9 Wind Energy: Grid Integration Challenges April 2009 Copyright © 2009 by ScottMadden, Inc. All rights reserved. Wind Energy: Grid Integration Challenges EXECUTIVE SUMMARY As heightened renewable portfolio standards are mandated across the United States, wind energy has moved to the forefront of the renewable power discussion. Wind is a clean source of energy, and its lack of reliance on fossil fuels makes it even more attractive as the country tries to reduce the impact of carbon-based fuels through renewable portfolio standards and emerging federal carbon constraints. Wind has proven relatively inexpensive to operate and maintain compared to conventional generation resources; however, there are integration costs that must be taken into consideration when assessing it. At the end of 2008, the United States had 25 GW of installed wind capacity, led by Texas and followed by Iowa. Wind power is materially different than conventional generation resources. It cannot be dispatched on demand, and it is nearly impossible to forecast with precision. Because of these characteristics, wind power presents a number of challenges for system operators, and additional reserves are typically required to maintain system adequacy. We reviewed a number of studies performed over the past six years to analyze the impact of wind power on reserve requirements and to calculate the associated costs, but there is relatively little information on actual reserve increases due to wind. Two of the studies reported specific findings—the addition of 1,500 MW and 3,300 MW of wind (15% and 10% penetration, respectively) resulted in increased regulation requirements of 8 MW and 36 MW. The remainder of the reports only noted that increases in regulation requirements were “modest.” Because the forecasted increases in reserve capacity were minimal, there was limited discussion of firming capacity with new combustion turbines (which, for reference, have a projected capital cost of $670 per KW as of March 2009). Instead, discussions centered around utilization of current resources—both spinning and non-spinning reserves— to address the additional capacity needs. For the studies surveyed, integration costs to incorporate wind power ranged from $0.45 to $8.84 per MWh generated, with an average of $4.56. The integration costs consistently comprised less than 10% of the wholesale value of wind energy, and those areas with higher wind penetrations tended to have higher costs per MWh. In addition, new transmission infrastructure will likely be required, and recent studies show a median estimate of $15 per MWh for capital construction costs. Each of these estimates, in addition to the changes in reserve requirements, rely heavily on a number of site-specific and operator-specific factors, including wind plant location, correlation with load profiles, forecasting capabilities, and conventional generation resources located within the balancing area. While the published reports address a number of important issues, we feel there are key components missing from the analyses. None of the studies were modeled on a capacity constrained grid. The assumption was made that reserves will come from current grid resources; however by the time wind generation is in place, those resources may not be available, and peaking capacity may need to be built. In addition, systems for demand 1 Wind Energy: Grid Integration Challenges response and grid-stability control are not addressed. Each of these issues, omitted by the studies, will likely raise integration costs above the published findings—perhaps significantly. For more information on this and other efficient energy topics, please contact us: Jere “Jake” Jacobi Partner 3495 Piedmont Road, Building 10, Suite 805 Atlanta, GA 30305 404.814.0020 Michael Anckner Managing Associate 3495 Piedmont Road, Building 10, Suite 805 Atlanta, GA 30305 404.814.0020 Raleigh Office 2626 Glenwood Avenue, Suite 480 Raleigh, NC 27608 919-781-4191 2 Wind Energy: Grid Integration Challenges INTRODUCTION All electric systems must maintain a balance between the aggregate demand for power and the total power fed into the system. This is a complicated task that requires detailed planning, automatic controls, and experienced operators who have thorough knowledge of the operating characteristics of power plants in the control area. Because power supply must match demand at all times, and because there is a greater-than-zero probability of an interruption in generation supply from conventional resources, sufficient reserves must be established and maintained to ensure integrity of the system. These reserves consist of both spinning and non-spinning generation, and along with reactive power and regulation, are known as the ancillary services needed to support grid operation. Wind generation is a factor of wind availability and speed, and, consequently, it must be utilized “as delivered.” Because wind generation cannot be dispatched on demand, other conventional resources must be used to fill the gap between available wind power and