by Keith D. Foote
A very strange thing happened in Texas. What is called the ?spot price of electricity,? fell toward zero, then hit zero, and after that, went into the negative for several hours. While the people of Texas slept, power producers were paying their customers, instead of vice versa. During that night, the price dropped to a negative $8.52 a megawatt hour. The wind blowing across Texas was turning 100s of wind turbines, and generating huge amounts of electricity at a time when very little was actually needed.
Most economists would say this was impossible, but they're not doing business in Texas. According to market tradition, especially in economies devoted to the free market, sellers do not provide a service or product at a negative cost. There is normally no profit with behavior of this sort. But circumstances in Texas led to exactly that, and curiously, this could only happen in Texas (at least in terms of using wind). Texas has created its own unique approach to handling electricity. There are three factors which are unique to Texas.
Texas is, first and foremost, an electrical island. This state is known for behaving as though it is a sovereign nation, and for nearly 10 years it actually was an independent republic. It is the only one of the 48 continental states running an electrical grid not connected to those serving other states. The grid is run by Ercot (Electric Reliability Council of Texas). The majority of states are normally part of larger regional body, such as MISO, which oversees the grid in a large part of the country's center, or PJM, which covers 13 states in the Middle Atlantic and mid-America. As an electrical island, Texas has developed much greater control over its electrical market. As a consequence, Texas does not suffer blackouts if there are problems in New Mexico or California. On the downside, this also means electricity generated in Texas must be consumed at the time it's produced. It can?t be sold to another grid, where other consumers might use it.
Second, the state of Texas has far more wind power available than any other state in the nation. Texas has more wind turbines (15,635 megawatts worth) than any other state in the Union. Texas has nearly 10,000 turbines, and gets 9 percent of its electrical power from wind. In 2014, wind power supplied 4.4 percent of electricity produced in the United States, as a whole.
Demand for electricity varies a great deal over the course of the day in Texas, as is true of most places. It increases as people wake up. They turn on the lights, fix breakfast, and go to work. Traditionally, usage peaks in the late afternoon. At night, usage drops abruptly. Wind speed and direction can change quite a bit, causing variables. So, at 2 AM, if the wind is very strong, wind power can become a major force. On March 29th, for example, at 2:12 AM, the wind generated about 40% of Texas' electricity. The great part about this is the wind is free. Unlike coal or natural gas, there is no cost for fuel. Once a turbine starts running, the wind is free.
Thirdly, Texas has a market structure that is ?unique.? ERCOT has set up a complicated grid system. It is set up in a way that acquires large amount of electricity through a continuous series of auctions. Power generators in Texas electronically bid every five minutes in ERCOT?s real-time market. They offer to provide blocks of energy at specific prices. The electrical council selects the lowest bids and the most sensible from a grid-management ideal. At 15 minute intervals, the bids settle down, at the price for electricity is accepted in the round.
Free or negative wholesale prices for power can, and do, occur in other places within the U.S. electrical systems, primarily when there is a large mismatch between demand and supply. The Energy Information Administration has identified 84 separate instances of negative prices occurring in the Northwest U.S. In 2011. This was the result of an abundant hydro-power supply during periods of low demand.
In Texas, after midnight on a Sunday, the combination of these factors caused the price of electricity to drop. Demand fell significantly at 4 AM. The electricity needed by Texas at this time was about 45% lower than the evenings peak. The wind blew constantly. At 3 AM, the wind was supplying about 30% of Texas' electricity. Because Texas is an electrical island, all the electricity generated by the state?s wind turbines could not be sold to grids in other parts of the country.
The situation gave wind-farms a great opportunity to not just lower prices, but actually pay consumers (though, in truth, the money came from the Federal Government).
This is possible because of a tax credit paying $23 per MW hour. Normally, the wind bid is made at the lowest prices. Because there are no fuel costs, it doesn?t cost much money to keep wind turbines turning after they have been built. A federal electrical production tax credit, paying 2.3 cents per kilowatt-hour, applies to each kilowatt of power generated. That means even if wind operators gave the electricity away, or offered the system money to take the electricity, they would still receive tax credits equaling $23 per megawatt-hour.