The previous section described the economic and environmental benefits that could be realized through the addition of 10,000 MW of wind-powered electricity generating capacity in the 12 states having the greatest wind generation potential of the contiguous 48 states. These benefits, while positive and attractive, do not consider the impact of adding wind power on customers’ electricity bills. In this section, we more carefully consider the rate impact by means of a Texas case study. We focus on Texas because that state has the second most energetic wind resource (only slightly less than North Dakota) and the highest energy consumption among the 12 windiest states. In addition, Texas has been active in assessing the renewable energy resources within the state.²²

Methodology

The method for studying the benefits and rate impacts of adding new wind-energy-generating capacity in Texas resembles that used in the national study in the previous section. Like the national analysis, the Texas study uses a spreadsheet to model the impacts of adding new wind-energy-generating capacity in the state. The Texas model proceeds from a similar set of assumptions as before, but with a few additional economic assumptions that relate to the calculation of ratepayer impacts:

The approach begins by dividing Texas’ annual electrical energy sales revenues by the total annual consumption to arrive at a selling price averaged over all sources and all rates. We then assume a representative value for wholesale conventional electricity costs in Texas consistent with wholesale market clearing prices and busbar generation costs reported in public references. Then we calculate the ratio of average selling price to representative wholesale cost. The resulting multiplier is applied consistently to wholesale energy from conventional and wind sources. As discussed below, this approach tends to overstate the impact of wind on average rates, but we have chosen to add a measure of conservatism to the analysis. Next, we calculate the difference in retail rates with and without the added wind capacity. On this basis, we arrive at a single illustrative value for the impact on the average rates.

Assumptions

All assumptions from the previous analysis are used in the Texas analysis, with the following exceptions and additions.

Additional Assumptions in the Texas Case Study
General assumptions	Economic assumptions
Amount of capacity allocated to Texas	Average energy selling price Costs other than generation Average cost of energy Energy usage escalation rate Cost of energy from added wind

Amount of new capacity installed in Texas: We allocate to Texas 3,050 of the 10,000 MW of wind-powered generating capacity assumed to be added in the United States. We arrive at this allocation by taking the average ratio of Texas’ wind resource potential and electrical energy consumption compared to the 12 state totals. Among the 12 states with the greatest wind energy potential, 12 percent of that potential exists in Texas. In addition, 49 percent of the energy consumption of these 12 states occurs in Texas. The average of these percentages, 30.5 percent, was the basis for the amount of new wind energy generating capacity installed in Texas: 3,050 MW, or, for purposes of comparison, about 4.1% of Texas’ 1996 combined utility and non-utility generating capacity of 74,645 MW.²³ (A total of 4,067 wind turbines rated at 750 kW would provide the required capacity.) While this procedure is indeed somewhat arbitrary, our purpose here is to estimate the rate impact of a large but roughly plausible capacity addition, rather than to predict what size addition would meet future conditions.

We assume the same installation schedule used in the national analysis, but scaled down for Texas, as shown in Figure 4.

Average retail electricity price: We use in our analysis an average retail electricity price in Texas of 6.2552 cents per kWh. We derive this price from state-reported electricity usage, and expense values documented by the Energy Information Administration.²⁴ By dividing the annual electricity revenues by the annual consumption of kWh statewide, we calculated an average retail electricity price. This price is averaged over all sources, rates, and electric utilities in Texas. The average retail electricity price was held constant over the ten-year study period.

Average wholesale cost of electricity: We assume for this analysis that the added wind-generated power is interconnected at the transmission-system level, and thus is a source of wholesale electricity. We have assumed a value of 2.5 cents per kWh for the latter, based on current typical market clearing prices in states with open transmission access (such as California). This results in a multiplier (i.e., the ratio of retail to wholesale price) of 2.502, or approximately 2.5. We apply this same multiplier to wind energy costs in calculating retail rate impacts.²⁵

The average cost of electricity was assumed to remain constant over the ten-year study period.

Energy consumption: Estimates of the total electrical en-ergy consumption in Texas are derived by escalating the state’s 1993 reported energy consumption at 2 percent per year throughout the study period. This is an extremely conservative projection: due to heat and economic growth, electricity consumption in Texas has increased at 3.2% in 1995, 3.7% in 1996, and 5.9% in 1997.²⁶ The projected energy consumption in Texas is given in Table 5. The values shown are used in the analysis of price impact.

