TODAY’S STUDY: HOW WIND CUTS ELECTRICITY BILLS

The Potential Rate Effects of Wind Energy and Transmission in the Midwest ISO Region

Bob Fagan, Max Chang, Patrick Knight, Melissa Schultz, Tyler Comings, Ezra Hausman, and Rachel Wilson, May 22, 2012 (Synapse Energy Economics)

Executive Summary

Wind as an electricity supply resource has been getting steadily cheaper, and its technical performance characteristics continue to improve as larger turbine sizes and higher hub heights capture both economies of scale and more of the passing wind.1 Simultaneously, the projected cost of coal-fired power has begun to climb; the increasingly global coal market has given rise to higher coal prices, and many existing coal plants will need to be retired or retrofitted with new environmental controls to comply with stricter regulations being enacted by the Environmental Protection Agency (EPA).

These trends in electricity supply costs are particularly relevant in the Midwest ISO (MISO) market area. Today, more than half of the MISO generating capacity consists of coal-fired units. MISO also contains effectively inexhaustible supplies of the most economic wind power available to the nation. Over the past five to ten years, this low-cost energy resource has begun to be tapped in ever-increasing quantities. As of December 2011, wind installed in the MISO region had risen to 10 gigawatts (GW). However, the inadequate capacity of many segments of MISO’s transmission grid, coupled with the inflexibility2 of much of the baseload incumbent generation has given rise to operational complexities and system constraints. This leads to costly congestion and uneconomic curtailment, or spilling, of available wind. To relieve the bottlenecks and capture the economic and environmental benefits of more electricity from wind, investments need to be made in the region’s transmission system.

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The MISO region recently developed a new type of transmission project, labeled Multi-Value Projects (MVPs), to address reliability, economic, and policy needs. Among other things, these projects address congestion on the transmission system, reliability constraints, and clean energy mandates. According to MISO, the 17 approved Multi-Value Projects (collectively, the MVP portfolio) will provide economic benefits exceeding their costs, and will enable the delivery of at least an additional 41 million megawatt-hours (MWh) of wind energy per year—enough to satisfy Renewable Portfolio Standard mandates in MISO states.

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Additional Investments May Benefit Ratepayers

While the MVP portfolio serves as a starting point for bolstering the MISO transmission grid, additional wind-enabling transmission investments may also provide significant benefits to consumers in the region. In this study, Synapse examines two related questions: 1) How would electric market prices in MISO be affected by the addition of new wind supply—above and beyond what would be enabled by the MVP portfolio? And 2) How would retail electric rates in MISO be affected by additional transmission investments—above and beyond the MVP portfolio? Looking at these two effects, together, provides a sense of how beneficial it might be to invest in additional wind-enabling transmission in MISO.

Synapse’s study consists of two major components. First, we examine the downward pressure on energy market prices associated with adding more wind power to the MISO grid. Using a spreadsheet model developed by Synapse, we calculate the supply-induced price effect (SIPE) that would serve to depress MISO energy market prices through the addition of wind supply to the grid. Sensitivity analyses for this model were run across different coal plant retirement scenarios, and different levels of wind installation.

Second, we examine the retail rate impacts associated with existing and future transmission in MISO. The study evaluates the rate impact of existing transmission in MISO as a whole and for one specific utility, evaluates the expected rate impact of the MVP portfolio, and estimates the rate impact associated with three scenarios for transmission expansion above-and-beyond the MVP projects. These scenarios—which are rough benchmarks for the cost of needed transmission – are based in part on the “indicative transmission” portfolios reported on in MISO’s Regional Generation Outlet Study, and represent low, medium, and high transmission expansion scenarios for the MISO region. They are also based in part on more aggregate assessments of required transmission resource cost for the MISO area conducted through the stakeholder-guided Eastern Interconnection Planning Collaborative (EIPC). These scenarios represent a proxy for the cost of transmission needed to increase the scale of wind generation connected to the grid. It is important to note that this study does not directly address the question of “how much” transmission will be necessary to deliver given quantities of additional wind power by a given year.

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This is a planning exercise that we did not undertake, which would depend in large part on the load and supply resource mix and locations assumed.

