State renewable portfolio standards (RPS) are “crushing” the output of conventional generators and depressing the demand for coal and natural gas at regulated utilities, Bernstein Research said in a Sept. 27 commentary on commodities and power.
From 2007 through 2012, U.S. renewable power output has increased by some 140 million MWh, or 40%, according to the document by Bernstein Senior Analyst Hugh Wynne and Francois Broquin.
“Over the same period, U.S. power demand fell by 100 million MWh. With demand contracting and renewable generation growing rapidly, the output of the U.S. nuclear, coal and gas fired fleet fell by ~240 million MWh, or 6.5%, over 2007-2012,” according to Bernstein review. “With demand contracting and renewable generation growing rapidly, the output of the U.S. nuclear, coal and gas fired fleet fell by ~240 million MWh, or 6.5%, over 2007-2012.”
The reason behind this is the RPS obligations adopted by 29 states and the District of Columbia. Such standards require electric utilities to supply a stipulated fraction of their retail power sales from renewables. Together, these jurisdictions account for about 65% of total U.S. power demand.
While wind and solar are more expensive sources of electricity than combine-cycle gas plants, renewable sources are supported by taxpayers via investment and production tax credits (PTC), the Sanford C. Bernstein affiliate said.
“U.S. citizens are being dunned an extra $50 to $80 MWh for each MWh of renewable generation they consume, relative to the cost of purchasing electricity in the wholesale market, and an extra $35 to $70/MWh relative to the all-in cost of electricity from a new CCGT [combined-cycle gas turbine],” the Bernstein researchers said.
Merchant generators take a hit while utilities ‘indifferent’
The Bernstein analysis predicts that the growth of renewable generation through 2020 will continue to suppress the output of conventional electric power.
Competitive power generators are most at risk from the renewable energy trend, Bernstein says. That’s because renewable generation affects both their power output and their gross margin per MWh.
In competitive power markets, generators are dispatched in ascending order of variable cost. Renewable sources typically operate at “zero variable cost.” Renewable units are dispatched ahead of conventional resources, “displacing their output and thus reducing their volume sales of electricity,” Bernstein said.
Second, by displacing conventional generators, renewable energy tends to depress the price of electricity. In the ERCOT market, for example, it’s not uncommon for wind units to offer their output in ERCOT at negative prices; what the plants lose on the sale of electricity, the expect to make up in production tax credits.
To avoid shutdown costs, coal and nuclear units are prepared to accept negative prices, in effect making a payment to ERCOT to avoid the even higher cost of shutdown and restart, said Bernstein’s Wynne and Broquin.
“By contrast, regulated utilities are to a large extent indifferent as to the level of their power output and the wholesale price of power,” according to the Bernstein analysis. Utilities are allowed to recover the cost of the electricity they generate or procure on behalf of their customers.
The RPS situation is dramatically decreasing the amount of energy being supplied by coal and natural gas, the Bernstein analysis concluded.