total demand of the system. In addition, these same conventional resources must provide reserve capacity and ancillary services, ensuring that supply meets demand at all times. Unfortunately for grid operators, wind generation does not function in a similar fashion to conventional generation resources. Wind exhibits both variability and uncertainty. The variability of wind generation impacts all time horizons of power system operations—seconds, minutes, hours, and days. In addition, wind (as well as solar generation) is not a load-following resource. These two issues, combined with the fact that it is nearly impossible to precisely forecast wind at any given point in time, create grid stability concerns for operators and the need for operational flexibility. One option to achieve this flexibility is to increase operating reserves for the system. Higher reserves allow more flexibility for operators to maneuver should wind generation ramp up or ramp down more quickly than previously forecast. An alternative view is that relatively small additional operating reserves are required if the capacity value of wind plants is properly discounted. In either case, increasing reserves creates additional costs. To address grid frequency issues, one option is the addition of short-term energy storage devices such as those based on flywheel technology. There are currently multiple pilots in Regional Transmission Organizations (RTOs) (CALISO, PJM, and NYISO) for a flywheel technology solution to improve grid frequency stability. The U.S. Department of Energy (DOE) is reviewing a loan guarantee grant for Beacon Power to develop their flywheel technology for the express purpose of grid stabilization. In contrast to reserve costs, the costs for short-term energy storage devices are not included in any available wind penetration study to date. Although existing wind penetration studies acknowledge that increasing amounts of wind generation on the transmission grid create the need for additional capacity, the prevalent view is that this capacity will be accessed from another resource on the grid. It is our opinion that these alternative sources of capacity are becoming increasingly scarce and may not be available in several years when there is a larger contingent of wind generators on the grid. 3 Wind Energy: Grid Integration Challenges The needed capacity is likely to come from new combustion turbines (CTs). These costs are also not accounted for in any available wind penetration study. As will be explored, studies that have tried to estimate the impact of wind penetration have not been made for a capacity constrained grid. Despite the economic slowdown, the margin of reserves in various NERC regions has declined and is projected to continue that descent, especially as the current recessionary pressures begin to abate. As an example, published NERC data indicates that by 2013, capacity in the Reliability First NERC region (RFC) will fall below the NERC reference level and below the reference level including adjusted capacity resources in 2017. For the Midwest Reliability Organization NERC region (MRO), the comparable dates are 2010 and 2017. Other NERC regions are projected to experience differing levels of decline for capacity reserves, but project reserve shortfalls are expected in many areas. Figure 1: RFC-MISO Summer Capacity Margin Comparison Source: NERC 2008 Long-Term Reliability Assessment 2008-2017 We will use RFC as a reference point. In RFC, current wind penetration studies do not take into account the role of planned demand response on grid capacity. There is no projected increase in load-demand management in RFC from 2008 to 2017, but 6,000 MW of curtailable load (mostly from large industrial customers) and 1,000 MW of direct control small devices (water heaters, home appliances, etc.) are currently available in the region. 4 Wind Energy: Grid Integration Challenges INTEGRATION COSTS A number of studies have shown that the variability and uncertainty of wind generation increase operating costs for an electric system due primarily to the challenge created for ancillary services. This increased burden is referred to as integration costs. As wind penetration rates increase, so do the integration costs for the system. To properly understand the impact of wind generation, three grid operating parameters must be analyzed: • Regulation: time horizon of one minute to one hour (1- to 5-second increments) • Load following: time horizon of one hour to several hours (5- to 10-minute increments) • Unit commitment: time horizon of several hours to one week (1-hour increments) A number of studies have been completed over the last six years to assess the financial impact of integrating wind generation into the grid and delineate that impact across these operating parameters. The studies have documented a wide range of potential integration costs with an average of $4.56 per MWh. Costs are higher in more recent studies, with those from 2007 averaging $6.59 per MWh. The results can be seen in Figure 2 below. Figure 