There are three important things utilities need to know about wind right now.
The first is what the U.S. Energy Information Administration concluded about wind's role in Clean Power Plan (CPP)-imposed greenhouse gas emissions (GHG) reductions.
The second is how to compare today’s record low natural gas prices with today’s record low wind prices.
And third, utilities need to know what will happen to the competitiveness of wind between 2016, when the current build cycle slows, and the early 2020s, when CPP compliance becomes urgent.
“Electric utilities now consider wind to be a mainstream energy source and part of the portfolio,” explained Lawrence Berkeley National Laboratory (LBNL) Senior Scientist Ryan Wiser, co-author of LBNL’s just-released 2014 Wind Technologies Market Report. “It is not just something they have to do because of the state renewables mandate but something that can be an economic solution for meeting their load.”
Record low prices and new technology
“Wind PPA prices have reached all-time lows,” the paper reports. Based on prices from the Midwest, where electricity tends to be cheapest, wind’s national average PPA price in 2014 “fell to around $23.5 per MWh nationwide.”
The record low price and other market conditions make wind highly competitive. The average 2013-14 wind PPA price “compares favorably to a range of projections of the fuel costs of gas-fired generation extending out through 2040.”
This record $0.0235 per kWh price is particularly noteworthy for two reasons. One is that installed project costs have not dropped comparably. The other is that newer wind projects are being sited in “lower-quality resource areas.”
These factors should not drive the price of wind down. The reason it is falling is that wind projects are producing more efficiently, thanks to taller turbines that reach better winds and harvest them with longer blades and more sophisticated controller software.
“This is the first year we have numbers demonstrating the strength of the major trend we have been hearing about for the last two years, of a proliferation of large rotor machines not just in low wind speed sites but also increasingly in moderate and high wind speed sites,” Wiser said.
Using better machines to harvest both high and low quality winds dilutes fleet-wide capacity factor calculations. But “controlling for these two competing influences,” the paper reports, “shows that turbine design changes are driving capacity factors significantly higher over time among projects located within a given wind resource regime.”
Because of the new technology, if the wind is very good and the cost of electricity is low, wind’s price can be competitive. If the wind is less good, wind’s competitiveness depends on the technology and the price of electricity. “Regional variations in capacity factors reflect the strength of the wind resource and adoption of new turbine technology,” the paper reports.
Wind and the Clean Power Plan
With 13.6 GW of wind capacity under construction, “the wind industry is in a big build cycle,” Wiser said. “This year will be big. Next year will be similarly big. What happens after 2016 is anybody’s guess because of concerns about the federal production tax credit.”
The CPP’s ambitious GHG reductions will drive “some amount of incremental growth” but it will not be a substitute for the $0.023 per kWh production tax credit (PTC) that has long driven growth. When Congress has hesitated or failed to renew the PTC, wind growth has plummeted. In the 2016 to 2021 period, Wiser said, the CPP alone “doesn’t get the wind industry to 10 GW per year growth.”
Though prices are attractive even without a PTC, “more wind will be built at $0.0235 per kWh than at $0.04 per kWh,” he added. “That is why the wind industry is reluctant to transition away from a support system, the PTC, that has demonstrably worked.”
The just-released final draft of the Environmental Protection Agency CPP is going to need all the emissions-free renewable energy it can muster to achieve a 32% reduction in GHGs from 2005 levels by 2030.
Though solar’s growth rate is phenomenal, it is still at a very low 1% of U.S. generation capacity. Because wind now supplies five times that, it is positioned to take the lead.
“Wind accounts for 57% of the optimal energy mix to comply with the Clean Power Plan, according to the EIA,” reported a white paper summarizing the EIA findings by American Wind Energy Association Senior Research Director Michael Goggin. “Thanks to its combination of low cost and zero emissions, wind energy has the largest role in cost-effectively meeting the carbon rule.”
The EIA analysis also likely understates the role wind can play because it did not recognize wind’s rapidly falling price and the range of potential new sites the technology advances offer, Goggin explained.
A recent Navigant analysis of the Clean Power Plan also found wind playing a lead role in CPP lowest-cost compliance.
A recent Brattle Group study confirmed grid operators’ capabilities to integrate the levels of wind needed for CPP compliance. Its conclusions were confirmed by a National Renewable Energy Laboratory (NREL) review of grid integration studies.
What about natural gas?
Record low natural gas prices are driving coal out of the electricity generation marketplace and threatening to drive out renewables as well. Use of the resource represents the other important CPP compliance strategy.
Avista Utilities, the Pacific Northwest electricity and gas provider, is “not currently planning new renewables investments because their assessments do not find them cost effective,” Senior VP/CFO Mark Thies recently said. “Solar and wind and the other renewable technologies, we look at them all the time, but the least cost opportunity for additional generation continues to be natural gas, not wind and not solar.”
Avista is not threatened by talk of natural gas price volatility. “There is always some volatility in commodity prices,” Thies said. “Right now, spot prices are under $3. We do expect some event-driven volatility but the price will go back to normal.”
“When you enter a 20 year power purchase agreement with a wind project, you know what the price will be for 20 years,” Wiser responded. “When you enter into a 20 year power purchase agreement with a natural gas plant, you know what the price of natural gas was yesterday. You have no idea what it will be tomorrow and you have no idea what it will be 20 years ahead.”
Economic comparisons between natural gas and wind are inherently complicated, Wiser added. “It may be true in a very narrow sense and certain circumstances that natural gas beats wind in the near term. But what does it look like over the 20 year term?”
Besides its low cost, wind offers hedging value against potential natural gas price rises, Goggin’s white paper notes. And because it is emissions free, it requires less alteration to the present generation mix.
“Using natural gas would require the replacement of nearly twice as much coal generation to achieve the same level of emissions reductions, leading to significantly more coal plant retirements in EIA’s analysis,” the white paper reports.
The EIA analysis shows the natural gas price increases when it is the primary CPP compliance tool but decreases when wind energy is the primary compliance tool, added AWEA Communications Deputy Director David Ward. This aligns with a recent Department of Energy report showing electricity prices to be 20% less sensitive to natural gas price fluctuations when combined with large amounts of wind energy.
Despite these findings, it is not clear to Wiser the CPP will be enough to bridge the years between the end of the big build in 2017 and the beginning of the big turn to wind, if there is one, as the 2022 kickoff for CPP compliance approaches
Despite the low price of wind energy and the potential for further cost reductions, the LBNL report explains, a combination of federal policy uncertainty, low natural gas prices, modest electricity demand growth, and already-met state renewables mandates “may put a damper on growth.”
And, Wiser added, “these are all totally outside the control of the wind sector.”