Monday 27 August 2012
Last Update 27 August 2012 4:44 am
LONDON: The looming expiry of a key US wind tax credit presents an opportunity to strengthen policy to tackle stubborn costs and some reverses in performance highlighted in a US Department of Energy report.
The industry will have to cut costs faster than it has over the past decade if it is to compete with natural gas, regardless of whether the production tax credit (PTC) is extended.
The PTC was introduced in 1992 as a subsidy meant to help wind power get on terms with natural gas and has expired three times previously.
Whether or not to extend it after Dec. 31 has polarized Republican and Democrat presidential candidates ahead of the November election, pitching arguments for smaller government against supporting American jobs.
Regardless of whether it is extended, there will be an industry slump. What is at stake is more the scale of the downturn and speed of subsequent recovery.
To justify continued support, the wind industry will help itself by cutting costs faster and improving performance.
A looming manufacturing over-capacity will help drive costs down, while policy tweaks would usefully target site selection and grid connection.
Both capital and generating costs are higher last year than a decade ago, in constant dollars, according to the DoE's “2011 Wind technologies market report”, published last week.
Meanwhile capacity factor — the proportion of nameplate capacity which actually generates power — has stagnated and the quality of wind resource at new wind farms has fallen sharply.
The industry's capital and total installed costs hit a peak around three years ago, because of high demand and supply bottlenecks, and are now on a firm, downward trajectory, but remain above levels a decade ago.
Variable operational and maintenance costs have been more stubborn.
These various costs are combined in the prices utilities contract with generators under power purchase agreements (PPAs).
Most heartening, regarding falling costs, the DoE report shows PPA prices falling sharply in the past two years, while remaining above 2002 levels.
Average, capacity-weighted PPAs signed in 2011 were for $35 per MWh, compared with $59 in 2010, and $72 in the peak year 2009.
These are encouraging signs, showing that the cheapest PPAs in the Texas and Heartland wind belt would be almost competitive without subsidies in wholesale electricity markets.
The production tax credit at present gives generators an extra $22 per megawatt hour (MWh), which is about half present wholesale power prices and so a sizable income boost.
In contrast, some aspects of performance have stalled or even gone into reverse, implying that if the industry tackled these it would be on an even faster road to competitiveness.
Capacity factor is the percentage of a power plant's nameplate capacity that actually generates electricity, and for example is high for nuclear power plants, at around 80 percent, because they run constant baseload power barring maintenance outages.
For wind turbines, capacity factor depends on how windy it is, at the site and the prevailing weather, as well as the height of the turbine (capturing more wind), and grid access. It averages around 25-35 percent.
After controlling for other factors, such as less windy years, the DoE report showed that capacity factors had stagnated year on year since 2005.
It attributed this to a peaking over the past five years in turbine (or hub) height, at around 80 meters, and only a small uptick in size of blades, measured as rotor diameter.
Most significantly, it found a sharp decline in the amount of wind resource at new projects, measured 80 meters above ground level.
“Projects built in 2011 were on average located in estimated 80-meter wind resource conditions that are 16.1 percent worse than those projects built in 1998-99,” it found. “This decline is ... a key contributor to the recent stagnation in average capacity factors.”
The looming tax expiry hiatus may offer an opportunity to re-examine wider aspects of policy.
Regarding site selection, there is strong evidence that state-level mandates, currently applied in 29 out of 50 states, are contributing to higher average, nationwide costs.
For example, California has the most ambitious renewables portfolio standard (RPS), requiring that by 2020 its utility companies will generate a third of their retail electricity sales from renewable energy sources.
But California also has poorer wind resources than many other states, notably in Texas and the Heartland, and partly as a result lower average capacity factors and more expensive PPAs.
Regarding capacity factor, California ranks near the bottom of US regions, with an average 29 percent compared with the Heartland's 37 percent in 2011.
And California PPAs signed in 2012 were contracted at $60 per MWh, compared with around $30 in the wind belt, and $50 for the rest of the United States, the DoE report shows.
One policy approach, then, would be to allow utilities to meet more of their RPS obligations by funding projects out of state.
In California, at present half of renewable energy can come from projects out of state where these supply to California's grid through interconnectors, and up to a quarter through the purchase of tradable renewable energy certificates (TRECs), including out-of-state projects.
A second problem the DoE report alludes to is inadequate transmission capacity to the windiest locations.
Simplifying transmission permissioning would similarly target site selection, but of course there are no easy answers given the cost of projects, previously partly funded by the Recovery Act, and the distance between cities and the resource.
A case in point, a Texas project to be completed by the end of 2013 will accommodate some 18,500 megawatts of wind capacity, but its initial cost estimate of $4.9 billion has increased by over 40 percent to almost $7 billion.
A long list of similar projects are underway or planned.
Earlier this month, the Senate Finance Committee passed a renewal of the PTC tax break which has a long battle to adoption including a Republican-led House of Representatives.
Either way, a focus on whether there should be an extension, for how long, and whether on condition of a phaseout, should not exclude a renewed focus on improved performance.
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