2: Summary of Wind Power Integration Studies (Costs in $/MWh) Wind Capacity Penetration Regulation Load Following Unit Commitment Gas Supply Total ($/MWh) Date Study 2003 Xcel-UWIG 3.5% $0 $0.41 $1.44 n/a $1.85 2003 We Energies 29% $1.02 $0.15 $1.75 n/a $2.92 2004 Xcel-MNDOC 15% $0.23 n/a $4.37 n/a $4.60 2005 PacifiCorp 20% $0 1.60 $3.00 n/a $4.60 2006 CA RPS* 4% $0.45 Trace Trace n/a $0.45 2006 Xcel-PSCo 15% $0.20 n/a $3.32 $1.45 $4.97 2006 31% n/a n/a n/a n/a $4.41 2007 MN-MISO** Puget Sound Energy 10% n/a n/a n/a n/a $5.50 2007 AZ Public Service 15% $0.37 $2.65 $1.06 n/a $4.08 2007 Avista*** 30% $1.44 $4.40 $3.00 n/a $8.84 2007 Idaho Power 20% n/a n/a n/a n/a $7.92 *Regulation costs represent three-year average **Highest over three-year evaluation period ***Unit commitment includes cost of wind forecast error Source: Berkeley Lab, based in part on data from NREL 5 Wind Energy: Grid Integration Challenges COST ESTIMATION METHODOLOGIES Before discussing the results of the wind integration studies, it is important to understand how the costs were calculated. The studies use a variety of methods to calculate integration costs. For regulation, one such method is based on “opportunity cost.” This process computes the opportunity cost of reserving incremental capacity that could otherwise be utilized in the market: • First, a number of statistical methodologies are employed to determine the increase in reserves needed for each time horizon • Second, the reserves are converted into potential MWh that could be generated in a given year • Third, potential MWh are multiplied by an appropriate profit margin to determine wouldbe profit (or total opportunity cost) • Finally, the calculated profit is divided by a capacity-discounted estimate of annual wind generation to determine the opportunity cost per MWh For example, in the 2004 Xcel-MNDOC study, the incremental regulation cost of installing 1,500 MW of wind generation was calculated to be $0.23 per MWh using the following steps: • Statistical models determined the necessary increase in regulation reserves to account for wind variability was approximately 7.8 MW • 7.8 MW was multiplied by 8,760 hours per year to determine potential generation of 68,328 MWh associated with the reserves • 68,328 MWh was then multiplied by a profit margin of $15 per MWh to determine a total opportunity cost of $1,024,920 • The total opportunity cost was then divided by total MWh for 1500 MW of wind generation with a 35% capacity factor (~4.5 million MWh) • The result is an incremental regulation cost of $0.23 per MWh An alternative method is to base the calculation on capacity value. This technique yields similar results to the opportunity cost example discussed above. As for unit commitment costs, they are typically defined as a total of the incremental production, priced at hour-ahead energy costs, divided by the total amount of wind energy delivered during the study period. While each study varied slightly with the method employed for calculating integration costs, the results were not materially different and are comparable for discussion purposes. 6 Wind Energy: Grid Integration Challenges KEY OBSERVATIONS FROM THE STUDIES Each referenced integration study was performed for a specific utility or location, but there are some consistent themes throughout the results. The key observations from the studies and a brief discussion of each are noted below. 1. Integration costs increase as wind penetration rates increase As more wind generation is introduced to an electric system, variability and uncertainty increase on a system-wide basis. This creates the need for additional operational flexibility in the form of increased reserves and leads to higher integration costs. Figure 3 compares integration costs per MWh to wind penetration rates from the 11 studies listed in the table. Figure 3: Wind Integration Cost per MWh vs. Penetration Rate $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 0% 5% 10% 15% 20% 25% 30% 35% Though the studies show a wide range of results, integration costs trend upward as penetration rates increase. It is important to note that both location and system dynamics can play a large role in incremental costs. 2. Total integration costs comprise less than 10% of power costs on average While integration costs can vary across regions due to a number of factors, this has been a consistent finding from all the studies performed over the last 10 years with wind penetrations of 20% or less. 3. The majority of integration costs are driven by the unit commitment time horizon Conventional generation resources are scheduled by system operators to maximize their efficiency and deliver the lowest cost of energy produced. When wind is introduced into an electric system, the imprecision of its day-ahead forecasting can create ramp-up situations where reserve power must be deployed to follow the load and sub-optimal generation sources are used, thereby driving up costs. 