The renewable energy industry is still very much in its infancy. As we noted in a blog post a few weeks ago, the erratic and often contradictory nature of supply versus demand can have especially dramatic and unforeseen consequences on the renewable energy market.
This has perhaps never been more aptly demonstrated than it was on the morning of Sunday, September 20th, when energy prices in the state of Texas dropped below $0 for about six hours. At one point, energy producers were paying $8.52 to sell their electricity to the Texas energy grid.
In order to understand how its possible for the price for anything to fall into the negative, you have to understand five things about Texas’ energy infrastructure:
#1. Texas is essentially an energy island.
While most of Canada and the United States have energy grids that cross provincial and state borders, Texas is a bit of an exception. Most of Texas has its own energy grid, called ERCOT (Electric Reliability Council Of Texas), which is almost completely cut off from surrounding energy grids. This does give Texas an advantage in that its grid won’t go offline if nearby states suffer a massive blackout. But the cost of that independence is that when the supply of electricity overwhelms the demand, its not easy to find outside buyers for large amounts of electricity.
#2. The energy market in Texas is built on a real-time bid system.
Similar to AESO and other energy markets in Canada, the Texas energy market has a constantly fluctuating spot price for electricity. Every five minutes, electricity generators automatically submit a bid to the ERCOT system, consisting of a propositioned price per megawatt-hour, and a certain number of MWh that they have on offer. The prices bid by the various energy generators are generated mathematically, according to each company’s electricity supply, the current system demand, and other factors. Every 15 minutes, the bidding process is settled by ERCOT by first measuring how much electricity the grid needs. Then it organizes all the bids from lowest to highest price, and selects the minimum quantity of lowest bids needed to fulfill demand, and pays all the bidders for the highest price per MWh among the bids that were selected. So for instance, let’s say that at 5:15 P.M., the grid needs 150MWh of electricity. Between 5 P.M. and 5:15 P.M., the system receives the following bids, from lowest to highest price:
- Company A offers 60 MWh for $30 per MWh
- Company B offers 10 MWh for $35 per MWh
- Company C offers 70 MWh for $45 per MWh
- Company D offers 30 MWh for $55 per MWh
- Company E offers 50 MWh for $60 per MWh
- Company F offers 15 MWh for $65 per MWh
The grid needs at least 150 MWh of electricity. Company A, B, and C’s electricity supply total 140 MWh, which isn’t enough. So D’s bid is also selected. The power produced by Companies A through D is purchased by ERCOT for the highest price offered among those four companies: D’s bid of $55 per MWh.
#3. Despite the common perception of Texas as an oil empire, it produces massive amounts of wind power.
When compared to the United States as a whole, wind power is over-represented in Texas. While the U.S. derived 4.4% of its electricity from wind generation in 2014, that same year Texas produced 9% of its power via wind farms. Currently, the state is home to more than 10,000 wind turbines.
#4. In Texas, it tends to get windiest late at night and early in the morning, when energy demand is at its lowest.
While window accounts for an overall average of 9% of Texas’ electricity consumption, wind power’s representation in the moment-to-moment supply of electricity can skyrocket when the weather is at its windiest. Early one morning in March, 40% of the state’s electricity was produced by wind farms. So when electricity demand is at its lowest, the supply of wind energy is often at its highest.
#5. This is the clincher: The U.S. Government offers a tax credit of 2.3 cents per KWh of electricity produced by wind farms, or $23 per MWh.
These federal tax credits essentially have an equivalent cash value, making them a commodity that can be bought, sold, or traded. Wind generation farms are basically being paid $23 by the federal government for every MWh of electricity they produce.
As a consequence, even when power producers were paying as much as $8.52 per MWh, they were being paid $23 per MWh by the government, meaning they made a profit of $14.48/KWh.
