How the Wind Blows

 | Dec 23, 2011 | 4:00 PM EST  | Comments
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When you are sitting in the control room of a massively large power plant, you see the world differently. Large coal and nuclear plants are impressive machines. Their turbines are gigantic, their generators produce massive amounts of energy, and even little things like cranes are huge. That's when it hits you: Why do policymakers ignore these crucially important facilities and seek to provide government subsidies only for tiny energy generators such as wind plants and solar panels. The answer? They don't.

I received a note from an operator who was complaining about wind subsidies. He runs one of the nation's largest coal facilities as a control room operator. He found himself in the middle of the workweek forced to turn his plant down so local wind turbines could take over serving his customers' load. His plant was forced into providing spinning reserves for as long as the wind was blowing. As the wind gusted and retreated, the power plant stood by to make up any differences.

Spinning reserve is an important service. To put a power plant on spinning reserve means the coal plant has to be ready to produce power on a minute-by-minute basis; it has to operate, but not produce much electricity.

Obviously, the main idea behind windmills was to displace coal plants. Because wind resources are uneven and never match consumers' demands, coal and other fossil-fuel plants are forced to provide spinning reserves. Worse, large coal-fired power plants are progressively less efficient, as they are turned down from 100% power to 30% power or less. Because they are less efficient on standby or on spinning reserve, they produce more greenhouse gases per megawatt-hour than when at full power.

Efficiency is not just about economics; it is also about the environment. The dream that wind plants would always provide consumers with perfectly clean electricity is a myth. In the West and Midwest, it may be a tad bit cleaner, but not by much.

Thinking more about wind reveals an important point many in Washington miss. Casual thinkers believe either wind is blowing or it is still and therefore wind plants are producing power or they are idle. But wind is not a digital source of energy; it is an analog source. For system planners, it is not if wind blows, but how strong it blows and for how long. As wind speeds vary, power production also varies.

Varying wind production is why our operator is forced to put his plant on standby. If he ignored the system and behaved as a wind plant instead (and operated whenever he wanted), his production could cause substantial damage to the grid's infrastructure. Too much power would oversupply the system and could damage transmission lines.

So it is understandable why some coal operators may resent federal subsidies. They see seemingly wasted subsidies going in the direction of relatively incompetent sources of energy, such as wind.

To be fair, many coal plants also get subsidies. They are not necessarily from the federal government, but they do come from the system. They are called capacity payments. Most coal operators don't normally think of capacity payments as subsidies. But they are paid to plant owners simply to keep their facilities available. Power plants do not have to produce a watt of power to earn these payments, which is why many old facilities sit idle, yet make enough to hang around.

Capacity payments are not always obvious. In deregulated markets, most Regional Transmission Organizations (RTOs) offer rent or capacity payments to all types of power plant owners. These payments have many names and most are subject to complex formulas. But the idea is assure the RTOs can maintain generation reserves so they can always meet peak demands.

In regulated markets, utilities are compensated for their power plant's full costs, including capital costs. In these cases, the utility commission compensates the utility through other mechanisms, but they essentially earn a capacity payment. The utility commission's goal is the same as the RTO's goal: Assure consumers that there is enough capacity to support peak demands.

No matter what the source of power, utility investors benefit from subsidies. Independent power producers, including Calpine (CPN), Geneon Energy (GEN), Dynegy (DYN), NRG Energy (NRG) and Atlantic Power (AT) straddle multiple RTOs and earn various capacity payments from RTOs. Integrated utility companies, including Dominion Resources (D), Exelon (EXC) and Next Era Energy (NEE) earn tax credits from their wind and solar resources. They also earn capacity payments from their deregulated fleets, including their nuclear facilities.

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