By: Roger Warehime, Manager, Energy Management & External Relations
Recently a customer questioned one of our employees regarding the rationale for all of the wind turbines that utilities have been installing in recent years. He felt that wind power was increasing electricity prices, and he was surprised to learn that utility investment in wind power is primarily the result of state mandates. Therefore, I decided to talk about wind power this month.
Minnesotais one of twenty-four states which have a renewable portfolio standard (RPS). An RPS is a state policy that requires electricity providers to obtain a minimum percentage of their power from renewable energy resources by a certain date. In Minnesotathe requirement is currently 7%. It will increase to 12% by 2012, 17% by 2016, 20% by 2020, and 25% by 2025. The standard imposed on Minnesota’s largest electric utility, Xcel Energy, is even more aggressive requiring 30% by 2025.
OPU purchases all of its wholesale electricity from our power agency, SMMPA (Southern Minnesota Municipal Power Agency). Therefore, we rely on SMMPA to comply with the state mandated standards. SMMPA, like other utilities in the state, has relied primarily on wind energy to meet the RPS. Minnesotahas a strong wind resource and wind power is the least expensive renewable energy resource capable of providing utility-scale power at the levels required by the RPS.
SMMPA ‘s experience with wind power began in 2001, several years before the current RPS became law in 2007. Two wind turbines were installed near Fairmont. The cost of the turbines was funded by our green pricing program which allowed customers to pay a little extra on their utility bill in order to fund renewable energy development. These first two turbines produced an amount of energy equivalent to the needs of approximately 700 homes. Four larger turbines were installed between 2003 and 2005 (two near Fairmontand two near RedwoodFalls), bringing the total renewable energy being produced up to the equivalent of 3,400 homes.
In 2008 (with the current RPS in place), SMMPA entered a 20 year fixed-price contract to purchase output from a 67 turbine wind farm located near Dexter (between Rochesterand Austin). The output from this wind farm is enough to meet the energy requirements of 45,000 homes.
With the wind farm, 13.5% of the electricity provided to OPU by SMMPA is from renewable energy sources. This is significantly greater than the current requirement of 7%, and even in excess of the 2012 requirement of 12%. Fortunately, utilities that have more renewable energy than is needed can sell the excess as Renewable Energy Credits (RECs) to other utilities that happen to be short of the requirements. Alternately, a utility can essentially bank RECs and use them to count toward the requirement in a future year. The current price for RECs is extremely low so SMMPA has decided to bank the RECs it has produced and purchase additional RECs on the market. With these RECs, we will continue to meet the requirements until approximately 2019 without any additional investments.
So what effect is all of this wind power having on rates? It is actually difficult to say. Estimates from various studies have varied greatly. Factors such as wholesale rates, fuel prices, and electricity demand are always changing, making it difficult to compare the cost of electricity with and without wind power in the mix.
While the RECs (credit for renewable energy) can be “banked”, the actual energy produced from wind turbines cannot. Electricity must be used at the same time it is produced. This is a problem for wind turbines because they often produce electricity when demand for electricity is low (at night and during the spring and fall). When electricity is produced during periods of low demand, it must be sold into the wholesale market at a loss.
For SMMPA, this loss is approximately $10 million per year. To put that in perspective, $10 million equates to roughly 5% of the cost SMMPA charges its members for wholesale electricity. That doesn’t mean, however, that wind power has caused rates to increase by 5%. The loss is the result of the difference between the fixed-price contract for wind power and the wholesale market price at which the wind power can be sold. Due primarily to the recession and lower natural gas prices, the market price for wholesale electricity is significantly lower than it was just a few years ago. Will wholesale prices increase in the future? Probably. When that happens the cost wind power will look good again.
