Wind power helping lower electricity prices

Originally published on the Beyond Zero Emissions (BZE) blog.

When it comes to wind energy for every setback there has been some good news.

In August, the Victorian government amended state planning rules for wind energy. The changes applied onerous conditions on wind energy projects and arbitrarily set up exclusion zones for vast tracts of the state. Whether it’s a community-owned project like Hepburn Wind or a utility-scale development, wind energy projects will be a lot harder to build in Victoria.

As Beyond Zero Emissions Executive Director Matthew Wright noted, “Ted Baillieu has put the brakes on Victoria’s transition to 100 per cent renewable energy.” The wind industry will now focus investment in states with reasonable planning policies and without the ideological opposition to renewable energy.

One such state is South Australia, where just a day after Baillieu’s backward step Labor Premier Mike Rann endorsed the construction of one of Australia’s largest wind farms—a massive 180 turbine, 600 MW farm that will generate enough electricity to power 200,000 homes every year.

This isn’t the only good news story about South Australia’s wind energy sector, which currently provides around 20 per cent of the state’s electricity. The increased penetration of wind energy is reducing the cost for consumers. This experience flies in the face of the fossil fuel lobby’s  ‘Can’t Do’ campaign’s claims that renewable energy will increase electricity bills and should not be built.

“While the levelised cost of energy from wind farms is higher than that of baseload coal and gas,” explains Giles Parkinson at Climate Spectator, “the deployment of wind energy here and overseas is having a surprising impact on energy market prices: it is causing them to fall.”

Why is this so?

The concept of the “merit order effect” is not one often discussed in the mainstream media, but it is the reason for wind resulting in reduced energy costs.

The national electricity market utilizes a “merit order dispatch system” (also known as “economic dispatch“). In this system, all energy production capacity (be it wind, coal, solar or gas) is ranked according to the price the generator bids into the market. Generation capacity is dispatched in order of merit (i.e. from lowest cost and upwards) to meet the demand (dispatch target) for a trading period. “The final price is set by the last generator needed to meet demand”, explains Parkinson of the merit order mechanism. “The higher the demand, the higher the price paid by all.” This merit order system ensures the system demand is met for the lowest possible cost.

The bids placed by the generators generally reflect the short run marginal cost of the generator, and typically renewable sources (e.g. wind and solar) have low marginal costs. As such, they are ranked lower in the merit order than high marginal cost plants (e.g. gas). Renewables, through the merit order dispatch process, can therefore defer or even avoid the dispatch of higher marginal cost generators, and consequently avoid the associated higher pool prices. Renewable generation can result in lower wholesale electricity prices than would otherwise be experienced.

Climate Spectator reported that Windlab Systems modelling suggests the proposed 700MW Kennedy wind farm in Queensland would cause pool prices to fall by about 9 per cent due to the merit order effect. Parkinson writes that this would equate to savings in costs to consumers of around $330 million, not including further cost benefit from a reduction in transmission losses because of the proximity of the wind farm.

Decisive action is needed from Australia’s politicians to grow the wind industry, which is ready to provide Australia with a massive swathe of clean, renewable electricity. Aside from reducing the carbon-intensity of our electricity sector, wind energy developments can result in savings for consumers meaning there are plenty of good reasons for politicians to act.

– BZE Media Team