Cost of new wind-generated energy: The cost of energy from added wind power in Texas is assumed to be 4 cents/kWh. This value is held constant throughout the ten-year study period. The assumed average cost of wind-generated electricity does not account for the 1.5-cent/kWh production tax credit currently available for wind facilities from the federal government.

Results

Land and wind resource availability: Texas would require approximately 190 square miles, or 486 square kilometers, for the addition of 3,050 MW of new wind-energy generating capacity. From Table 1 we can see that Texas has 123,700 square kilometers of available windy land area. Developing this capacity would require the use of only 0.39 per-cent of the available windy land area in the state. Table 1 also shows that the available wind capacity potential in Texas is 136,100 MW. The 3,050 MW of new wind energy capacity assumed to be installed in Texas amounts to just 2.24 percent of this potential.

Capital costs: As shown in Table 6, the cumulative capital cost of the 3,050 MW in Texas is approximately $2.16 billion.

Maintenance costs: At completion of the installation of the 3,050 MW of wind-turbine capacity in Texas, the ongoing labor and material expenditures for unscheduled and preventive maintenance would be approximately $28 million per year, held constant over the remaining twenty years of the project’s life. Table 7 shows the year-by-year calculation of maintenance expenses.

Energy production and revenue: As shown in Table 8, the energy production from the new wind energy generating capacity in Texas reaches 6.6 billion kWh annually. Assuming a sales price of 4 cents/kWh for wind energy, revenues reach $263 million annually when all of the capacity has been installed. The analysis is based on the assumption that only half of the capacity installed in a given year is functional during the year of installation. The remainder is assumed to come on line in the following year.

Land-use payments: At two percent of the wind energy production revenue, land-use easement payments to landowners in Texas would be approximately $5.3 million per year.

Environmental benefits: As explained above, precise calculation of the environmental benefits of wind power lies beyond the scope of this study. However, we estimate that the added wind-driven generating capacity in Texas would displace approximately 4.6 million tons of CO₂, 43,000 tons of SO₂, and 17,000 tons of NO_x.²⁷ In addition, there would be no radioactive or hazardous emissions associated with this renewable energy generation capacity. In some plausible policy hypotheses, owners of wind capacity could earn credits from avoiding the emission of NO_x and CO₂.

As a further benefit, this capacity would add to the diversity of energy supplies in Texas and would help mitigate the effects of fossil fuel price changes.

Impact on average retail electricity prices in Texas: After full installation of the 3,050 MW of added wind power capacity, using the above assumptions and the values summarized later, and with no economic recognition given to the environmental and employment benefits of wind power to energy providers or ratepayers, the impact on the average rate is 0.075 cents per kWh. For a Texas ratepayer using 12,000 kWh per year, this would amount to an added 75 cents per monthly bill or about 9 dollars annually. Table 9 shows the calculations leading to this result.

The calculations and data shown in Table 9 result from the following procedure:

Step 1 The procedure begins by projecting the total energy usage in Texas for each year (column 6). These values were shown previously in Table 5, Projected Energy Consumption in Texas. This total annual energy usage is assumed to be supplied by a mixture of conventional and wind sources.

Step 2 Calculated next is the contribution to the total annual energy usage from the increasing capacity of wind turbines added annually during the study period, with full operational capability achieved in 2007 (column 4). These values are the same as those shown previously in Table 8, Energy Production and Revenue in Texas Example, above. Two uses are made of these wind energy contributions.

Step 3 For the first use, the wind energy contribution (column 4) is subtracted from the total annual energy usage values (column 6) to arrive at the contribution each year from the conventional sources (column 7). The total cost of the conventional source contribution (column 8) is then calculated using the assumed constant cost of energy value 2.50 cents per kWh.

Step 4 In the second use, the total cost of the wind energy contribution (column 5) is calculated from the wind energy contribution (column 4), assuming a constant cost of 4.0 cents per kWh.

