50 Gigawatts by 2010 “Plausible” At the Second Annual Conference of the American Council For Renewable Energy (ACRE) In Washington D.C. this month, Steven Taub, Director, Cambridge Energy Research Associates (CERA) in Massachusetts presented his views on the State of renewable energy in America. Taub offered excerpts from his speech to SolarAccess as an RE Insider.50 Gigawatts by 2010 “Plausible” At the Second Annual Conference of the American Council For Renewable Energy (ACRE) In Washington D.C. this month, Steven Taub, Director, Cambridge Energy Research Associates (CERA) in Massachusetts presented his views on the State of renewable energy in America. Taub offered excerpts from his speech to SolarAccess as an RE Insider. CERA is in the midst of a study of the US and European renewables markets, working with a consortium of more than 20 companies representing a broad spectrum of interests and capabilities. Taub told the audience that at a recent project workshop to discuss the future potential for the renewables market, he was struck by a consensus of clients present that there was a plausible scenario that could approach 50 GW of new renewable capacity in the US by 2010 and keep growing from there. He said that the scenario caught everyone’s attention—from policymakers and investors to utilities and consumers. Taub focused on three key points regarding the electricity sector… RE Insider, July 21, 2003 – First, the US renewables industry is poised for tremendous growth. Second, the economics and politics of this opportunity will depend on the natural gas market. But third, the future is very uncertain, and profits are far from guaranteed. I’m sure the idea that the renewable energy industry is now poised for very significant, possibly even tremendous growth does not surprise anyone. The potential is so large partly because renewable energy is a small piece of the US energy landscape today, even though it is growing rapidly. But even though (that industry) is small, renewables are what is now on the margin, and one of the basic tenets of economics is that what is on the margin is what really matters. How much growth will there be? One approach to answering that question is to add up the amount of new investment that will be necessary to comply with the various State renewable energy portfolio standards, how much capacity will be supported by the public benefits funds, and the amount needed to supply green pricing and green power marketing efforts. The way we do the math, this adds up to about 10 gigawatts (GW) by 2010, which would increase the existing installed renewable capacity of 17 GW by about 60 percent. The annual growth rate of installed renewable capacity would be 6.5 percent, which is not bad for the North American power business, where demand grows just 2 percent per year on average. If that was all there was, renewables would be an interesting niche but hardly worth getting too excited over. But the true potential market is much greater than this kind of conventional wisdom approach would suggest. There are many pieces that contribute to what I’ll call the “50 GW” scenario. One is an expansion and acceleration of the State and Federal supports that underlie the renewables market, in the form of new or modified renewable portfolio standards and public benefits funds. Several states, particularly New York, are developing or have started debating Renewable Portfolio Standard (RPS) mandates. The strengthening of existing RPS legislation in some states, such as New Jersey, seems quite possible as well. Meanwhile, 16 states will have allocated about $4 billion from public benefits funds for renewable energy by 2012. States are also adopting policies like net metering and interconnection standards to remove barriers and accelerate deployment. Extension of the production tax credit (PTC) and other Federal incentives play a critical role as well. There are proposals for a Federal RPS requirement in the current energy bill debate too, although at best it appears such regulation would not take effect until the latter portion of the decade. Consumer choice is another important factor that could lead to future growth. While competitive power marketing is stalled at about 5.5 percent of customers served by competitive providers, many of those customers have opted for a green power offering. Meanwhile, regulated choices, in the form of utility green pricing programs, are gaining momentum as a substitute for competitive choice. Already there are over 100 such programs around the US, though participation in most of them is quite small. We are also seeing a wave of interest in renewables by utilities trying to diversify their generating portfolios. Renewables play the same role in a power supply portfolio as government bonds in a financial portfolio. Just as bonds offer investors modest but stable returns, renewables produce electricity at a predictable, though possibly higher, cost. Even if they are more expensive than other options, renewables’ risks are not correlated with the other risks that power suppliers face, which is the classic rationale for diversification. Taking advantage of this portfolio effect will lower the expected cost of energy and make it more predictable. These considerations have led some utilities to act without a regulatory mandate, and have led others to over-comply with the requirements they face. Support policies and tax considerations play a major role in these decisions. But economics are the foundation. The key driver of both the economics and the policy of renewable energy in the US is going to be the natural gas market, which is underlining the value of diversification as we speak. Natural gas has been the fuel of choice for new power plants. 