We note that, with good system planning, it is likely that large quantities of wind could be integrated with low or moderate transmission investments – though still larger increases than have been seen in the recent past. For example, to the extent that load growth can be kept to a minimum through demand response and energy efficiency, incremental transmission need to integrate wind is lowered (relative to a baseline with greater load growth) because a key determinant of transmission need is peak load level. Transmission projects would still be required to connect remote wind resources to the grid, and “backbone” investments will still be needed across key areas of the Midwest. But unending investment cycles of extra-high voltage lines should not be necessary, and the cumulative rate impacts should remain small. Transformation of the supply fleet to much more flexible operation (e.g., by adding gas plants that can ramp up and down quickly), and the presence of extensive coordination, control, and forecasting improvements in the electric power sector could also mitigate the need for dramatically expansive levels of transmission. Lastly, it will be important that both existing and newly-freed-up “headroom” on the transmission grid is fully exploited.

While this study does not perform the planning exercise described above, it does allow for an evaluation of the overall rate impacts of adding new increments of transmission and new increments of wind to the MISO system.

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Key Findings

Transmission-Enabled Wind Energy Leads to Reduced Electric Market Prices

Synapse’s analysis indicates that the effect of introducing greater levels of wind resources into MISO is to generally depress the average annual market price, relative to a baseline case of no additional wind generation beyond the existing 10 GW in place in MISO today. Since wind energy “fuel” is free, once built, wind power plants displace fossil-fueled generation and lower the price of marginal supply—thus lowering the energy market clearing price.

Figure ES-1, below, illustrates the energy market price trends that arise out of Synapse’s modeling exercise. This graph illustrates our modeled level of energy price declines in the Midwest over the coming decades, if wind (and new transmission, as estimated in Table ES-2, below) comes online in the quantities estimated. For each of the coal retirement sensitivity cases shown in Figure ES-1 (i.e., 3 GW, 12 GW, and 23 GW), market prices are reduced significantly as more wind is added to the system.

For example, as seen in the 3 GW coal retirement sensitivity case (the dotted line in Figure ES-1, below), the market price reduction in 2020 associated with a 20 GW addition to the wind resource base (i.e., total wind increases from 10 GW to 30 GW) is roughly $14/MWh, and a 40 GW wind addition leads to an average energy price decline of more than $21/MWh.

These market price declines will lead to reduced overall energy costs. For this coal retirement sensitivity, power supply costs for MISO-region customers could range from $3.9 billion to $7.9 billion per year lower than baseline costs for the 20 GW wind addition, and from $6.1 to $12.2 billion per year lower than baseline costs for the 40 GW addition.6 These cost savings will exceed the annual costs of transmission improvements needed to integrate this level of wind addition.

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When including the effects of transmission, the net savings ranges from $3.0 billion to $6.9 billion per year for the 20 GW wind addition scenario, and $3.3 to $9.4 billion per year for the 40 GW wind addition scenario.

For an average MISO region residential customer using 1,000 kWh per month, this translates to a net savings that would range from $63 to $147 per year in 2020 (for the 20 GW wind addition scenario), and from $71 to $200 per year for the 40 GW wind addition scenario.

Synapse’s analysis suggests that ongoing wind installations across the MISO grid will continually and inexorably exert downward price pressure on market energy prices. Energy market price reductions will be material and pervasive, ranging initially (2012 – 2018) from $3 to $10/MWh, and continuing to reduce energy market prices by $10 to $49/MWh by 2031, when on the order of 100 GW of wind energy could be online in the Midwest region.

Rough temporal patterns emerging from Synapse’s analysis suggest that the supply-induced price effect from wind additions would be greatest in spring, fall, and winter, when aggregate wind plant output is expected to be highest.

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Transmission Expansion Has a Small Effect on Retail Rates

Synapse’s analysis shows that adding wind-enabling increments of transmission above-and beyond the MVP portfolio would have a small effect on the average electricity bill in MISO. Table ES-1, below, shows the transmission rate impact associated with each of the studied scenarios for the years 2015, 2021, and 2031. These transmission expansion scenarios could allow for up to 100 GW of additional wind energy in MISO. As shown below:

* At the low end of the range, the rate impact of the MVP portfolio in 2015 is $1.0/MWh (0.10 cents/kWh).

* At the high end of the range, the rate impact of the MVP portfolio plus Synapse’s High T Expansion scenario in 2031 is $11.2/MWh (1.12 cents/kWh).

Table ES-1 shows that transmission rate impacts in the near-term are modest, adding a few dollars per megawatt-hour (MWh) to retail electricity bills.8 For perspective, total retail power rates currently average $87/MWh in the MISO region. The largest component of that rate is energy supply costs.

