Jun 20, 2012

Blowing in the Wind


I suppose I should feel guilty, just as I imagine the good citizens of Rio might feel when they complain about the giant Jesus towering over the city, but I just don’t like the windmill at the top of Grouse Mountain. For me, it not only is a manufactured blight on an otherwise stunning landscape, but it reminds me daily what is so wrong with our cost and reason-be-damned pursuit of all things seemingly green.

I understand why the wind lobby is so keen on building thousands of megawatts of wind capacity. There is a fortune of money to be made selling electricity to BC Hydro at the very high prices BC Hydro has been offering private suppliers of power. I just despair about government policy and, sadly, the more zealous proponents of green energy, that don’t understand the relatively low value of wind energy in an integrated system like BC Hydro’s.

The great strength of the BC Hydro system is its ability to store energy and shape electricity production to when it is most valuable. Ever since the emergence of open access wholesale markets in Alberta and the U.S., BC Hydro’s trading subsidiary Powerex has been making hundreds of millions of dollars per year by buying power in the spring time or in off-peak periods when it is relatively cheap, and selling it in other seasons or time periods when it is much more valuable. It is a form of arbitrage BC Hydro is uniquely capable of doing with its large hydro reservoirs to the great benefit of British Columbians.

BC Hydro’s reservoirs enable it to control how much power it produces at any point in time. When it wants to buy power in the wholesale markets, it reduces the amount of electricity it generates at its hydro stations, and uses purchased power instead of its own generation to meet its requirements.  And when BC Hydro wants to sell power in the wholesale markets, it  increases its own hydro production so it has surplus available for sale. It uses its reservoir system to optimize when it lets the water behind the dam go through its generators to produce electricity. The flexibility to control the timing of production is key. That is what enables BC Hydro to take advantage of the large and growing seasonal and daily price spreads in the market.

The problem with wind energy, and it is also true (worse in some ways) with run-of-river power, is you can’t control when the electricity is produced. With wind energy you get the electricity when the wind blows; with run-of-river when the creeks are full. When BC Hydro commits to acquiring those sources of supply, it doesn’t get the wind and run-of-river energy when it wants the power; it gets the power whenever it is produced.

As a result, wind and run-of-river energy reduce the flexibility — the very valuable arbitrage potential — of the BC Hydro system.

Powerex’s trading operations last week provide a perfect example of the problem. Wholesale power prices were negative much of last week. Sellers had to pay buyers to take power off their hands. It was, one can readily appreciate, a perfect time to buy. But what was Powerex doing? It certainly wasn’t buying as much power as the transmission interties would allow, despite the fact it would be paid to do so. And at times it was even exporting — receiving either very low prices, and toward the end of the week paying people to take the surplus power BC Hydro had and could do nothing about .

Heavy rains and high water levels in its reservoirs were no doubt a factor. BC Hydro can only store or spill so much water. A certain amount has to go through the generators producing electricity. But exacerbating that unavoidable  circumstance were the commitments BC Hydro has made to acquire power from wind and run-of-river producers whenever that energy is produced. That limited BC Hydro’s flexibility to manage how much energy and surplus it had during this period of low and negative wholesale prices.

With apologies to Gertrude Stein, energy is not energy is not energy. How the energy fits into the system matters. And the fact is, excessive amounts of wind and run-of-river don’t fit in very well — at least not if you want Powerex to continue the very valuable arbitrage operations for the benefit of British Columbians.





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