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Windy City Congestion Increasing Due To…Wind?

For a city commonly known as the Windy City, wind power has historically played a relatively small role in Chicago’s electricity generation. However, that has begun to change. Over the last few years, over 4 GW of wind farms have been brought to market in central Illinois and western Indiana. All that wind generation has caused an interesting pricing dynamic. First, overall power pricing in Chicago has been decreasing. However, the congestion component of power pricing has been increasing. Today’s Energy Market Insight will focus on this shifting dynamic, and what implications it may have for Midwest power markets.

Utilizing the BTU Power View, one of the first things we want to look at is how wind has been increasing in PJM near Chicago. By filtering down to existing wind generation in Illinois and Indiana, we can see how rapidly wind capacity (and subsequently generation hitting the grid) has been increasing in this area.

In previous Energy Market Insights, we have explored how an increase in wind generation has led to decreasing but more volatile energy pricing in SPP. The chart below shows the changes in the Chicago hub power prices over the last 10 years as wind generation increases.

From the above, we can see that the energy component of the LMP (as well as the total LMP) has been trending down over the years. This makes sense because we have seen an increase in low-cost wind energy and natural gas prices have been falling.  Average natural gas pricing at Chicago Citygate has fallen from an average of $4.45/MMBtu in 2010 to an average of $1.88/MMBtu in 2020. However, the congestion component of this LMP has been increasing. At a high level, a negative congestion component indicates that there is more cheap energy within the region than outside the region. As congestion moves up and starts to become positive, this indicates the opposite; the low-cost generation is now outside the region, and there is not enough transmission capacity to get all the lower cost generation into the region. Given that all the wind generation around the region is outside of the Chicago Hub, at least part of this can be contributed to increasing wind generation.

Congestion pricing approaching $0/MWh means infrastructure is keeping up with market dynamics. However, as additional wind generation is built into the region, transmission will have to keep up, or congestion pricing could start to creep above the $0/MWh mark, indicating inefficiencies in getting low-cost energy to high demand areas. Using the BTU Power View, we can quickly see that there is a meaningful amount of wind capacity that is slated to be added, up to a possible 3 GW of capacity, however, only a smaller portion of that capacity, 0.3 GW, has reached a BTU Grade of 5 indicating the projects have cleared many of the hurdles for development.

With cities and states continuing to make strides towards their emissions reduction targets, where electrons are generated versus where they are consumed will become more critical and change pricing dynamics. To access BTU Analytics’ database of existing and planned power plants check out the BTU Power View.

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Corey Boettiger is a Senior Quantitative Analyst at BTU Analytics. He works primarily on BTU Analytics’ power market analysis, with a focus on power price modeling and plant revenue modeling. He has previously been involved in several areas of BTU Analytics’ market research, including wellhead economic and NGL production, and has created and maintained several of BTU Analytics’ models. He holds a B.S. in Applied Mathematics and Statistics from the Colorado School of Mines.

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