How Wind energy removes fossil fuel power plants in the Market Structure.

How wind power affects structurally the power prices at different time in a day in the power markets

How wind power affects structurally the power prices at different time in a day in the power market

It is generally understood that Renewable energy costs are Higher than Conventional forms of energy.

In the Electricity market as Renewables are penetrating the markets, the rule is no more true.

The production tax credit that a  producer is entitled and Trade Rules Intricacies are favoring Renewables over Conventional plants ( Nuclear, Coal, Nat Gas).

Trade Rules Intricacies 

Quoted from From

  • Wind power normally has a zero marginal cost: wind is free unlike a fossil fueled plant and therefore enters near the bottom of

the supply curve in a market. (also called the generation stack)

This shifts the supply curve to the right on figure 0.11, resulting in a lower power price, depending on the price elasticity of the power demand. The price is reduced from Price A to Price B when wind power production increases during peak demand. In general, the price of power

is expected to be lower during periods with high wind than in periods with low wind. This is known as the‘merit order effect’. 

The merit order for a Market Operator is a way of ranking available sources of energy, in ascending order of their short-run marginal cost of production, so that those with the lowest marginal costs are the first ones to be brought online to meet demand, and the plants with the highest marginal costs are the last to be brought on line.

  • There may be congestion in the power transmission lines, especially during periods with high wind power generation. Thus, if the available transmission capacity cannot cope with the required power export, the supply area is separated from the rest of the power market and constitutes its own pricing area.

With an excess supply of power in this area, conventional power plants have to reduce their production, since it is generally not economically desirable to limit the power production of wind.

In most cases, this will lead to a lower power price in this sub-market. When wind power supply increases, it shifts the power  supply curve to the right.

At a given  demand, this implies a lower spot price at the power market, as shown.

Night, Day and Peak Load

However, the impact of wind power depends on the time of the day.

If there is plenty of  wind power at midday, during the peak power demand,  most of the available generation will be used. This
implies that we are at the steep part of the supply curve in and, consequently, wind power will have a strong impact, reducing the spot power price significantly.

But if there is plenty of wind-produced electricity during the night, when power demand is low and most power is produced on base load plants, we are at the flat part
of the supply curve and consequently the impact of wind power on the spot price is low.

Solar is also a renewable power. Germany has the highest market penetration of solar power in the world, but fewer
hours of sunlight than many other countries: the result is that they offer remarkable generous
feed-in tariffs for solar power, (Trade regulations & social preference).

Solar power is available during some of the peak demand period and helps 
flatten the demand for non-solar power so power price.

I Pay you to take my Energy
These same results have been confirmed for Wind-power in the Supply Curve in the ERCOT, MISO(in its most wind rich zones of such Iowa), California Iso and the Nordpool markets.

The % of hours with negative real-time electricity price is astonishing everywhere renewable have a high market penetration.

Wind Energy producers can bid a lower, negative price to enter the markets and therefore paying the market to take their energy.

Production tax credit (PTC)

How can they make the break-even if they dump cheap energy ?

The answer is that as long as they receive a net benefit from the production they sell and the tax credit on each MWH produced, it makes sense to produce.

This idiosyncrasy is well explained in Negative Electricity Prices and the Production Tax Credit by THE NORTHBRIDGE GROUP.

Why wind producers can pay us to take their power – and why that is a bad thing.

Renewable energy Producer can pay us to take their power with his tax credit from the governement

Fossil Fuels power plants vs Renewables.

Fossil fuel (Coal, fuel oil) can’t instantly be activated or dis-activated in the grid.

Natural gas-fired plant tend to be activated at the peak period because of operations costs, if peak prices are depressed they will not get activated.

The Negative bid strategy used by Windpower is crowding out fossil power plants so it cost more for them to restart the plant at the peak hour.

In contrast, Wind power can be activated within one hour, wind is intermittent and wind field power can come into the market quickly.

In regions where renewable have a high market penetration, many conventional power generation capacity may have to be closed because of  less activity hours at lower electricity prices.

The actual power generation capacity in the Grid comes from past investments decisions initially based upon by the initial electricity deregulation rules in the 90’S.

When deregulated Markets were conceived, the goals were to bring competition in the electricity market with a set of rules that could enact the investments needed to build a solid transmission grid and a reliable supply.

It was not envisioned that a new source of energy by its nature could one day get a bidding privilege in the merit order effect and could be favored with a granted production subsidy to compete other sources of energy.

– The Trade Shipping and Finance Wizard


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