7 Wind Energy: Grid Integration Challenges 4. Regulation costs are relatively low While wind-forecasting error can create the need for reserve power on a more consistent basis, the increase in required reserves has been found to be relatively modest across the studies. Costs can vary based on a number of factors, including the correlation of wind generation with system load and the type of reserves employed. If the majority of wind generation scheduled is during non-peak hours, it may not be necessary to increase reserves if a fluctuation would be relatively inconsequential. As for the type of reserves, the decision whether to use spinning or non-spinning with quick-start capability has been shown to influence regulation costs more than 50%. 5. Integration costs vary considerably by both month and year The studies show that actual wind performance can vary significantly from month to month and year to year. The Xcel-MNDOC study tracks hourly integration costs for the two years included in the analysis. The costs range from a high of $11.01 per MWh in a high-load month of Year One to a low of $1.64 per MWh in low-load month of Year Two. Variability seems reasonable, since months with higher loads mean more expensive generation is being called upon more frequently. Years with relatively higher rainfall can allow increased hydro generation to help fulfill reserve requirements, reducing costs. 6. Total production costs decrease as wind penetration increases Although integration costs for installing wind generation in an electric system must be considered, the total power production cost decreases as wind displaces conventional generation. Wind reduces the need for fossil fuels, and wind plants have considerably lower operations and maintenance (nonfuel O&M) costs than fossil plants. These lower production costs provide a direct benefit to consumers, though there are some disadvantages. Specifically, conventional power producers may see a rise in costs due to inefficient operation of committed units that results from sub-optimal scheduling. OPPORTUNITIES TO REDUCE INTEGRATION COSTS The variability and uncertainty of wind generation will always result in integration costs as wind power is incorporated into the grid. Fluctuations in wind speed throughout the day and imprecise forecasting create an additional burden for ancillary services above and beyond the level required for conventional generation. Studies have shown, however, that there are a number of measures that can be taken to reduce these costs. One such measure is increasing the geographic diversity of wind plants. Spreading wind plants across various locations in a state or balancing area and installing more turbines at each site can provide substantial “smoothing” of wind generation variations as the wind and 8 Wind Energy: Grid Integration Challenges output at various locations will not be perfectly correlated. This geographic diversity creates an aggregate wind generation supply that functions more like a stable source of power. Figure 4 was taken from the 2007 NBSO Wind Power Integration Study completed for the Maritimes provinces in Canada. It clearly shows a decrease in the hourly swing of total wind generation when eight locations are used instead of a single site. Figure 4: Wind Generation at a Single Site vs. Geographically Dispersed Sites Source: NBSO, ERNB: Maritime Area Wind Power Integration Study – Final Report While the variability is reduced, it is important to note that benefits begin to taper off as additional sites are added. Figure 5 plots the standard deviation and average swing magnitude for the same study. There are considerable benefits to adding the first three to four sites, but as additional locations are included, the slope of the line decreases significantly, indicating diminishing returns. Figure 5: Diminishing Returns of Adding Additional Sites Source: NBSO, ERNB: Maritime Area Wind Power Integration Study – Final Report 9 Wind Energy: Grid Integration Challenges Another opportunity to lower integration costs is to consolidate the balancing areas in which wind plants are located. High wind output variations and steep ramp-ups/ramp-downs in wind generation may be challenging for smaller balancing areas to accommodate. Larger areas with more diverse generation resources are likely to have additional options to accommodate variability. The diversity of options allows operators greater flexibility to schedule the most efficient resources for generation and reserve capacity, thereby lowering costs. In a similar manner, improved forecasting and better integration with control room operations can also reduce costs. Day-ahead forecasting for wind generation is typically based on a combination of historical data and forecasted weather conditions. In many cases, the historical data may not align with weather patterns for the particular day, leading to a substantial difference between forecast and actual generation. To mitigate this, it is important to monitor wind speeds throughout the day and update forecasts on an hour-ahead basis with as much real-time information as possible. Incorporating