If the research of Matthew Butner interests you, the CU Energy Club is hosting Energy Talks throughout the Fall semester and YOU can come! To join them, meet this Friday at noon in Koelbel 375.
In an energy conscious state like Colorado, many people think that energy production should have as small of a carbon footprint as possible. This fuels impressions that installing more renewable energy resources (think wind turbines and solar farms) is inherently good. Consumers salivate at the thought of reducing power bills by using generators with free fuels like wind and sunlight. And yet, research by economics PhD candidate Matthew Butner turns this assumption on its head. Although renewable resources do save money, these savings are padding the pockets of electricity producers rather than electricity consumers.
The rapidly decreasing cost of producing electricity by renewable energy sources is a well-reported phenomenon. Decreasing costs turn into increasing profits, a trend that’s reflected in how renewables account for a larger and larger majority share of the new electricity-generating commissions with each passing year.
While it’s easy for consumers to see increased adoption of renewables (such as wind turbines replacing smoke stacks), the economic trends underlying the switch to these renewable resources are rarely as intuitive or visible. There is no guarantee that consumers are saving money just because the wind turbines are spinning.
Butner started from the same idealistic notions that most consumers have, saying: “renewable generation is great–it is reducing the price [of electricity], and thus traditional electricity producers must act more competitively”. Butner instead found that the rules and mechanisms for how electricity is bought and sold incentivize energy producers to limit the output of their conventional energy generators. This ultimately drives up the price of electricity and diminishes the magnitude of savings passed on to consumers.
Energy trading in wholesale markets uses a common economics model: the supply curve (or merit order) model. In this model, a central authority (the market operator) receives supply bids from all interested electricity producers. Supply bids denote the quantities of electricity that producers offer from each of their generators and the price they want to receive for that quantity. The operator records these supply bids and gives preference to those offering electricity at the lowest cost. Demand bids are simultaneously gathered from consumers to find the real electricity demand.
The intersection of supply and demand sets the universal price which active producers will be paid for the electricity from each of their generators. Only those generators whose supply bid is less than the universal price are commissioned to actually supply electricity to consumers. This bidding process is used because it should incite competition amongst producers to offer lower-priced supply bids.
The quantities of electricity producers offer from each of their generators are an indispensable factor for market operators determining the composition of the supply curve. Butner however is interested in the opposite: the quantities of electricity that producers don’t offer.
The act of offering less electricity than a generator’s capacity is known as withholding, and Butner hypothesized that producers use this strategy to increase their overall revenues by driving up the cost consumers pay for electricity from their wind turbines.
To test this hypothesis, Butner used publicly available data from the Midcontinent Independent System Operator, an organization offering the most extensive dataset on electricity producers’ generation from conventional and wind sources. In his analysis, Butner found that some electricity producers withhold output from their own coal or gas-fueled generators when their wind farms are active.
This withholding forces the market operator to request other, more expensive generators begin working to meet demand, which in turn raises the price all generators are paid for their electricity. This is a winning strategy for these electricity producers as it increases the revenue of their wind farms at no cost to themselves. Unfortunately, those increased revenues come straight from consumers’ pockets.
The withholding strategy is only viable for electricity producers who have a mixture of fuel sources–for instance wind and natural gas–as producers with no wind farms aren’t incentivized for restricting the amount of electricity from their coal or natural gas generators. Despite the limited applicability, producers who withhold electricity from their traditional sources still cause consumers to lose potentially millions of dollars in savings per day.
Butner’s work raises some difficult questions: how should the market be structured to maximize consumer kickbacks, and what (if anything) should be done to force electricity producers to divest from owning both wind and conventional generation sources? What might the future energy market look like when energy demand is fully met by renewable sources?
Spurred by the success of this research, Butner plans to expand his models to include other factors that market operators consider in their supply-side analysis of the electricity market (such as losses of electricity in the network during transportation). Butner also hopes to study how electricity-withholding producers change their bidding strategies in concert with fluctuations in electricity prices. As more renewable generation comes online, do electricity prices become more or less stable? Answering these questions is essential–ultimately, it is the everyday consumer who will pay for going with the wind.
By Adrian Unkeles