Step 5 The cost of energy from conventional (column 8) and wind (column 5) sources are then summed to arrive at a total cost of energy for each year. When divided by the total annual energy usage (column 9), we arrive at the composite cost of energy in cents per kWh (column 9).

Step 6 Then, the composite cost of energy (column 9) is marked up by the multiplier of 2.502. We thus arrive at the composite retail energy price (REP) for each year (column 10).

Step 7 Finally, the assumed conventional retail energy price of 6.2552 cents per kWh is subtracted from the composite retail energy price (column 10) to derive the annual impact on average rates (column 11). Forming the difference completes the comparison.

From the last entry in column 11 of Table 9, we see that the impact on the average electricity rate of adding the full 3,050 MW of wind in Texas is 0.0749 cents per kWh. For a Texas ratepayer using 1,000 kWh per month, or 12,000 kWh per year, this would add 75 cents to the monthly bill or about 9 dollars annually.

Sensitivity to variations in wind and conventional energy costs: The above illustrative example estimates retail electricity rate impacts in the case where wholesale costs are 2.5 and 4.0 cents per kWh for conventional and wind energy, respectively. If the cost differential were 3 cents rather than 1.5 cents, then the rate impact would simply be doubled. However, in that case, the degree of conservatism, as discussed above in Footnote 25, would be even greater; so the actual rate impact would likely be less than double. If the wind and wholesale energy costs become equal, either because conventional costs rise, wind costs drop, or some combination of the two, then our analysis approach would predict a zero impact on average retail rates. To the extent that wind generation incurs incremental transmission and/or wheeling charges, the analysis would understate the retail-rate impact in this case. However the actual impact would almost certainly be less than that calculated in our Table 9 base case.

Discussion

The following conclusions follow from the analysis of our Texas hypothesis:

• Wind resources in Texas are more than adequate to power the 3,050 MW of new wind-energy-based generating capacity assumed in this study.
• The addition of 3,050 MW of new wind turbines in Texas over ten years would result in the creation of over $2 billion in new economic activity, even apart from the activity generated by servicing the wind units.
• The impact on retail electricity prices of such an addition in Texas would be small if the additional costs of the use of wind energy were spread evenly among all energy consumers.

Again, these conclusions are sensitive to the assumptions made in the analysis. As noted previously, the analysis in this study was kept as simple as possible in order to keep the analysis general and the methodology clear. Several issues merit further discussion and analysis in future iterations of this study.

Transmission costs: The issue of transmission costs discussed above in the analysis of the 10,000 MW total greatly pertains to Texas, where the bulk of the wind resource blows far from existing load centers. Texas calculates transmission fees on the basis of a complex formula adopted by the Public Utility Commission of Texas and implemented by the Electric Reliability Council of Texas (ERCOT). Only about 30 percent of the transmission fee reflects the transmission distance; factors determining the remaining 70 percent include the size of the load and scheduling constraints. On average, these transmission fees currently are assessed at about $13,500 per MW annually. Adding these transmission fees to the cost of wind-generated energy calculated for Texas would result in a 15 to 16 percent increase in the cost of wind energy on a per-kWh basis. This is equivalent to increasing the assumed levelized cost of 4 cents/kWh for wind energy to approximately 4.6 cents.

It is currently unclear whether new wind generating capacity in Texas would be subject to transmission fees at all, and if so, what the amount would be. Relative to the average transmission cost of approximately $13,500 per MW per year, the state might actually assess lower transmission costs for new wind-driven, energy-generating facilities. Much of the transmission fee reflects load size, and since windfarms tend to be small and dispersed relative to conventional generation facilities, these costs may tend to be low.

These estimates of transmission costs are based on planned or scheduled loads. Currently, unplanned loads in ERCOT do not pay any scheduling fees. To the extent that wind power facilities qualify as unplanned loads, the issue of transmission fees may be eliminated entirely.

A more likely scenario is that windfarms will qualify for reduced fees under new dynamic scheduling through ERCOT. With dynamic scheduling, facilities schedule an upper and lower load limit for any given time, but do not schedule for transmission of firm loads. The dynamic schedule may be most appropriate for wind facilities.²⁸

Again, transmission costs are not unique to wind power. Any new generating facility, regardless of fuel type, must interconnect with the transmission system. The cost of this interconnection can be highly variable, and can increase the total cost of energy from the facility significantly. For these reasons, we do not include transmission costs in our model. Nevertheless, even at 15%, the impact on rates of adding wind capacity remains relatively modest. And, as discussed above in footnote #25, our base case analysis implicitly includes an increment in excess of this amount.

