“Corrosive.” “Seriously flawed.” On the “brink of market failure.”That’s what critics say about New England’s forward capacity market (FCM), whereby ISO New England conducts...
Yet Another Subsidy For Wind?
FERC risks going overboard in easing penalties for generation imbalances.
Take an actual wind farm, this one with a capacity of 102 megawatts (MW), developed and brought on line by FPL Energy. Now consider what happened next with the Oklahoma Municipal Power Authority (OMPA), which owned a 50 percent share in the facility during its first full year of operation, beginning Sept. 29, 2003.
According to records assembled and analyzed by the Transmission Access Policy Study Group (TAPS), an association of municipal and other transmission-dependent utilities (TDUs), the wind farm did just about as good a job of incurring penalties for imbalances as producing profits from actual power sales.
Over the first 12 months, from October 2003 through September 2004, OMPA's share of the wind farm produced more than 154,000 MWh, at an average unit cost of $16.33/MWh. So far so good.
But wind is fickle. Wind turbine output often failed to match the schedules that OMPA would have filed with the control area operator (now also known as the balancing authority). In fact, over the full year, OMPA recorded some 14,000 MWh of excess power deliveries. Shortfalls ran higher—at 40,688 MWh—and that's the problem of most interest here.
These shortfalls, under typical transmission owner tariffs governing generation imbalances, and permitted by the Federal Energy Regulatory Commission (FERC), likely would have given rise to more than $3.4 million in imbalance penalties. That’s $22.10 per MWh—a third higher than the production cost. These harsh charges would have come from FERC’s so-called $100 “death penalty” ($100/MWh, or 10 cents per kilowatt-hour), which is calculated on all generator imbalances that exceed a dead-band of the greater of 2 MW, or plus or minus 1.5 percent of the plant’s schedule. (Energy imbalances, which occur when customer demand runs higher or lower than promised by load-serving entities, also trigger an identical $100 penalty, outside of an identical dead-band.) These penalties are sanctioned by FERC Order No. 888, which allowed transmission providers to build them into their generation interconnection agreements, for generation imbalances, and their pro forma open access transmission tariffs (OATT), for energy imbalances.
To be accurate, the TAPS analysis assumes that OMPA would have avoided its $16.33/MWh production cost on the under-deliveries, so that the net penalty would have come in a bit less than $100/MWh. And, to be conservative, TAPS recognizes that some economists might instead credit OMPA with a higher avoided production cost of $50. That would be the cost of production of a gas-fired turbine burning fuel at prices of $5/MMBtu, at a heat rate of 10,000 Btu/kWh-the theory being that a wind farm might actually turn to purchased power on margin in the short term to meet all its delivery obligations. Yet, even in this most conservative case, OMPA's wind-farm investment would have racked up more than $2 million in penalties for generator imbalances, worth $13.20/MWh, or nearly as high as the $16.33 cost of the power itself. (See FERC Docket No. AD04-13, Post-Technical Conference Comments, pp. 4-8,