97 percent of the 250 GW that have come online in the past 3 years were natural gas fired turbines or combined cycles. The 4.4 GW of new renewable generating capacity added since 2000 pales in comparison. Natural gas use in the electric power sector has increased by 40 percent since 1990, and could grow by another 50 percent by 2010, pushing total gas demand up by about 10 percent. This growth in gas demand is colliding head on with a supply shortage born of a mature resource base combined with restrictions on exploration. Instead of the growth needed to keep up with demand, we expect total North American gas supply to be flat and then start shrinking around 2007. The result, as we’re seeing already, is a dramatic rise in gas prices, from $2 to $2.50 per Million British Thermal Units (MMBTU) throughout the 1990s over $5 today; and gas supply is not responding to high prices as it has in the past. Developing new supplies from unexplored lands, remote frontier regions like arctic Canada, or new LNG, is going to take several years at least, so we think higher gas prices will persist. Higher gas prices translate into more than just higher heating bills for consumers: they are hitting petrochemicals, fertilizer, steel, and other energy-intensive industries very hard as well and may even affect the US economy as a whole. While some industries are suffering, renewable energy will benefit because higher gas prices make renewables more competitive. Wind power, biomass co-firing in coal plants, incremental hydroelectricity from existing dams, geothermal power, and biomass-fueled CHP can compete with gas-fired Combined Cycle Gas Turbines (CCGTs) at $5 per MMBTU, especially with the support provided by the Federal production tax credit. With a good resource, new wind power can even compete with the spot market price of power in those regions where gas is the fuel on the margin setting the market price. To the extent that higher gas prices translate into higher electricity bills for consumers, solar photovoltaics will benefit as well. We think that wind power will benefit most from the high gas prices because unlike geothermal, hydroelectricity, or biomass there is a large untapped base of economically attractive resources. And we expect wind power costs to fall by about 25 percent by 2010. But it won’t all be wind. Reaching the 50 GW mark would probably require 10 GW or more of non-wind renewable capacity as well. These economics are already translating into politics. Renewable energy is increasingly being discussed as a response to the gas market crunch, an answer that has more political appeal than opening public lands to gas drilling, building new pipelines to Alaska or arctic Canada, or as Alan Greenspan has suggested, constructing many new LNG terminals to import gas from abroad. On June 26, the Secretary of Energy convened a special Gas Summit meeting of the National Petroleum Council in Washington D.C. to begin to address the urgent issues facing the natural gas market to avert a crisis. Federal and State efforts to promote renewables in response to the tight gas market would reinforce the favorable economics high gas prices have already created. How much of an impact could renewables have on the gas market? We haven’t finished the numbers for the 50 GW scenarios, but in our study of the renewables market the 10 GW of new renewables that existing policies imply would cut gas consumption by about 0.8 billion cubic feet (BCf) per day in 2010, which is about 1 percent of the total. This is the gas market equivalent of one liquefied natural gas (LNG) terminal or a mild winter—not a tremendous change but still quite significant. Tight supplies will magnify the effect that these small demand changes have on prices, and the more optimistic scenario will have a much greater effect. Clearly the gas market situation makes the aggressive renewables scenario much more likely to happen. Climate change is driving the interest in renewables in many other countries, and it is also a factor here in the US, but, interestingly, all these renewables may not have much impact on US greenhouse gas emissions. For the most part the renewables will be displacing gas-fired power plants, not coal plants that have much higher greenhouse gas emissions. High gas prices make coal-fired plants more valuable, so we don’t expect to see