Generating electricity from wind is growing fast enough that as more wind farms are brought online, more are being built. Depending on your point of view, that is either a good or a bad thing.  In China, wind development is a good thing, and the country is now getting serious about upgrading its power transmission grid. International companies such as General Electric Co. (NYSE:GE), Siemens AG (NYSE:SI), and IBM Corp. (NYSE:IBM) are seeking a toehold in developing a smart grid for China. In northern Ohio, GE is developing a 20-megawatt wind farm in Lake Erie.

Meanwhile, in Texas, wind developers like NextEra Resources, a division of FPL Group Inc. (NYSE:FPL), German power firm E.On AG, and United Technologies Corp. (NYSE:UTX) are getting some pushback from companies like NRG Corp. (NYSE:NRG), Calpine Inc. (NYSE:CPN), and EOG Resources Inc. (NYSE:EOG), all of which have natural gas-fired plants that the companies say hurt by new wind generation.

The Chinese have embarked on a $60 billion effort to upgrade the country’s electricity transmission system over the next 10 years. The state-owned power distribution company, State Grid Corp. of China, plans to begin the upgrades next year. Both Siemens and GE already have in place agreements with local governments and local divisions of State Grid that give them a solid hold on the higher technology area of smart grids. Chinese companies already manufacture equipment like transformers more cheaply than foreign companies can, so there is little incentive to compete for that business.

However, the sophisticated computer technology is needed to operate a smart grid. State Grid estimates that it can contribute to a 20% reduction in greenhouse gas emissions that the government has committed to by 2020 using smart grid technology.

China is likely to demand that it be able to purchase a stake in the companies that do smart grid work because it is a strategic national asset and no foreign company should be able to hold China’s power supply hostage. GE has already indicated that it is willing to enter strategic joint ventures with China to win this business. State Grid is also a customer of IBM, which opened a new energy and utilities research lab in Beijing in March.

The signal advantage of the smart grid is that it can help balance power distribution using technology to offset the variability of power generation by both wind and solar generators. And the variable nature of wind-generated electricity is at the heart of a dispute in Texas between wind developers and natural gas plants.

Texas already uses wind to generate more electricity than all the power plants in Utah, some 9,400 megawatts. Most people think that wind generated power will reduce the need to burn coal to generate electricity. That is not right. Coal-fired plants, and now some natural gas-fired plants, provide the baseload generation for electricity consumers. Natural gas has routinely been used as a fuel to drive peaking plants that can be made available at short notice to meet extraordinary demand.

Wind is not replacing baseload, it is replacing peaking generation. Not only that, in Texas, wind farms are exempt from rules that would force them to make payments to the system operator if they can’t deliver power when the wind stops blowing. Natural gas burners say everyone ought to play by the same rules.

A lot is at stake. The Texas wholesale electricity market amounted to $34 billion in 2009. Wind now generates about 6% of the state’s electricity and that number is expected to double by 2013. Natural gas’s share of the generation market has dropped from 46% to 42% in the last three years, exactly as much as wind power generation has grown.

Texas is not the only market looking to cool the enthusiasm for wind development. The Midwest system operator adopted rules in December 2009 ending wind’s exemption from penalties for failing to provide promised power. The wind companies have filed a protest with the Federal Energy Regulatory Commission, which has authority to regulate inter-state transmission rules. The state of Wyoming, which lives on gas and coal taxes, is considering taxing wind-generated electricity.

China’s central planning regime makes it fairly easy to set a course of action. The problems have always come in the execution. In the US, central planning exists primarily as a set of incentives to point industry at a preferred solution. The planning is almost always faulty, and is usually corrected in the execution. Neither is very efficient, but, after a fashion, both seem to work.

Paul Ausick

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