Wind energy has an important role to play in reducing spot prices and checking increasing electricity prices by:
- displacing more expensive generation
- reducing risks associated with dry years
- reducing the impact of rising fossil fuel prices.
Displacing more expensive generation
Wind farms are likely to be used to generate whenever they have sufficient wind and transmission capacity to do so because generators have to offer wind energy into the electricity market at $0.01/MWh. As a result, wind energy generally displaces electricity that is offered in at a higher price. In New Zealand, the displaced electricity is usually thermal electricity. The overall result is lower spot prices when wind energy is available.
While the effect of wind energy on spot prices has not been quantified in New Zealand, overseas studies have quantified the effect of wind energy on electricity prices.
In Denmark, research by Paul Morthorst of the RISØ national research institute has shown that the price paid for electricity by consumers in the western part of the country (excluding transmission and distribution tariffs and VAT) would have been approximately 7 to 13% higher in 2005 if wind power had not made a contribution. This translates into a saving of 0.3 to 0.5 €cents per kWh consumed.
The Spanish Wind Energy Association has also found that introducing wind power into the Iberian market offsets the most expensive technologies and reduces the average electricity price. In 2005, every time an additional 1,000 MWh of wind power output was generated, the price reduced by 0.19 €cents/ kWh. At times of peak demand, the effect was even greater - a reduction of about 0.5 €cents/kWh.
Reducing risks associated with dry years
New Zealand has sufficient generating capacity to meet peaks in demand. However, because we rely heavily on hydro generation, having the energy (in the form of stored water) to generate electricity is not certain in ‘dry years' - years with low water inflows.
During dry years, electricity spot prices rise significantly. Carbon emissions also increase significantly as thermal generation is increased to meet demand. (Thermal generation is currently the second largest source of electricity in NZ, accounting for 37% of generation from July 2007 to June 2008.)
Greater amounts of wind generation will increase the diversity in New Zealand generation mix. This diversity in turn creates flexibility, so when there is a problem with one form of generation other sources can be used to meet demand without causing high spot prices or significantly increased carbon emissions.
Reducing the impact of rising fossil fuel prices
The fuel for wind farms - the wind - is free. This means the future cost of wind energy will not be affected by increasing fossil fuel prices or the cost of greenhouse gas emissions.
Increasing gas prices are already pushing up the price of thermal electricity in New Zealand. This trend is expected to continue. When the electricity sector enters the Emissions Trading Scheme in 2010 the price of thermal generation will increase further.