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Incremental Transmission Costs to Enable New Wind Will Be More than Offset by Energy Market Price Reductions

The energy market price effects shown in Figure ES-1 significantly offset—and often exceed—the rate effect associated with expanding the transmission system. Table ES-2, below, lists the total average transmission rate associated with each scenario for the years 2015, 2021, and 2031. This total rate includes all transmission rate cost components, including costs for existing transmission and expected MISO reliability projects. The table also shows the approximate range of wind capacity (in gigawatts) enabled by each transmission scenario, and the approximate range of market price reduction resulting from the wind enabled by each transmission scenario.

Table ES-2 below indicates that the price savings associated with the wind additions modeled by Synapse exceed not only the incremental rate effect of the transmission expansion scenarios (shown in Table ES-1), but also, in many cases, the total transmission rate associated with each scenario.

In sum, this study suggests that adding more wind power to the grid in MISO, above and beyond what will be enabled by the MVP portfolio, would result in the continual decline of energy market prices and lead to lower electric rates for ratepayers (relative to rates in a less windy electrical landscape)—even when you factor in the costs of additional transmission.

Moreover, the price suppression effect seen in our analysis would be even greater if gas prices rise above the Energy Information Administration’s current Annual Energy Outlook real price projections for 2020 and 2030. Similarly, the effect would be magnified under scenarios with large coal retirement, since gas-fired generation would likely be on the margin for a greater share of market-price-setting intervals.

The results of this study cannot precisely discern the extent to which MISO market-wide price depression arising from increased use of wind resources will directly “flow through” to load-serving entities in the region in 2020 or 2030—especially given the significant changes in resource base expected to be in place in those out years. However, it is reasonable to assume that much of the price effect patterns seen here would be reflected in energy costs borne by ratepayers in the MISO region.

While this study does not address the question of “how much” transmission will be needed to deliver additional wind in MISO, we can assume the following: To the extent load growth is reduced by demand-side resource delivery, supply-side resource flexibility increases —and improvements are seen in electric power sector coordination, control, and forecasting—relatively less transmission investment is likely to be required to achieve the wind additions and associated benefits seen in this study, compared to a “business as usual” case that does not see these gains.

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Conclusions & Next Steps

In sum, this study indicates that adding more wind power to the grid in MISO, above and beyond what will be enabled by the MVP portfolio, would result in the continual decline of energy market prices and lead to lower electric rates for ratepayers (relative to rates in a less windy electrical landscape)—even when you factor in the costs of additional transmission.

The table below shows that the price savings associated with the wind additions modeled by Synapse exceed not only the incremental rate effect associated with each of the studied transmission expansion scenarios, but also, in many cases, the total transmission rate associated with each scenario. (The total rate includes all transmission rate cost components, including costs for existing transmission and expected MISO reliability projects.)

We draw the following conclusions from our analysis:

* Ongoing installation of wind energy across the MISO grid over the next two decades will continually and inexorably put downward price pressure on market energy prices. The price suppression effect will be material, and will be pervasive.

* Anticipating that any level of wind increase and coal retirement scenario will still lead to sufficient capacity reserves on the grid, the price effect is seen to persist and be material under a range of coal retirement / gas addition circumstances.

* If gas prices rise above the Energy Information Administration’s current Annual Energy Outlook real price projections for 2020 and 2030, the price suppression effect from wind will be greater. Similarly, this effect will be magnified under scenarios with large coal retirement, since gas-fired generation is likely to be on the margin for a greater share of market-price-setting intervals.

* Transmission increases that accompany wind additions will continue to minimize price differentials across the region (i.e., lower congestion costs) and allow the presence of wind energy to affect clearing prices throughout the MISO region.

* To the extent that transmission additions allow for capture of the highest valued wind resources, lower total investment in wind capacity will be required to achieve the effects seen in this analysis.

The next steps we see to expand this analysis and more carefully assess the interrelationship of Midwest region wind and transmission are as follows:

* Continue to analyze different sensitivities with the existing model structure. In particular, examine wind performance changes, gas price changes, and differing levels of coal plant retirement.

* Conduct a production cost and resource expansion analysis that considers a more formally optimal resource expansion path given specific levels of coal plant retirement in the region, and given policies on carbon emissions and renewable portfolio standards post-2026.

* Incorporate MISO’s neighboring regions in the analysis. In particular, model import and export effects that will be seen, especially given the existing connections and the possible expansion of extra-high-voltage interconnections to the Southwest Power Pool, PJM, and the regions immediately west of MISO’s boundaries. Incorporate the effects of likely increased coordination between markets and system operators.

* Incorporate the effects of aggressive demand-side measures in assessing future loads and the need for any particular level of resource expansion.

* More carefully analyze the “flexibility” need and supply resource projections of the region, and how this will affect transmission expansion needs.

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