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Offshore Wind Requires Understanding Wholesale Electric Energy Costs

As we continue to think about the development of distributed offshore windfarms, it is important to take a closer look at the wholesale cost of electric energy. The wholesale price varies across the United States, and in some states is not public information. Understanding the wholesale cost of electric energy will help consumers determine whether to purchase energy from an inland or an offshore supplier.

For this article, we focus on the wholesale price of electric energy in New York (New York ISO), California (CAISO) and at PJM (the Pennsylvania-New Jersey-Maryland Interconnection). These regional transmission operators were selected because electric energy production, transmission, and distribution are deregulated in these areas.

In future articles, we’ll take a closer look at retail prices for electric energy in other areas, with reference to this article as background. For now, let’s explore the typical cost of electric energy, methods of displaying those costs for customers to view, and marginal pricing determinations that utilities use to establish their pricing.

Cost of Electric Energy

The price of electric energy varies hour by hour and day by day based on available energy production capacity and consumer demand. Wholesale prices for electric energy are a function of supply and demand.

At 4 AM on any day in April, the marginal price of electricity can be less than $1 per MWH when the amount of energy available exceeds the demand. At 6 PM on any day in August, the marginal price of electricity can be $200 per MWH because of high demand for electricity. This price may be even higher when the energy is produced by operating high cost production facilities, such as diesel generators or combustion turbine generators.

At the time that Prescient checked, the marginal cost of electric energy was $16.85 per MWH in New York (Figure 1), $95.45 in California (Figure 2), and $38.87 in Washington, DC (Figure 3).

Figure 1 show the New York ISO day ahead pricing. Find today’s pricing here.

Figure 2 shows the California ISO marginal energy costs. Find today's pricing here.

Figure 3 shows the PJM locational marginal pricing. Find today's pricing here.

Each of the three regional transmission operators display their energy costs on an interactive website that customers are welcome to view. As you can see in the figures above, the New York electric energy market has 11 zones. The California electric energy market has hundreds of locations. The PJM electric energy market displays prices in hubs with selected interfaces (Figure 4).

Figure 4 shows PJM marginal pricing in Washington, DC.

It is important to note that PJM dispatches generation and coordinates the movement of wholesale electric energy in all or part of 13 states (Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, and West Virginia) and the District of Columbia. PJM’s markets include energy (day-ahead and real-time), capacity and ancillary services.

Comparing Pricing Methodologies

The California pricing methodology (myriad) is designed to accommodate an abundance of distributed, small scale production facilities. Every dot in Figure 2 represents a different price point. On any given day, most dots are the same color. Blue indicates that the cost of energy is negative. (Yes, blue indicates that producers are willing to pay consumers to take energy.) Red indicates that the cost of energy is very high.

Although the New York methodology (zonal) was designed to accommodate large scale production facilities, the zonal methodology works for both large and small production facilities. The zonal methodology is more practical than the myriad methodology.

The PJM methodology (hub) works well in areas with an abundance of production facilities and transmission pathways. During the 1970s, electric energy flowed west to east within PJM 24 hours a day, 365 days a year as low cost energy produced at mine mouth production facilities was transferred to east coast cities. Energy exchanges between New York ISO and PJM are limited because, in the 1960s, New York built a 345 KV transmission grid while PJM built a 500 KV transmission grid.

Marginal Price Determinations

The marginal price of electric energy is impacted by the configuration of the electric energy grid, forecasted energy production, and forecasted energy consumption. When transmission lines are removed from service for maintenance or repair, congestion pricing causes price increases in some areas and decreases in other areas. Production facilities will sell wholesale electric energy at less than the production cost when the cost to restart a facility after a shutdown is more than the cost of selling at a loss for several hours.

Some energy producers prefer to sign long term contracts to deliver predetermined amounts of energy at predetermined times on predetermined days. This guarantees a sustained rate of return on investment.

Some energy producers prefer to compete in the day to day market. This allows them to reap higher rewards during peak load periods, as was the case in Texas during the 2021 winter storm.

Understanding Costs Motivates Consumers and Utilities

During any year, the cost of electric energy can vary from almost nothing ($1 per MWH) to incredible high values (>500 per MWH). Low costs are expected in spring and fall. Extremely high costs occur when extreme temperatures occur, when multiple production facilities shut down at the same time, and when transmission line outages occur. Costs also vary greatly by location.

For consumers to want to purchase energy from offshore wind development, they must first understand the wholesale cost of electric energy. In theory, distributed offshore wind will provide electric energy at a lower wholesale cost than today's costs, especially on the west coast. This will increase consumer demand for the energy, which in turn should motivate electric utilities to invest in offshore wind development.

To learn more about our ideas for the next generation of offshore wind development, check out our other blogs posts:

Contact us to learn more.

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