Wind Subsidies and ‘Predatory Pricing’ in Texas (Part I)

“Wind and solar generators often are the low bidders in the market not because the capital, operational, or marginal costs—without government interventions—of developing wind and solar generation are lower. They are low bidders because the subsidies lead investors in renewable generation to act as if they have lower costs overall.”

Renewable energy generators are driving other, more reliable sources of energy out of the Texas electricity market. The reason is straightforward. Renewable generators often undercut the prices of their competitors by selling electricity below their costs, and even their marginal costs, to gain market share.

In many ways, this behavior is similar to predatory pricing, one of the classic “anticompetitive” behaviors in antitrust theory. But unlike in free markets where predatory pricing is difficult and rare, government intervention has uniquely set up intermittent wind power to ruin the economics of reliable, conventional power.

What is Predatory Pricing?

In anti-trust theory, “predatory pricing … is an economic phenomenon whereby a company lowers its prices (possibly below costs) in an attempt to drive rivals out of the market. The predatory firm is then expected to increase prices, after competitors have been forced out of the market, to a level that allows them to recoup any losses incurred during the predation period” (Mises.org).

In a free market, though, there are reasons to believe that predatory pricing may not actually occur because it does not benefit the firm lowering prices. This is because “rival firms could just exit the market when prices are lowered and re-enter when prices are increased. Even if rival firms are forced out of the market when prices are increased by the predatory firm, this could induce new competitors into the market” (Mises.org).

Investment in Renewable Generation Driven by Profits from Subsidies

The possibility of companies benefiting in the long run by selling below their costs looks more promising in a competitive Texas electricity market distorted by renewable energy subsidies.

ERCOT reports that “system-wide prices in the ERCOT wholesale market tend to be lower when more wind generation is being produced [because] the ERCOT market generally uses the lowest-cost resources to meet consumer demand.” “Lowest-cost resources” refers to the “lowest-price” resources, which in the Texas market are heavily subsidized wind and solar generators.

ERCOT attributes lower prices of wind and solar to the fact that they “do not incur any fuel costs when producing electricity,” citing “federal tax credits” only as “a contributing factor.” However, this begs the question as to why inefficient, intermittent generation facilities like wind and solar are built in the first place. Just because wind and solar generators may have lower marginal costs does not mean they have lower overall costs. Investors do not invest in a generation asset because it has low marginal costs. They invest in a generation asset because they predict its overall costs will be lower than its revenue.

In Texas today, Wall Street is investing in wind and solar, which makes up almost all of the new generation coming online in ERCOT. Since 2016, wind generation has increased by 44.3% and solar generation has increased by 425.7%. All other sources of generation, except natural gas, have decreased. And natural gas has increased by only 18.2 percent. In terms of MWh, total generation since 2016 has increased by 31,059,835 MWh. Of that total, renewables make up 27,123,039 MWh, or 87.3% of the increase.

The decisions to invest in wind and solar is made attractive because of two non-market factors. First, wind and solar generators in Texas (and many other states) can lower their costs due to local property tax abatements and subsidized transmission. Second, wind and solar generators can increase their revenue through the federal Production Tax Credit (PTC) and Investment Tax Credit (ITC) and state Renewable Energy Credits (RECs).

Figure 1: Texas Renewable Subsidies That Skew Investment Decisions – 2006-19
Renewable Cost SubsidiesRenewable Revenue Subsidies
Transmission$8,211,000,000PTC & PTC        $9,538,000,000
Property Tax$1,116,000,000RECs$546,000,000
Total$9,327,000,000Total$10,084,000,000
Source: The High Cost of Renewable Energy Subsidies

The effect of these subsidies on investment decisions should not be underestimated. For instance, “[i]n 2016, new wind was eligible for a $23 per MWh PTC, 39% of that year’s EIA levelized cost estimate of $58.5 per MWh.”

Today, the “PTC for wind farms that begin construction in 2020 is $15 per MWh, which is 44% of the $34.10 per MWh levelized cost of building and operating a new on-shore wind facility in 2020” (America’s Power).

Ginn and Nikolaou explain why this weighs heavily on investment decisions: “Since the bulk of the costs for renewable projects are fixed, the profitability of new projects are dependent on current and future fiscal and regulatory environment,” i.e., subsidies, rather than on the price of electricity.

Further highlighting the dependence of investment decisions on subsidies in is that the “intermittent nature of wind and solar means that renewable operations are likely to systematically receive a lower overall market price than the average generator” (Wyman).

Billionaire investor Warren Buffet acknowledges the importance of subsidies on investment in wind farms. “[O]n wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit” (Bastasch).

Wind and solar generators often are the low bidders in the market not because the capital, operational, or marginal costs—without government interventions—of developing wind and solar generation are lower. They are low bidders because the subsidies lead investors in renewable generation to act as if they have lower costs overall.

Investors and renewable generators thus conduct what otherwise would be irrational behavior in two primary ways. First, investing in and building generation facilities that sell electricity at prices below what is needed to recover their overall investment. Second, selling electricity below their almost zero-dollar marginal costs, i.e., engaging in negative pricing, when the generators pay “buyers” to take electricity.

The result of these dynamics is a near monopoly on new investment by the renewable energy industry in Texas. In Part 2 tomorrow, we’ll examine how this is harming competition in the Texas electricity market.


Bill Peacock is Policy Director at The Energy Alliance, a project of the Texas Business Coalition. This post is a revised version of a study prepared for the Alliance. Formerly vice president of research at the Texas Public Policy Foundation, Bill holds a B. A. in History from the University of Northern Colorado and a M.B.A. with an emphasis in public finance from the University of Houston.

The post Wind Subsidies and ‘Predatory Pricing’ in Texas (Part I) appeared first on Master Resource.

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October 13, 2020 at 01:13AM

Author: uwe.roland.gross

Don`t worry there is no significant man- made global warming. The global warming scare is not driven by science but driven by politics. Al Gore and the UN are dead wrong on climate fears. The IPCC process is a perversion of science.