flavour of the month. By its very nature, wind power has a much lower marginal cost of production than oil or gas - or even coal, nuclear or hydro - for that matter. As a result, it changes the dynamic of the supply market: i.e. as the lowest cost producers, transmission companies buy from wind power generators first.

Of course, wind power cannot always be relied on to deliver when it is required. But on windy days the output from the generation medium enables peak demand to be met without recourse to the most expensive špeaker' plants. Consequently, at times of consistent wind, wind power has a moderating effect on market prices. This means that, ultimately, customer bills are lower than if wind power were not present, even taking into account the cost of any support regime.

This price-lowering effect is known as the merit order effect (MOE), and the savings resulting from it can be significant; especially in European countries that have consistent prevailing winds. In fact, one recent study by researchers at the Fraunhofer Institute for Systems and Innovation Research in Karlsruhe, Germany, found that MOE saved German consumers €5 billion a year - serious money!

With figures like this it's a no-brainer to assume that the MOE is good for consumers. But what about the producers; what does it do for them? Well there is a school of thought that the MOE actually creates opposition to renewables among energy companies, discouraging investment in them.

In order to understand this argument, consider for a moment that you operate a utility company with coal-fired or nuclear plants. From your perspective, wind power is causing you to lose out on the windfall cash previously provided by high spot prices at times of peak demand. In view of this would you be inclined to look favourably on plans to increase the share of wind power in total electricity generation? Perhaps not…

The resistance to wind power is not going to go away while energy markets are marginally priced. This is because they favour short-term profits, and that encourages the building of power stations with low capital costs and high marginal costs: gas-fired facilities. Statistics of power plants built over the last decade-and-a-half bear out this assertion.

Hardly any nuclear or coal fired plants have been built over the period, only gas-fired plants and some renewable - the latter thanks to support mechanisms such as feed-in tariffs. It is salutary to think that had these mechanisms been ruled to be market-distorting subsidies and removed, leaving the market to make all the calls, we would see nothing but new gas plants built. "

This would leave us vulnerable, wondering where tomorrow's natural gas, on which we would be utterly dependent, would come from - a scenario that has only been prevented because wind turbines receive support…but for how much longer?
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