Use of average electricity rates: The result of this model’s use of average rates is that the costs of added electric power generated by wind-driven turbines are distributed equally among all kilowatt-hours sold in Texas. The use of average rates has the effect of distributing the cost of new wind energy generating capacity as widely as possible, and with the lowest possible impact on a per-kWh basis. Our rationale for this decision is straightforward: that policy makers’ likely rationale for encouraging wind development will be its environmental and economic benefits. Because these benefits will accrue to all Texans, we presume that policy makers will find it appropriate to spread the modest cost as evenly as possible.

Nevertheless, our treatment here has sacrificed some detail for the sake of clarity. Different utilities sell kilowatt-hours at different prices to different customers in different customer groups within the state. The outcomes of complex regulatory and other ratemaking processes determine the allocation of costs among residential, commercial and industrial customer groups. Although an equal distribution of costs among all kWh sold may be a policy goal of these ratemaking processes, it is rarely the only goal, and it is even more rarely the result.

In the future, as the electric utility industry becomes more competitive, regulatory processes to determine rates may become less common, or at least less stringent, allowing utility and energy supply companies more flexibility in assigning specific costs to specific customer groups. Some utilities may choose to recover the costs of renewable energy from voluntary “green power” customers, customers who agree to pay a premium rate for energy derived from renewable sources.

Permitting costs: This analysis did not consider permitting costs. The process of obtaining permits for large-scale installations of wind energy generating capacity in Texas or nationwide may be costly and time consuming, unless streamlined processes can be developed. A consensus-building exercise involving environmental constituent groups could speed the permitting process and decrease costs. Were wind development an important policy goal or even an increasingly important economic activity, it is possible that state policy makers would help organize such a process. Of course, permitting difficulties may be equally severe for proposed powerplants using conventional resources.

Recommendations for Future Study

The analysis given in this section for expansion of wind-driven electric power generation in the state of Texas illustrates an important point of this paper: the incorporation of substantial numbers of wind turbines presents few significant land use, technical, or economic problems. Indeed, the analysis illuminates the direct economic benefits and shows that the impact on average rates can be small. With further assumptions about the variability of forward fuel prices, recognition of indirect economic impacts (the multiplier effect of the direct economic impacts), and recognition of the environmental benefits, the integration of large amounts of wind-generated power may be shown to result in reduced energy costs. On the other hand, it is possible that, for a particular region, there may exist significant short-term constraints, such as inadequate or inaccessible transmission capacity or an abundance of clean, low-cost fossil fuel sources.

While these and other further assumptions and refinements were not incorporated into the analysis and model presented here, we recognize that they are important and should be included in a more comprehensive analysis. They were omitted because, in any given state or region, there are particular circumstances that do not appear in other locales. Thus to include a more extensive list of factors would complicate the analysis and possibly reduce its general applicability.

In applying variations of this model or others to assess the impact of incorporating large amounts of wind power in a particular state or region, analysts should consider the following refinements:

1. The analysis should integrate the properties, locations and costs of transmission capacity relative to the prospective windfarm locations.

2. The use of averaged rates, as done initially to develop and illustrate the method, is overly simplistic. While analyses can be performed to examine the sensitivity of price impacts to changes in the average costs of energy, a more comprehensive description of sector energy usage and rates within a state, region, or utility service territory may be appropriate.

3. Similarly, the costs of wind power should be compared with those of other generation sources available during the period of comparison.

4. The distinction between cost and price should be maintained with a more comprehensive description of their ratio for electricity suppliers.

5. Since projections of future cost for almost any commodity or product are fraught with uncertainty, a sensitivity analysis should take into account projections of fuel prices, efficiencies of fossil-fueled generation sources and costs of both renewable and conventional generation sources.

6. Some economic consideration should be given to the possibility of more stringent environmental regulations.

7. The availability of energy production, financing and other incentives should be incorporated into the methodology, both for conventional and renewable sources.

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