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Paper by Former American Experiment Intern Reveals the Hidden Cost of Wind to Electricity Consumers

Last month the Odell Wind Farm went on line in Southwestern Minnesota, which will add another 200 megawatts of electricity to Xcel Energy’s portfolio.  Xcel claims this addition of wind will result in savings for customers, but analysis by Tyler McNeal—a former American Experiment intern—calls such savings into question.

According to an Xcel news release, this addition of 100 industrial wind turbines “is part of a commitment Xcel Energy made in 2013 to increase its wind capacity by 42 percent by adding 750 megawatts of cost-effective, clean wind energy in the Upper Midwest by the end of 2016.”

This is just the latest example of Xcel’s public relations effort to sell it’s very, very expensive goal to cut carbon emissions 60 percent by 2030.

Xcel might claim these wind additions are cost-effective, but cost-effective doesn’t necessarily mean low cost.  Cost-effective just means Xcel aims to meet their aggressive goals by containing cost increases in an “effective” way.  Xcel’s own Renewable Energy Standard (RES) Rate Impact Report estimates retail rates are 70 cents per kilowatt hour higher in 2016 than they would be if the company used non-renewable resources.

That said, Xcel’s petition to gain approval for the Odell Wind Farm and two other wind farms does make a specific claim that these wind additions will deliver savings.  The claim is not outside the realm of possibility thanks to the federal government’s Production Tax Credit (PTC) for wind generation and lower pricing on power purchase agreements (PPAs) for wind these days.

While possible, there are strong reasons to question this claim.

A principal reason is that wind in Minnesota is a very low “value” energy source.  That’s because the wind blows the strongest and, therefore, produces the most electricity when demand for electricity is the lowest.  This is true on both a seasonal and daily basis.  Wind blows strongest in the spring and the fall and at night when electricity usage is the lowest. As a result, wind on average sells at a lower price than other sources of electricity.  The lower sale price poses a cost, which is referred to as a “profile cost.”

Everyone in the electricity industry knows this is true, but it is real hard to quantify the actual cost because most data from the industry is considered proprietary and, consequently, inaccessible.

Not too long ago, however, I discovered the Wapsipinicon Wind Farm in Southeastern Minnesota regularly reports hourly wind production data to the Minnesota Public Utilities Commission (PUC).  With that data, you can match the contracted price of the wind to the sale price of the wind into the wholesale market on an hourly basis.  The difference between the contracted price and wholesale price reveals the profile cost.

Data in hand, last summer I asked Tyler McNeal—an American Experiment intern who recently graduated with a Bachelor of Science in Neuroscience from the University of Minnesota—to analyze the Wapsipinicon wind farm’s profile cost.  With his educational background in math and science, he was a bit overqualified for the task.

What did he find?

He found the average price of the electricity the wind farm sold into the wholesale market was 1.8 cents for 2012 and 2.4 cents for 2013. That compares to a much higher contract price of 6.2 cents for 2012 and 6.3 cents for 2013.  For the Southern Minnesota Municipal Power Agency—the utility buying the wind at the higher contract price—this translated to an annual profile cost of $14.6 million in 2012 and $12.7 million in 2013.  This represented 6.2 percent of the utility’s expenses in 2012 and 5.2 percent in 2013.

McNeal describes his methodology and analysis in much greater detail in a paper published in Comparative Advantage, Stanford’s Undergraduate Economics Journal.  He also recently published a summary of his findings at MasterResource.org, “a blog dedicated to analysis and commentary about energy markets and public policy.”

Many PPAs these days start with contract prices closer to three cents per kilowatt hour, not six.  Xcel pays 3.3 cents per kilowatt hour for electricity form the Prairie Rose Wind Farm, according to FERC filings.  McNeal’s analysis shows that, even at those prices, a utility is very possibly losing money on their wind contracts because the timing of the generation hits low-value periods.  The fact is, 3 cent/kWh electricity generated from wind when electricity is valued at an average of 2 cents is more expensive than 4 cent/kWh electricity generated from natural gas when electricity is valued at an average of 5 cents.

As more and more wind enters the grid, the value proposition only gets worse because wind additions will increase supply at times when demand and, therefore, the price of electricity is already sagging.

Paging through Xcel’s petition to gain approval for the Odell Wind Farm reveals absolutely no discussion of the fact that the wind blows when demand for electricity is low.  If their modeling assumptions neglected the profile cost of wind, then their claimed savings are illusory.




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