The economics of transmission constraints on wind farms: some evidence from South Australia

The impacts of transmission congestion and network investment on the development of the Australian wind energy industry have received growing attention from wind farm developers as well as relevant policy stakeholders such as the Australian Energy Market Commission (AEMC). There are many potential wind farm sites across the country with excellent wind regimes yet only limited transmission capacity. At least one wind farm in South Australia has spent a period following construction where its output was curtailed by transmission constraints (NEMMCO, 2009). Current market rules do not guarantee dispatch to an existing wind farm as more wind generation connects to the same transmission. Given the expense of transmission network extension and augmentation, there are interesting questions of what economic impacts such constraints might have for wind farm operators. This paper examines this issue in the context of the South Australian region of the Australian National Electricity Market (NEM). The State currently hosts almost half of total Australian wind generation capacity and has significant transmission capacity limitations for further development. Half hour wholesale electricity spot prices were used along with generation data from nine South Australian wind farms over the 2008-9 and 2009-10 financial years to assess the potential impact that transmission constraints might have had on wind farm revenue. Results showed that a number of the wind farms would have suffered only very limited revenue reductions from having significantly greater wind farm capacity than the rating of their transmission connection to the NEM. Importantly, some wind farms could be limited to a maximum power output of half their rated capacity and still achieve higher capacity factors then other already existing unconstrained wind farms. The key reasons for this are that wind farms do not generate at rated capacity for a great deal of the time over the year, periods of high wind generation appear to be associated with lower wholesale prices and there is significant variance between the wind farms capacity factors. Our findings suggest that there may be circumstances where wind farm developers might benefit from installing more wind turbines than the capacity of their transmission connection.