LCG Consulting’s Market and Grid Assessment Services for Wind Power
Wind power has been expanding rapidly, averaging about 15% annual growth over the last decade, but nearly 30% over the last 5 years. Announced plans as well as market drivers and trends suggest that this will continue. In part this reflects “supply-side” advances in wind turbine costs and performance, as well as in the understanding and use of wind resources. However, there has also been increased market demand for wind power, especially to mitigate the price volatility, supply security and environmental liabilities of the fossil fuels that dominate our energy system. There are various federal, state and local incentives for renewable generation, for which wind is the most promising near-term option. Of the 6,374 MW of U.S. wind generation capacity in place by the end of 2003, 52% was located in California and Texas, with an additional 16% in Minnesota and Iowa. These states all have Renewable Portfolio Standards (RPS) or renewable energy targets, as well as various financial incentives for renewable energy. Another 20 states each had at least 1 MW of installed wind power capacity at the end of 2003, mostly in western and plains states.
Wind developers, wind power purchasers, and society as a whole face important challenges in expanding and integrating wind power.
- Realistic market valuation of wind generation investments at different locations under evolving market designs and across a range of future contingencies, considering not only market energy prices, but also what fuel use, emissions and even capacity investments may be avoided by wind power additions.
- Gaining adequate transmission access to load centers, by optimal use of existing transmission and transmission rights, as well as by identifying and promoting appropriate new transmission investments.
- Understanding and mitigating the physical and financial disadvantages arising from the intermittency of wind generation on several time scales.
- Predictable temporal patterns of wind speed and wind generation often do not coincide with times of greatest need for power.
- Daily, hourly and intra-hourly uncertainties in wind farm output may create added costs for scheduling and for procurement and deployment of balancing energy and operating reserves.
- Brief output fluctuations can create grid power quality problems, especially at high levels of penetration on relatively weak grids.
An analysis platform is need that provides realistic, integrated simulation of
- the transmission grid and its constraints,
- interacting energy and ancillary services markets, and
- market drivers and uncertainties affecting physical operation and financial value.
Each of these challenges (market valuation, transmission access and intermittency) presents its own analytic requirements, and may be viewed somewhat differently from different perspectives, such as wind developers versus wind purchasers versus society overall (including regulators and voters). However, the various challenges and perspectives overlap. For example:
- Transmission limitations affect not only access to the market, but also market prices and wind’s market value at different locations.
- Intermittency affects market value, financial consequences of transmission constraints and the value of transmission rights.
- While wind developers seek long-term contracts with stable pricing, market valuation and intermittency issues influence what buyers are willing to pay. Furthermore, transmission constraints harm both sellers and buyers, unless market design provides full compensation for curtailment, in which case “society” pays.
In a competitive and dynamic energy system with growing interest in renewable energy, the above analytic challenges are critical.
LCG Consulting’s UPLAN Network Power Model (UPLAN) has been developed and extensively applied in numerous generation investment and supply assessments over more than a decade, keeping pace with market developments such as FERC’s SMD and new RTO/ISO protocols. It provides the ideal vehicle for analyzing wind generation investments, and has already been extensively applied for market valuation, transmission access, intermittency and other wind generation issues for various clients across WECC and ERCOT. Electricity storage can address wind’s intermittency problems, and UPLAN has been designed and used to assess the operation and financial value of electricity storage technologies in different U.S. market areas, including integration of storage with wind generation. UPLAN’s key features are summarized next.
Example Wind Power Analyses and Issues
Market-Based Valuation of Wind Energy. Realistic, detailed hourly simulation of the grid and market down to the bus level provides the best basis for market-based valuation of wind energy. It captures the effects of transmission constraints, since limited access to load centers is reflected in low energy prices or “value” at the wind farm location, relative to higher prices near load centers. Most simply from the perspective of “society” or of a wind developer selling into the spot market, discounted future revenues based on locational energy prices should recover the investment and other fixed costs plus provide an adequate return. More commonly, developers will seek long term contracts. Contract prices will likely be influenced by the buyer’s market value of a wind contract, which can be estimated based on projecting energy market locational prices at the wind farm interconnection with the grid, assuming that this is where the buyer takes delivery (thus being responsible for congestion costs).
However, valuation of wind energy typically includes extra-energy market “adders”. Assuming its renewal, the Federal Production Tax Credit (PTC) recently set to $18 per MWh of wind output provides an added revenue stream to wind project owners. Also, in some areas wind energy buyers obtain “renewable energy” value separate from energy commodity (locational price) value, and sometimes this renewable energy value is quantifiable and tradable, such as via “green tags” or “Renewable Energy Credits” (RECs). LCG’s realistic, detailed market simulations can help estimate the added renewable energy value even where no formal renewable energy “market” exists - - as the difference between observed renewable energy contract prices and locational energy commodity prices, or else based on above-market revenues renewable energy owners are calculated to require to obtain an adequate overall return.
Wind’s Ancillary Services Burden. Growing penetration of wind power with its partly unpredictable output may require increased procurement and costs for various ancillary services (A/S) such as regulation, spinning and non-spinning, reserves, and the associated increase in day- or week-ahead unit commitment. This A/S burden will depend on grid, market and location circumstances, including the statistical uncertainty in wind output when aggregated over individual turbines and even over multiple wind farms. Studies to date suggest that the added A/S burden may be minor for wind penetration in the 5% range, remaining moderate until penetration reaches about 20% . UPLAN provides realistic, detailed simulation of the grid, the energy-A/S market interaction and the unit commitment/dispatch processes. This provides an ideal basis for (1) realistically projecting the market-based costs of any added A/S requirements, including impacts on locational energy prices, and (2) calculating the physical reliability and security benefits of added generator commitment for synchronized reserves. Even if not directly allocated to wind energy buyers or sellers, the quantified A/S burden may be important for policy and transmission planning purposes.
Transmission Constraints and Expansion
Wind projects are often located in remote areas with limited transmission, so that access to loads becomes an issue. Transmission constraints can produce financial “congestion costs” reflected in reduced locational energy prices (market-based wind energy value), and can also lead to curtailment of wind output. Realistic, detailed modeling and analysis of the grid-market system is essential to assess physical curtailment and financial congestion risks, as well as the value of physical and financial transmission rights to hedge against these risks. It is also essential to realistically evaluate the impact of planned or potential transmission upgrades in alleviating these risks, not only to assess revenue and energy delivery prospects, but also to justify and optimize transmission investments enhancing access to loads. Wind generation’s intermittency can affect the value of transmission rights and transmission upgrades, and must be appropriately factored into the analyses.
Volatility Analysis in Wind Power Assessments. To be robust, informative and address risk, LCG’s generation investment and supply strategy studies often use volatility analysis to assess how uncertainties in key market drivers impact cash flows, asset values and other bottom line outcomes. For wind energy investments and purchases, volatility analysis is especially important for assessing in an explicit and structured manner the impact on wind energy value and sales volume of uncertainties in fossil fuel prices and environmental penalties, future market entry, wind output profiles, and transmission capability.
Intermittency Management. As wind power expands, there is growing interest in addressing intermittency issues in ways other than simply increasing reliance on ancillary services. This generally involves physically or financially linking wind power with storage or with other generation that is dispatchable or has complementary output patterns. Assessing such strategies requires detailed, realistic hourly simulation and analysis of transmission power flows, constraints and reliability, as well as locational energy prices and the commitment, dispatch and operating capabilities of individual generators. It requires credible volatility analysis, since risk and reliability are inherent to intermittency issues. For clients, LCG has modeled and analyzed wind-storage integration as well as physical and financial performance of diverse supply portfolios and technology combinations.