many shutdowns. Instead we are hearing proposals for new coal plants and even nuclear plants, though renewables have significant advantages in terms of public acceptance and can be brought on line much more quickly. So the opportunity for renewables is large. But even so, the future is very uncertain and profits are far from guaranteed. Just as we were able to construct a plausible scenario that adds 50 GW of renewables by 2010, we could just as easily see a situation where even the modest 10 GW implied by the support policies does not materialize. The future role of renewables in the US electricity industry will depend on many unpredictable economic, technological, and political factors. Short-term events can obscure the long-term trend and delay the response. A very mild summer followed by a mild winter would probably bring gas prices below $4.00 per MMBTU for a while, for example. On the other hand, a short supply disruption or weather-driven demand spike could easily push gas prices into the double-digits. The gas market outlook could be changed more permanently by the unexpected discovery of a huge new field or—perhaps more likely—by new technology that unlocks reserves that are not cost effective to produce today. Economic factors are also critical. Right now, for example, one of the biggest problems with building renewables is the creditworthiness of the utilities signing the long-term contracts that renewable project lenders demand. State governments are looking to public benefits funds to close the budget shortfalls created by the slow economy. But the biggest uncertainty is politics. Who can say what will happen with the efforts of the Federal Energy Regulatory Commission (FERC) to restructure the power markets and encourage investment in the transmission system? Will Americans who support renewable energy in the abstract accept the steel, concrete, and fiberglass reality of it in their communities? Will Congress agree to open new lands to exploration in an effort to preempt a gas market crisis? Already, the delay in reauthorizing the PTC is knocking the wind out of the wind market. 2003 will be a strong year as developers rush to get about 1500 MW online by the end of the year, but 2004 installations will drop back to 500 MW or so. Even if the boom does happen, the Internet and the telecommunications industries have taught us that rapid growth in demand doesn’t necessarily translate into abundant profits. If anything it can drive a shakeout that is just as disruptive as a severe downturn. As the renewable electricity business booms and players flood in, there is a significant chance that companies will compete away the profit margins that attracted them in the first place. Furthermore, the renewable energy industry is on the cusp of a cultural shift every bit as wrenching as the change in the business environment. One of the insights from our study is that as renewable energy becomes a big energy business, it is going look more and more like other big energy businesses, and be affected by them. Competing in renewable energy will increasingly demand corporate structures and strong capitalization. Projects will be larger, more complicated, and more integrated with the broader energy markets. Consolidation will continue, and even accelerate. People will need to be able to think about renewables differently and in a more integrated way than they have in the past to succeed in this environment. So, what’s the bottom line? Will we have another 50 GW of renewables or more by 2010? Will we see the 10 GW implied by the various State policies, or will we fall short of even that modest goal? The answer is at least partly in our hands. Organizations like the American Council for Renewable Energy have a very important role to play in advocating policies that create a favorable climate for investment. When it comes to support policies, the devil is in the details. The timing and structure of the policies is crucial to their success. Policymakers should understand that effective measures must provide a stable, predictable environment, and they must be broadly based to ensure the best chance of meeting the ambitious goals. About the Author: Steven Taub, is Cambridge Energy Research Associates (CERA) Director, and a specialist in emerging technologies, electric transmission and distribution, retail energy, and quantitative analysis. He is Research Director for CERA’s Distributed Energy Advisory Service. Taub co-directed the CERA multiclient study Renewables: Challenging the Energy Mix–Winds of Change, Rays of Hope. His recent CERA research includes reports on global distributed generation strategies and markets, and the prospects for a hydrogen economy. He was also Project Director for CERA’s Multiclient Study Eye of the Hurricane: Energy Distribution in Uncertain Times. Prior to joining CERA, Taub worked for the US Department of Energy. Taub holds a BS from Columbia University and MS degrees in mechanical engineering and in technology and policy from the Massachusetts Institute of Technology.