Bacon's Rebellion

The Ascendancy of Gas and Wind

A front-page article in the Wall Street Journal today highlights how the rapid rise of wind and natural gas is forcing electric utilities to close older coal- and nuclear-powered generating units. Last year natural gas surpassed coal as the leading source of electricity, and wind provides energy at the lowest price of any source.

Last year the wholesale price of electric power averaged less than $25 per megawatt hour in Texas, which has the most deregulated electricity market in the country. The wholesale price has fallen as low as $29 in the PJM Interconnection grid (of which Virginia is a part), which arguably operates the most sophisticated interstate grid in the country. PJM benefits from the construction of gas-fired plants tapping cheap Marcellus shale gas and extensive wind farms in the Midwest.

Citing a study by investment bank Lazard, the WSJ gave the following average unsubsidized cost of generating power from different electricity sources:

But the WSJ provides one very big caveat: Those numbers don’t factor in the intermittent production of wind and solar. A megawatt of electricity that is “dispatchable” — that is, it can be produced when called upon to meet demand — has greater economic value than a megawatt of electricity from a source that produces output when the sun is out and the wind is blowing.

I’m still trying to figure out the economics of this. As I understand it, the marginal cost of operating a wind or solar facility is essentially zero. The energy source is free, and the manpower requirements are negligible. Thus, wind and solar producers dump all of their production into wholesale markets, undercutting coal, gas and nuclear generating units that actually have operating costs. As a consequence, coal and nuclear are losing market share and, increasingly, many units are unable to operate profitably. Even less efficient gas-fired units may be in trouble.

Question: If the wholesale price for electricity is below the unsubsidized cost of generating electricity in the PJM system, how can anyone justify building new capacity of any kind?

Another question: What happens if dozens of coal and nuclear plants in the PJM system shut down? Will there be sufficient capacity to meet base-load demands for electricity, especially at night when solar isn’t producing? There is plenty of wind power at night, but not in Virginia. There is only so much power the electric grid can transmit from Midwestern wind farms to Virginia.

I have seen no indication that PJM’s experts are worried about these problems, so maybe I’m raising a non-issue. All I can say is that the electrical industry works according to laws of economics like no other.

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