Cheap Wind Power Disrupting Brazilian Energy Market

As the cost of wind power drops, and the wind industry grows, wind farms have a greater impact on electricity markets. And one of those big impacts is reducing the price of electricity.

As we’ve been writing for years, due to the merit order effect, wind power lowers the price of wholesale electricity. At the same time, due to technology improvements and cost reductions from economies of scale, the overall cost of wind power has been coming down. As an example of that, the cost of wind power in Brazil has fallen 41% since 2009!

Wind farms have won 55% of contracts awarded by Brazil’s national energy agency, Empresa de Pesquisa Energetica, and wind power now costs about $45/MWh (4.5 cents/kWh) in the country. This has been deterring the construction of gas-fired power plants, prompting the decline of some bids from wind farms so that at least some gas-fired plants are built.

When the wind picks up, wind farms generate electricity very cheaply. So cheaply that they undercut the prices of the rest of the power plants.

Furthermore, as noted above, there’s the merit order effect. Here’s a short explanation of the merit order effect: “Electricity providers bid in order to sell their electricity on the electric grid. Because solar and wind don’t have fuel costs, the extra cost to supply electricity (when the sun is shining and the wind is blowing) is basically $0. With subsidies or feed-in tariffs, they can even sell for negative prices and make a profit. As a result of these clean energy sources’ $0 fuel costs, they can outbid every other energy source. And the overall effect from down-bidding everyone is that the wholesale price of electricity is lowered.”

Empresa de Pesquisa Energetica is now introducing separate categories for the electricity market, where fossil-fueled power plants can bid against other, and wind projects compete in a separate auction.

The reason cited for this is that low-cost wind energy prices biomass and fossil-fueled power plants out of the market.

“Wind energy is the most competitive, so if they mix together all the technologies they won’t be able to contract the amount of thermoelectric they want because thermoelectric plants are much more expensive,” said Elbia Melo, president of the local wind energy association.

Imagine if there was a cheap energy storage medium to capture the cheap wind energy generated and sell it at the times it is needed most, such as during peak hours, when electricity is expensive.

As the authors indicate, one of the factors determining how fast the capacity value declines to zero is the geographic dispersion of the wind resource. Thus, a larger region with a well-dispersed wind resource would have a much slower “decay” rate for capacity value than a compact region where all the wind was in the same place. But even if the entire United States is assumed to be a grid region for balancing load, there would be seasonal and diurnal wind patterns that would make it very difficult to count on any incremental capacity value for wind at high penetration levels.

Further, the prime wind areas in the continental U.S. are already largely taken.  There are still many that will support wind installations, but the quality of wind in them (both speed and intermittency) is lower and will be less profitable for builders of new plants. And, many windy areas are isolated and require transmission to consuming areas, but the authors did not take transmission issues into consideration, which would further increase cost. Also, areas that have a greater density of wind turbines will have lower quality wind.  An operating turbine propagates turbulence that lowers the ability of a downwind unit to produce steadily.