Can Wind Grow without the PTC?

Posted on October 23rd, 2012 by
   

Wind proponents insist the industry is one of the fastest growing sectors of the American economy having doubled U.S. nameplate capacity since 2008.

But let’s be clear: Recent growth in the industry is largely due to the massive infusion of public cash lavished on big wind under ARRA. Expiration of Section 1603 cash grants coupled with record-low natural gas prices, will likely collapse the stimulus-induced bubble and push installations back to mid-2000′s levels. The production tax credit, if extended, will continue to offset above-market wholesale prices for wind power but the credit will not drive the same level of growth.

Wind and State RPS policies

In the last ten years, more than half of the states adopted renewable portfolio standards (RPS) that encouraged development of home-grown low-emission generation. State legislators voted in favor of the mandates after being convinced by proponents that more renewable resources in the energy mix, particularly those with no fuel cost, would replace fossil use, attract jobs and ultimately stabilize and reduce energy prices.

But the artificial no-compete power markets created by RPS policies for self-selected renewable resources[1] drove up electricity prices and forced ratepayers to pay for energy they didn’t need. In 2011 residential rates in states with mandates were 27% higher than those without mandates while industrial electricity prices were 23% higher.

Impediments to price parity with gas

The rapid run-up in installed wind since 2008, together with flat and declining energy demand, has resulted in state mandates being met and fewer utilities obligated to purchase wind at prices substantially above that of more reliable forms of generation. Factor in abundant supplies of low-cost natural gas, and it’s unlikely wind energy will achieve price parity with coal or gas anytime soon, barring legislative actions that might raise the price of non-renewables.

The PTC helps offset a portion of wind’s high price, but developers need to lower their capital costs and narrow the price gap with gas. However, cost reductions will carry the industry only so far.

The biggest impediment to wind achieving price parity with more reliable resources is the fuel source itself.

As long as wind farms operate at or under 30% capacity factors, there are too few hours of generation per year to spread the large upfront capital costs over. This issue is compounded by two other limitations of wind power. First, since wind typically generates at a time of day and year when the energy is least needed, the market price for its energy is low. Second, wind projects must be sited at the fuel source, which, for onshore wind is typically long distances from load. Locational constraints can lower the market value of wind’s energy and also drive the need for expensive transmission.

Individual wind projects can still operate without the PTC or Section 1603 provided they’re sited in areas with excellent, steady winds and within close proximity to existing transmission. But nationwide, such sites are increasingly rare.

Technology improvements

Two technologies, if available, might enhance wind’s value: forecasting and storage.

Efforts are underway to improve the predictability of wind energy through better forecasting tools. If grid-operators can more precisely anticipate when the wind will blow, how long it will blow, and at what speed and direction, it would aid in power dispatch schedules[2].

Improved storage technology can increase wind’s usefulness as a capacity resource, but large-scale storage is prohibitively expensive and the technology is not fully proven. A DOE loan guarantee for $117 million went up in flames in August when First Wind’s ‘innovative battery system’ designed to flatten wide swings in wind output was destroyed by fire[3] releasing massive plumes of toxic smoke into the air. The industry predicts it’s at least 10+ years away from breakthrough technology that can store nighttime generation for dispatch during peak hours.

Conclusion

Substantial obstacles exist that prevent the wind industry from growing rapidly during the next decade, with or without the PTC. If Congress let the PTC expire, the industry would respond quickly by finding ways to make up for the revenue shortfall. Turbine manufacturers, for example, would likely be pressured to lower prices by as much as 25-30%[4] current levels. Developers will also turn to the states to recoup the rest of the funding via higher REC prices. But ultimately, costly government efforts to push rapid deployment of wind power, in spite of its inherent limitations, will falter and the industry will quietly shrink to a growth rate commensurate with the value of its energy.

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[1] State RPS policies limit which renewable resources are eligible for meeting compliance.

[2] NREL found in Texas that total wind output could vary significantly in a short period, from almost 8,000 MW to near zero output. During periods of large variability, slight forecasting errors could have large consequences on system operations.

[3] This was the second fire involving the battery system since the project went online in March 2011.

[4] Assumes $1,200/MW pricing, a 30% capacity factor and half of the pre-tax value of the PTC ($35/mwh) recovered through reduced turbine prices.

The opinions expressed in this article are solely those of the author, Lisa Linowes, Executive Director of the Industrial Wind Action Group

 

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