Successful Renewable Energy Development in a Competitive Electricity Market: Texas

1. Successful Renewable Energy Development in a Competitive Electricity Market: Texas Jay Zarnikau Frontier Associates LLC and The University of Texas Austin, Texas Renewable energy conference December 3, 2010 Hong Kong Energy Studies Centre Hong Kong Baptist University December 2010

2. Themes • The development of renewable energy in markets with a high degree of competition at wholesale and retail levels poses some challenges that may not be present in areas served by vertically-integrated utilities. • The intermittent nature of some renewable energy resources can impact the entire wholesale market by affecting the reliability, operations, and market prices. • Meeting renewable energy goals requires coordination among many market players. • These challenges may be successfully overcome by imposing goals, trading mechanism, and operational changes on competitive markets.

3. The Green State of . . . . Texas? • Texas is home to most of America’s major oil companies. • Many of the state’s leaders deny any link between global warming and human activities. • Texas consumes 12% of all energy resources used in the U.S. • The leading state in electricity consumption and production. • The leading state in CO2 emissions, with 10% of the nation’s total. • Among the most competitive electricity markets in the world. But. . . . Texas leads the nation in wind power! Why?

4. Texas became a Net Importer of Energy (If Btus are used as a metric) (Scale: Trillion Btu) 4

5. Further Texas has the greatest non-hydro renewable energy resource potential in the U.S. 5

6. In theory, Texas has the potential to satisfy all of its demand (11.556 Quadrillion Btus) for energy with renewable energy resources. Wind Power Solar Energy Biomass Geothermal Energy Hydro Power

7. The Growth in Wind Power in MW 7

8. Most of the Development of Wind Power has been in West Texas 8

9. Also, Small-Scale Photovoltaics are Starting to Take Off 9

10. Also, Small-Scale Photovoltaics are Starting to Take Off 10

11. Why has Texas been so successful? Goals were set and a renewable energy credit trading program was established Good business climate Growing demand for electricity Federal tax credits Excellent resource potential Developer-friendly transmission interconnection policy 11

12. Challenge No. 1: Intermittency(ERCOT data for 2007. A 8.7% coincidence factor is used to convert wind capacity to its contribution toward meeting a summer peak in reserve margin calculations. Forecasting is a challenge.) 12

13. 12000 Challenge No. 2: The wind farms are in the wrong place. 9600 10600 • ERCOT sponsored a study to identify areas with best wind resource potential • Identified highest CF 100MW sites and clustered into 25 areas • Identified wind capacity potential (in MW) with >35% capacity factor in each area is shown 8300 4600 2700 2200 6200 6000 2900 7900 6900 4700 3000 Source: Ercot

14. Challenge No. 2: The wind farms are in the wrong place.($5 billion is transmission system upgrades are planned.) 14

15. Challenge No. 3: Impacts on Wholesale Prices Wind farms sell into the market at a loss, but make up for it with the Production tax credit. Divergence in prices among zones is common.)

16. Other Operational Challenges and Issues Some early problems with “gaming” by wind farms. Eliminated when ERCOT assumed responsibility for forecasting wind generation output. Forecasting wind generation is difficult. Many wind farms not able to provide comparable levels of reactive power and response to changes in system frequency. As wind generation increased, ERCOT had to procure higher levels of operating reserves (regulation and non-spinning reserves). Quick ramp rates of wind turbines create frequency problems. Many wind generator owners had little experience with power system operations. 16

17. New Questions as ERCOT Transitions to a Nodal Market in a Couple Months Can wind generators submit offers into a day-ahead market? Can wind power capacity be used by load-serving entities to avoid exposure to reliability unit commitment charges? Can some wind generators provide ancillary services (e.g., operating reserves)? 17

18. Is it worth it? Costs: $5 billion in transmission investment More operating reserves, which increase costs Cost of wind generation is about $80 per MWh Add these together, and you get about $110 per MWh for wind power (See Baldick’s article in Dialogue). Generation from natural gas plants cost about $35 in 2009 and 2010 in Texas. If the “premium” is viewed as a CO2 reduction strategy, its cost is about $116 per metric ton. But carbon offsets are available in the range of $5 to $30. 18

19. Lessons Learned The development of renewable energy (at least, wind power) can be achieved in a competitive electricity market if goals and a REC program are imposed on the market. A favorable business climate and tax credits help. When wind generation reached about 5% of total annual generation, impacts on system operations became pronounced. Strange price patterns Transmission congestion Increased need for operating reserves Changes in system operations Despite the higher costs, the state’s development of its wind and solar power resources is generally regarded as successful. 19