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Windmill Boom Curbs Electric Power Prices for RWE

Wind turbine
A flock of birds flies by smokestacks and cooling towers emitting smoke and water vapor next to wind turbines at the RWE AG owned coal-fired Weisweiler power station near Aachen, Germany, on Nov. 26, 2009. Photographer: Wolfgang von Brauchitsch/Bloomberg

On windy nights in northern Germany, consumers are paid to keep the lights on.

Twice this year, the nation’s 21,000 wind turbines pumped out so much power that utilities reduced customer bills for using the surplus electricity. Since the first rebate came with little fanfare at 5 a.m. one October day in 2008, payments have risen as high as 500.02 euros ($665) a megawatt-hour, about as much as a small factory or 1,000 homes use in 60 minutes.

The wind-energy boom in Europe and parts of Texas has begun to reduce bills for consumers. Electricity-network managers have even ordered windmills offline at times to trim supplies. That hurts profit for wind-farm operators, said Christian Kjaer, head of the European Wind Energy Association, which represents RWE AG of Germany, Spain’s Iberdrola SA and Dong Energy A/S of Denmark.

“We’re seeing that wind energy lowers prices, which is great for the consumers,” Kjaer said at his group’s conference in Warsaw this week. “We as producers have to acknowledge that this means operating the existing plant fewer hours a year, and this has an effect on investors” and profit.

After years of getting government incentives to install windmills, operators in Europe may have become their own worst enemy, reducing the total price paid for electricity in Germany, Europe’s biggest power market, by as much as 5 billion euros some years, according to a study this week by Poeyry, a Helsinki-based industry consultant.

Wind Capacity

Germany has doubled capacity to generate power from wind since 2002 and has turbines producing about 7.5 percent of the nation’s electricity, according to the German Wind Energy Association. That compares with 4.8 percent for the European Union and about 1 percent in the U.S. The turbines operate about a third of the time and are idle in calm weather.

“Wind is playing an important role in spot-price volatility because it’s very difficult to predict when more power is coming on line,” said Ruxandra Haradau-Doeser, an analyst at Bankhaus Metzler in Frankfurt.

The erratic nature of weather makes it difficult for utilities to estimate by how much wind power pushes down revenue they earn from competing energy sources such as natural gas. A spokeswoman at Bilbao, Spain-based Iberdrola, the world’s largest wind-power operator, declined to estimate.

Spanish power prices fell an annual 26 percent in the first quarter because of the surge in supplies from wind and hydroelectric production, the Spanish wind-industry trade group said in a statement yesterday on its Web site.

Negative Prices

RWE, Germany’s second-largest utility, minimizes the risks of having to pay consumers to use power by using a “broad” range of different generation technologies in different markets, a spokesman for the company said. Rebates, or negative prices, do not have a big negative effect on the company, he said.

“Negative electricity prices happen when supply outstrips demand and we literally don’t know where to put it,” Peter Smits, head of central Europe at Swiss power-equipment maker ABB Ltd., said in an interview on April 20 in Hanover. “We will see this happen more often in the future.”

One solution is more investment in transmission systems to move power from northern Germany wind farms to heavy industry in the south, he said. “Power transmission is the bottleneck.”

Power trading needs to be expanded further, Kjaer said. Tying European markets together, already done among France, the Netherlands and Belgium, lets temporary surpluses flow toward electricity-poor zones. Germany plans to join them on Sept. 7.

Price Volatility

Trading more electricity across markets reduces price volatility, spreading any excess capacity from wind and solar power plants across a broader area, he said.

Storing electricity may be another fix. In Scandinavia, Danish wind power is used to pump water into Norwegian and Swedish reservoirs and later released to drive hydroelectric plants when the wind is not blowing.

Nord Pool, the Nasdaq OMX Group Inc.-owned Scandinavian power bourse, last year took steps to encourage generators to limit production by implementing a minimum price. The most generators would pay users to take their power is 200 euros per megawatt hour if there is excess electricity from too much wind.

The measures are meant to “increase the effectiveness of the market forcing power generators to consider reducing their electricity generation or having to pay for delivering electricity,” the company said on its Web site.

Wind’s impact on prices results from its “low marginal costs,” which pushes more expensive technologies including natural gas and coal out of the market, the Poeyry study said. Fossil-fuel burning relies on fuel, which can boost the price of electricity from those sources.

Negative Power Prices

Texas had so-called negative power prices in the first half of 2008 because wind turbines in the western part of the state weren’t adequately linked with more populated regions in the east, according to the Electricity Reliability Council of Texas.

Until there’s more integration and better transmission grids, prices probably will fluctuate, leading to negative prices, in which payment to consumers is reflected as a discount on their monthly bills.

That hasn’t yet stopped the expansion of wind power. Britain now has wind turbines with the capacity to generate 1 gigawatt of power offshore, enough for 653,000 homes, the industry group RenewableUK said today.

China WindPower Group Ltd., Iberdrola and Duke Energy Corp. will lead development of an estimated $65 billion of wind farms, according to Bloomberg New Energy Finance. Around the world, the potential output of electricity from wind is already 157.9 gigawatts, according to the Global Wind Energy Council, a Brussels-based industry group.

Projects in Danger?

“I haven’t yet seen that negative pricing is a danger to new projects,” said Andrew Garrad, chief executive officer of GL Garrad Hassan, a wind consulting company. “We do need to get the right market mechanisms in place” to better integrate wind power into energy grids.

Wind power is as cheap as electricity made from burning coal on windy days, and those lower costs drive down power prices. In parts of Texas, some utilities are using wind power because it’s the cheapest form of energy, said Garrad.

China is the most attractive nation for developing wind energy, followed by the U.S. and Germany, Ernst & Young said yesterday in a study. The consultant surveyed factors such as unexploited energy resources, power rates, taxes and financing.

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