	Overview

This report analyzes the impacts of wind generation on competitive power markets, including financial and economic impacts on electric power generators. Additionally, this report addresses three specific questions about the market interaction of wind power and electric power generators: (1) How might wind power affect wholesale market clearing prices? (2) Does wind power contribute to negative wholesale power price events within competitive electric power markets? Background

Wind electricity generation in the United States has experienced rapid growth over the last two decades. In 1992, cumulative installed U.S. wind capacity was approximately 1,500 megawatts (MW). In August of 2012, the U.S. wind industry reached a new milestone of 50,000 MW of installed wind power capacity. States essentially create demand for wind power projects by implementing renewable portfolio standard (RPS) policies that require a certain amount of renewable power to be generated by a certain date. The federal production tax credit is currently 2.2 cents ($0.022) for each kilowatt-hour of electricity produced from a qualified wind project. Reports by consulting companies have been published indicating that low and negative wholesale prices resulting from wind power are distorting markets, adversely impacting the financial economics of conventional power generators, and skewing the economic signals necessary to stimulate new capacity builds to ensure electric system reliability. These concepts and definitions provide some insight into the complexities associated with U.S. power markets, and the relationships between wind power generation, wholesale power markets, and the financial economics of power generators. Each RTO/ISO organization has a different structure and set of market rules that members must follow in order to participate in each respective market. Some generators are willing to accept negative prices (essentially, the generator pays the RTO to provide power) for a variety of reasons, some of which might include: (1) maintenance and fuel costs associated with power plant shutdown and start-up may exceed the cost of the temporary negative price event, (2) technical difficulties with cycling nuclear plants on and off provide an inherent incentive to operate continuously, and (3) incentives are provided for electricity production, such as the production tax credit (PTC) that is currently available for wind power projects. Since 2008, wholesale power prices in all RTO markets have declined. Considering the key concepts and definitions described above, the following sections examine three fundamental questions related to the impact of wind power in competitive electricity markets: (1) How might wind power affect market clearing prices?, (2) Does wind power contribute to negative wholesale electricity price events?, and (3) Does wind power impact electric system reliability? The ability of wind to bid negatively priced electricity is a result of value received from federal production tax credit incentives and the potential opportunity to sell renewable energy credits (RECs) to third parties. Two primary reasons for this decline, according to the IMM, were: (1) lower natural gas prices, and (2) lower average load demand. Two specific aspects of electric system reliability are typically discussed in the context of how wind power might impact electricity markets. Large amounts of wind electricity generation can potentially result in operational reliability issues due to the variable and sometimes unpredictable nature of wind power. There are two specific reserve types that may be needed to manage the variable nature of wind power production: (1) operating reserves, and (2) spinning reserves. Resource Adequacy and Capacity Margins

RTO system operators are typically concerned with the long-term operational reliability of the electric power system, and they generally monitor and plan for the power generation resources needed to satisfy expected load demand during a certain period of time (sometimes referred to as resource adequacy). As discussed in additional detail above, it is important to understand that wholesale electricity prices, typically the largest source of revenue available to power generators, are influenced by a number of factors (i.e., demand, weather, and fuel prices). Concluding Remarks

Increasing amounts of wind power can potentially impact wholesale power prices in RTO-managed markets by possibly reducing market clearing prices and contributing to negative price events in certain locations during certain seasons and times of day. However, the absolute financial impacts of wind power generation are unclear due to the complex nature of wholesale power markets and the many variables that can impact wholesale electricity prices and generator revenues (i.e., location, natural gas prices, generation mix, and electricity demand). Nevertheless, should wind power continue to experience growth, it is uncertain whether current RTO market designs would function to ensure availability of the types of generation that would be necessary to both maintain resource adequacy and manage the variable and intermittent nature of wind power.
U.S. wind power generation has experienced rapid growth in the last 20 years as total installed capacity has increased from 1,500 megawatts (MW) in 1992 to more than 50,000 MW in August of 2012. According to the Energy Information Administration (EIA), wind power provided approximately 3% of total U.S. electricity generation in 2011. Two primary policies provide market and financial incentives that support the wind industry and have contributed to U.S. wind power growth: (1) production tax credit (PTC)—a federal tax incentive of 2.2 cents for each kilowatt-hour (kWh) of electricity produced by a qualified wind project (set to expire for new projects at the end of 2012), and (2) renewable portfolio standards (RPS)—state-level policies that encourage renewable power by requiring that either a certain percentage of electricity be generated by renewable energy sources or a certain amount of qualified renewable electricity capacity be installed.
The concentration of wind power projects within competitive power markets managed by regional transmission operators (RTOs), the focus of this report, has resulted in several concerns expressed by power generators and other market participants. Three specific concerns explored in this report include: (1) How might wind power affect wholesale market clearing prices? (2) Does wind power contribute to negative wholesale power price events? and (3) Does wind power impact electric system reliability? These concerns might be considered during congressional debate about the future of wind PTC incentives.
When considering the potential impacts of wind power on electric power markets, it is important to recognize that wholesale power markets are both complex and multi-dimensional. Wholesale power markets are influenced by a number of factors, including weather, electricity demand, natural gas prices, transmission constraints, and location. Therefore, determining the direct impact of a single variable, in this case wind power, on the financial economics of power generators can be difficult. In 2012, wholesale electric power prices were down from recent highs in 2008, and lower price trends can result in financial pressure for power generators in RTO markets. Arguably, however, the two primary contributors to this decline are low natural gas prices and low electricity demand.
Wind power generation can potentially reduce wholesale electricity prices, in certain locations and during certain seasons and times of day, since wind typically bids a zero ($0.00) price into wholesale power markets. Additionally, independent market monitor reports for three different RTOs each indicate that wind generators will sometimes bid a negative wholesale price in order to ensure electricity dispatch. The ability of wind generators to bid negatively priced power is generally attributed to value associated with PTC incentives and the ability to sell renewable energy credits (REC). However, wholesale power price reductions and negative electricity prices associated with wind generation need to be considered in context with other dimensions of organized power markets. For example, other revenue sources (i.e., capacity markets) may be available to generators in certain RTO market areas. Also, generators oftentimes enter into bilateral power purchase agreements that can provide a hedge against power price volatility. Therefore, the absolute impact of wind electricity on the economics of power generators is difficult to determine due to the many variables and dimensions that influence wholesale power markets.
With regard to how wind power might impact electricity system reliability, two aspects of reliability are typically discussed: (1) impacts to system operations—the ability of the power system to manage the variable and sometimes unpredictable nature of wind power production, and (2) resource adequacy and capacity margins—the potential for wind power generation to either influence power plant retirements or contribute to market conditions that do not support investment in new capacity resources. RTOs are currently implementing various initiatives (i.e., dispatchable resource programs, renewable energy transmission projects) to address the variable generation characteristics of wind power. Furthermore, each RTO market is designed to provide the economic signals necessary to stimulate capacity additions in order to ensure resource adequacy and maintain capacity margins. However, should wind power generation continue to grow, it is uncertain if current RTO market designs will provide the signals needed to encourage specific types of generation capacity (e.g., operating and spinning reserves) necessary to manage the variable nature of wind power.