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Wind Power: the unintended consequence


The Australian Energy Market Commission has joined in the chorus that is being heralded by many fossil fuel generators in the last year: cheap electricity created by wind is threatening the overall supply of electricity.

For those in the know, the National Electricity Market is composed of many electricity generators: coal-fired, gas-fired, wind power and now residential solar PV. The problem with the latter two is that they produce electricity on a scale that is far cheaper than the traditional fossil fuel generators. While this is not a problem for the environment as it results in fewer emissions, it is a problem for the security of supply. This arises from the interactions of these generators in the NEM.

Each generator sells their generation into the market every five minutes. The bid their generation at a price that reflects the cost embedded in generating that power, known as the Short Run Marginal Cost of generation. Coal and gas generation is high because of the embedded costs of extracting resources and running large power stations. Wind is very cheap because once the initial capital involved in building a wind farm has been made, electricity is generated at a near zero cost per MWh. This means that if wind is bidding against coal and gas, wind will invariably win and be paid to produce while coal will set idle. This has exacerbated by the introduction of the carbon price which has increased the price of coal and gas generation.

The problem lies in the time when the wind is not blowing. If in this time wind cannot meet demand and as we have seen coal generators have gone off-line because they cannot compete in the NEM and are no longer profitable; a supply deficit is created.