such hour-ahead forecasts into system operations will allow operators to track a ramp-up or ramp-down in wind power more effectively and mobilize the most efficient resource to accommodate wind generation swings. The ERCOT event of February 26, 2008 provides a vivid example of how system operations could benefit from improved forecasting. In that instance, system operators were forced to initiate an Emergency Electric Curtailment Plan (EECP) to address a worsening imbalance between load and generation and the resulting decline in system frequency. There were three major contributions to the crisis: 1) an unexpected loss of conventional generation, 2) a fasterthan-expected evening load ramp-up, and 3) a large ramp-down in wind generation. ERCOT relied on a day-ahead forecasting model that used data from the current day to predict upcoming load. On February 26, 2008, the previous day’s load profile forecast did not match the current day’s available generation. A deciding factor in this was the difference between forecast and actual wind and, therefore, wind generation output. Most short-term wind forecasts use sophisticated mathematical models that take a number of factors into account, relying heavily on past results. Because there is a delay in information, forecasts may anticipate the correct shape of the wind profile, but the timing of that profile may be shifted forward or backward in time. This was the case for ERCOT. To improve forecasting and load management, real-time wind observations from a number of different sites around the operating area should be incorporated into the control room. System operators should monitor this data, compare it to earlier forecasts, and make necessary adjustments. This practice would facilitate utilization of the most efficient reserves. A final suggestion for lowering integration costs is to use purchased power as an alternative to internal resources for reserve capacity. Though day-ahead and hour-ahead markets need to be further developed in many areas of the country, the wholesale energy market could serve as a balancing source for wind energy and has significant potential to reduce integration costs. For example, in day-ahead planning, it would be possible to schedule hourly transactions consistent with the forecast variability of wind generation. On a shorter-term 10 Wind Energy: Grid Integration Challenges basis, hour-ahead purchases from the wholesale market could provide increased flexibility when dealing with forecast errors, displacing the use of more expensive internal generation resources. While this option presents a good opportunity, it is only viable if wholesale power is available for purchase; and some predictions indicate this may not be likely in particular regions once significant wind generation is in place. TRANSMISSION IMPACT In addition to concerns about the impact on operations and overall production costs, one of the main barriers to wind power is integration into the transmission grid. The best locations for wind generation are typically in remote areas, and in many cases there is not adequate transmission infrastructure in place to access the wind resources. To complicate matters, interconnect queues around the United States have recently seen all-time highs for both requests and backlogs. Although queuing processes are being streamlined by RTOs, the underlying problem is a lack of adequate transmission resources, coupled with long lead times to increase resources, even if queues and backlogs are reduced substantially. Currently, we seek to add wind faster than we can add the necessary transmission. In 2008, the DOE estimated that there is a backlog of almost 300 GW of wind projects waiting to connect to the grid due to inadequate transmission capacity. It is difficult to estimate the incremental transmission costs for an individual utility without studying the specific sites proposed for wind plants. A recent report by Berkeley National Laboratory estimated incremental transmission capital costs for a number of different areas of the country, including a median estimate of $15 per MWh of wind energy for new transmission build. The report concluded that incremental transmission costs do not necessarily increase with higher levels of wind generation. This is because cost per MWh is most influenced by the cost of long transmission lines to access new wind generation. Figure 6 shows the results of this study. Capital costs of transmission are plotted on the bottom axis, and total wind generation analyzed for each region is plotted on the top axis. 11 Wind Energy: Grid Integration Challenges Figure 6: Unit Cost of Transmission for Wind ($/MWh) Source: Berkeley National Labs: The Cost of Transmission for Wind Energy: A Review of Transmission Planning Studies Additionally, a number of studies have been completed for the United States. One recent report, developed through a collaborative effort of RTOs, estimated we would need to construct more than 15,000 miles of new transmission lines to accommodate 20% wind energy by 2024 in the Eastern Interconnection alone. This would cost approximately $80 billion. 