The production tax credit may still be critical to the continued development of wind power in the US. But as the price of generating wind power keeps falling, justification for renewing it could lose steam, and if lawmakers do prevent it from lapsing at the end of this year, the question may soon become how to phase it out without stunting growth of the sector.
“The cost of wind power has, along with solar, come down drastically over the last 15 years, but really precipitously in the last five years or so,” John Keller, chief executive of power plant asset management and consulting firm InventivEnergy, told Breaking Energy.
“We’re seeing prices now in the area of $1,300-$2,200 per kilowatt for equipment deployed, which is nearing the area where it is competitive with the most efficient natural gas combined cycle plants,” Keller said. The most efficient combined cycle gas plants have costs of around $1,000-$1,500/kW, but while a 100-megawatt wind farm in the Northeast generates roughly 25-30% of its capacity factor due to the intermittent nature of the resource, all of the capacity of a 100 MW fossil fuel plant is available for power generation, he said.
And wind electricity prices can vary widely by region. A power purchase agreement at $0.08 per kilowatt hour, based on an expected 25-30% capacity factor, is a relatively good price in New England, especially when compared to the Cape Wind project on Nantucket Sound, “which is astronomical at $.187/kWh and $0.205/kWh in PPA’s with NStar and National Grid”, Keller said. By comparison, there is talk of some West Texas PPAs [Power Purchase Agreements] going into effect in the $0.03/kWh range, he said. “They also have negative pricing at times in Texas because there’s so much wind generation that can’t be transmitted”.
But that is not to say that wind cannot be competitive with other power generation sources in the Northeast, particularly when demand spikes.
“The New England ISO [independent system operator] has, at any point in time, a basic menu of generating plants at their disposal,” Keller said. “When demand is very low, only the most efficient plants are run, and pricing is relatively low. As demand rises, they have to turn on plants that are less efficient and higher-priced, some much more expensive than $0.08/kWh,” Keller said. “Since you have wind power on the grid at $0.07-$0.08/kWh, wind is going to displace some of those higher-cost generating units.”
“The average price of powering New England last year was something like $0.04-$0.05/kWh. If you’ve got a PPA for wind at $0.07-$0.08, that’s not really comparing apples to oranges. At certain periods, the power needed due to demand will drive up pricing because the ISO will have to turn on higher-cost, inefficient, high-polluting conventional generating units. At some point in the generation stack, power from wind becomes a comparatively lower cost source,” said Keller.
Nearing Parity
Keller sees wind at some point approaching grid parity – cost-competitiveness with generation from conventional fuel sources. When it does, government incentives designed to encourage investment in wind, such as the PTC – in the event lawmakers opt to renew it after its expiry at year-end – may need to be reconsidered or modified to avoid a situation similar to that faced in Europe, where growth in renewables has exceeded available funds for continued incentives.
The PTC has been critical to the buildup installed wind power capacity in the US to more than 60,000 MW at year-end 2012 from less than 5,000 MW at the end of 2001. Its purpose has never been to support wind indefinitely, but rather to get it to grid parity. This means two things: that it should be kept in place only until such time as it is no longer necessary, and it should be structured to disappear when it is no longer needed, said Keller.
“The PTC is still needed to attract investment in wind projects. Without any kind of extension or certainty of extension, we have entities extremely reluctant to invest in wind power,” Keller said. But the time to begin phasing it out may be quickly approaching. “We’re getting very close,” he said.
Keller suggested that one possible option for structuring the PTC so that it provides incentives only as long as they are needed would be a mechanism tying it to costs, which are falling as technology becomes cheaper and more efficient and projected grid pricing, which may rise commensurate with increasing natural gas prices.
“I would be in favor of it [the PTC] starting to decrease consistent with the decrease in costs of a wind project,” Keller said. “As average costs for projects across technologies or manufacturers come down, the PTC could be adjusted downward along with the cost of wind projects, components and turbines, ultimately getting to where it doesn’t exist anymore.”
Competition from cheap natural gas remains a troubling obstacle to wind’s competitiveness for now, but Keller sees and endpoint. “As we see the price of technology in wind coming down precipitously, we’re also at a point where the lowest point in natural gas pricing is already behind us, and it’s beginning to come up. These two curves are going to intersect. We are going to have grid parity very soon,” Keller said.
