In the ongoing conversation about how renewable portfolio standards affect electricity prices, it’s important to keep in mind that building any new generation source, whether wind or fossil fuel, is going to create new costs for electricity customers.
Wind power investments can be spread more gradually, though, giving them a potential advantage over large, conventional power plants.
Last week I spoke with Dr. Harold Kung, a chemical and biological engineering professor at Northwestern University. He’s author of a paper titled “Impact of deployment of renewable portfolio standard on the electricity price in the State of Illinois and implications on policies,” published this spring in the journal Energy Policy.
“Any time you put a new capital investment in, it costs money, and you have to pass that cost onto your consumer,” Kung said.
Illinois created a renewable standard in 2008 that requires large utilities to generate 25 percent of electricity from renewable sources by 2025, with three-quarters of that coming from wind power.
The cost of building wind farms to meet the policy’s benchmarks in 2012 will lead to as little as a 2 percent premium on electricity bills, according to Kung’s paper. By 2025, wind farm construction could lead to anywhere between a 20 and 50 percent price increase.
Kung’s paper evaluates the different options policymakers have to buffer those impacts on Illinois consumers. His analysis favors investment tax credits, rather than production tax credits, as a more effective tool for lowering retail wind electricity prices.
What’s beyond the scope of Kung’s paper is how those wind costs compare to what utilities would have spent maintaining the status quo. I asked him why it’s been so tricky to pinpoint precisely how much these policies are contributing to electricity prices.
One reason is that answer depends on how fast the economy grows, Kung said. When the economy grows, electricity use usually goes up with it, forcing utilities to spend money on new power plants.
If utilities have to invest in new generation sources anyway, then the relative cost of wind power compared to fossil fuel sources becomes more negligible, or even non-existent in some cases.
Under normal economic growth, in which utilities might see electricity demand increase 1 or 2 percent per year, Kung said, wind has an often overlooked advantage in that you can build up capacity a few megawatts at a time.
“It’s very easy to slowly build it up, so that the capital investment is much less intensive than a big conventional power plant,” Kung said.
When a utility builds a large conventional power plant, they build it to meet a region’s long-term needs. It can take several years for demand to grow into the new plant’s size. As a result, there’s a “temporary excess capacity” during those year, Kung said.
And that’s an added cost to customers. It’s like a college student paying to live alone in a three-bedroom house because they expect to have a family someday.
“[I]n order to realize the benefit of the economy of scale, large-capacity power plants would be built that would result in temporary excess capacity,” Kung’s paper says. “On the other hand, wind electricity capacity is much more modular in nature, making it much easier to match capacity to need.”
A wind farm’s capital costs, from acquiring land to buying turbines and other equipment, accounts for vast majority of the cost of the power it produces. Policymakers who want to minimize the cost to consumers of complying with Illinois’ renewable standard should focus on capital costs, Kung’s paper concludes.
A 30 percent investment tax credit is more effective than a $0.022 per kilowatt hour production tax credit in lowering retail wind electricity prices, he concludes.
“The analysis shows that the capital cost dominates the electricity price, and changing the capital cost, either through technology changes, market pressure, or government incentive (in the form of [investment tax credit]) will have a large impact on electricity price.”