12 Wind Energy: Grid Integration Challenges BENEFITS AND COSTS OF INCORPORATING WIND ENERGY Though there are significant costs and challenges to integrate wind energy, most studies indicate that potential benefits far outweigh the costs. Integration costs due to the variability and uncertainty of wind are more than offset by the decrease in overall production costs as fossil generation is displaced, providing a direct benefit to consumers. This displacement also creates diversification of the energy portfolio and helps protect consumers from price volatility that can occur with fossil resources. Illustrating this price volatility risk, the average Texas household saw its annual electric bill increase by more than $750 from 1998 to 2006 as the price of natural gas tripled. In Texas, natural gas provides half of the state’s electricity. Since wind requires no feedstock or fossil fuels, the price of its power remains relatively constant over time and helps smooth such price spikes. In addition to reducing overall costs, wind provides substantial environmental benefits. Greenhouse gas emissions are reduced as a direct result of lower fossil generation. In a study by the DOE, results show that achieving 20% wind penetration in the United States by 2030 would reduce electric sector CO2 emissions by 825 million tons annually. With the new administration in Washington, DC and emerging federal carbon constraints (either through EPA regulation or legislation), these lower emissions could provide substantial value to producers. Another environmental benefit is reduced water consumption. Water scarcity has become an issue throughout the United States over the past several years due to persistent drought conditions. Electric generation accounts for nearly 50% of all water withdrawals, and while power producers recycle most of the water they withdraw, an average of 2% to 3% is lost through evaporation. Even with this relatively minor amount, the DOE estimates that more four trillion gallons of water could be saved (a cumulative 8% reduction) if the United States achieves 20% wind penetration by 2030. On the flip side, there is little documentation that captures the true cost of wind integration into the transmission grid and wholesale generating markets. CONCLUSION Wind power presents a number of challenges for system operators. Its variability and uncertainty create the need for more careful operation of an electric system, as well as the requirement to hold additional reserves. Each of these requirements contributes to the overall integration costs of wind power, which continue to increase as more recent studies are completed. In 2007, the average wind integration cost per MWh rose to $6.59 from a six-year average of $4.56, in addition to the capital cost of any required transmission. The amount of 13 Wind Energy: Grid Integration Challenges required reserves is difficult to estimate and is specific to a particular balancing area, though in most cases the studies assumed that current generation resources could be used to provide this capacity and no new facilities were needed. This report concludes that there has not been an adequate representation of wind integration costs in a reserve constrained environment. In summary, the available studies on wind penetration allude to, but do not adequately quantify, costs for significant wind penetration. Although it is recognized that wind is an energy-only resource, the general conclusion regarding firming capacity is that capacity will be available from existing resources interconnected to the grid. This is a dangerous assumption, at best. We believe that the need for incremental reserve capacity must be taken into account. Moreover, existing studies generally apply to small amounts of wind additions; they conclude little need for only supplementary resources. For a significant amount of wind penetration in a transmission-constrained zone, there should be a clearer picture outlined for incremental resource and cost requirements. There is a step-function change in requirements when transmission capacity is constrained, reserve margins are reduced, and wind additions are significant. Lastly, although this report indicates that the costs of wind integration have been largely underestimated, there is no clear set of decision rules regarding who will pay for the incremental costs. Cost allocation of transmission is currently the subject of a vigorous public policy discussion. In the case of firming capacity, the costs will likely be borne by the entity building the peaking gas capacity. In the case of short-term storage devices such as flywheel technology used for frequency control, the cost may be borne by an RTO or a utility that manages its own balancing authority and allocated to individual market participants or customers, or be borne by a single utility or group of utilities. 14 Integration Challenges of Wind Energy REFERENCES 1. 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