Wind and the changing power industry structure

Iberdrola Renewable Energies is one of the world’s largest investors in renewable energy. Here Iberdrola’s Carlos Gasco Travesedo argues that if we are serious about energy independence and reducing greenhouse emissions while meeting growing demand, we need to define a new energy model that includes wind power.

This current energy model is not sustainable, nor will it be in the future. Recent years have seen the risks of fossil resource depletion: recurrent geopolitical tensions, increasing energy dependence and volatile prices, with oil now approaching US$120 per barrel. Environmental constraints complete the new scenario. Climate change is a reality, as demonstrated by thousands of pieces of scientific evidence, and human activity is its main driver.

Within that context, global energy demand – even with the best efforts to enhance efficiency – will grow by around 50% by 2030, according to the International Energy Agency (IEA). Massive investment is required to quench that appetite for energy: we will encounter a world market estimated at €8 trillion for electricity alone within the next 20 years.

There is an important worldwide debate regarding the future energy model and which technologies to invest in. Oil is limited and increasingly expensive; gas has been intensely used and is also expensive. The securing of fossil fuels continues to create political tensions. When it comes to reducing greenhouse gas emissions, solutions such as carbon capture and storage (CCS), are slow to come to market. And ultimately, carbon emissions cost money.

Within this context renewable energy – particularly wind – has grown into a global industry and a solid means of delivering results alongside traditional generation. This is due to its three main advantages: environmental, energetic and enhanced competitiveness. Today, almost 100 GW of capacity turns in the global wind, with 20 GW added in 2007 alone, of which 10 GW was in Europe, 5 GW in the USA and another 5 GW in Asia. Wind power is on course towards full competitiveness.

Pro-renewables pronouncements are made every day at the political level. The right commitments, targets and regulations add significant stability to investments for all agents, enabling capacity to grow in the major markets. Public and private agents, investors, financers and others involved in this sector have been given clear signals to take up this challenge. Among those signals are:

Signal 1. The drivers behind regulation – security of supply

Fossil resources are limited and concentrated in a restricted number of countries, generating recurrent geopolitical conflicts. The price of oil is, on an almost daily basis, reaching record-setting values. Compared with 2001 levels, when the average price was around US$27, on 18 April, 2008, oil registered a new record reaching $117 per barrel on the back of the risk to oil supplies from Nigeria and some restrictions in the OPEC production. Shadowing the cost of oil is natural gas, also reaching all-time price highs.

In Europe, foreign energy dependence is currently at around 45%. The European Commission Green Paper on security of energy supply drew attention to this worrying level of dependence on imports from sources outside the European Union (EU). Projections show this is set to increase to 70% by 2030. Renewable energies, as an indigenous energy supply depending only on natural resources, can diminish this energy dependence.

Signal 2. New environmental policies – Bali

Remembering that neither the USA (nor Australia, until recently) signed up to the Kyoto protocol, we have just seen the first global commitment to reduce greenhouse emissions, reached in Bali, in December 2007. The conference started off with the premise to define new objectives of reduction of emissions beyond 2012; with the Intergovernmental Panel on the Climatic Change (IPCC) seeking to set ambitious commitments of 25%–40%. Simultaneously, that meeting tried to reconcile the positions of the United States and developing countries, particularly China, India and Brazil. The final outcome is positive, with the USA taking its first steps towards binding emissions reduction (although the level has not yet been defined) and with developing countries agreeing to adopt some control of their emissions in exchange for economic and technical aid.

Signal 3. Main regulatory signals

Europe: a massive market

The new Renewables Directive Proposal is a clear signal for the renewable industry in Europe. It defines a huge market, since by 2020, 20% of all energy consumed must come from renewable resources. In 2005 this was a mere 8.5%. This ‘opportunity sharing,’ as we like to call it in Iberdrola Renewables, has been an extremely difficult process. However, the outcome can be considered rather satisfactory. Each country must increase, in a flat rate, its renewable energy share by 6 percentage points. To attain the common goal, the rest of the effort will be distributed according to the per capita GDP, meaning that richer countries will be making larger efforts.

Pullquote: According to the proposal, renewable electricity is to supply 40% of total electricity. For wind power this represents a massive market.

According to the proposal, renewable electricity is to supply 40% of total electricity. For wind power this represents a massive market, leading to an enlarged industry, with very significant social and economic opportunities. It is vital to avoid bringing uncertainty to investors, or costs will increase and it is important that national support mechanisms should not suffer from a new system, if finally included in the text.

USA, a growing commitment

The US Energy bill tackles the biofuels issue extensively, and targets a minimum of 136 billion litres of fuel to be distributed by 2022. Regarding renewable support systems, the wind production tax credit (PTC) support system is still fundamental for the development of wind energy in the US. Its extension is still pending, and we remain optimistic about its future. The question is not if, but when and for how long the tax credit will be extended.

In parallel, a Federal renewable portfolio standard (RPS) – a true regulatory tool – is also under discussion. Meanwhile, State RPSs and the Modified Accelerated Cost Recovery System (MACRS) tax relief system are key instruments for investments. In that sense, 70% of electricity production in the USA enjoys State support.

Consolidated and emerging market for wind power: a global vision

Wind power is delivering globally. The Global Wind Energy Council (GWEC) reports 95 GW of wind installed to date, a figure which stands at around 30% higher than in 2006. Europe continues as the principal market, reaching 57 GW of capacity, with consolidated markets giving way, gradually, to emerging EU countries such as Italy, France and the UK. New European turbine capacity reached 8.7 GW last year with wind energy growing faster than any other technology in Europe, making up to 40% of new installations.

While Europe remains the leading market for wind energy, in 2007 investment there was just 43% of the global total, compared to nearly 75% in 2004, and this trend is likely to continue.

Nonetheless, in Spain, the wind industry has shown healthy development. Spain reached more than 15 GW of wind installed capacity at the end of 2007 and the immediate target is set at 20 GW installed by 2010. Wind production represented some 11% of total electricity demand in the country last year and in the first quarter of 2008, wind production beat all records. On 22 March, for instance, some 40% of national electricity demand was met with wind. That is a serious business and also a challenge. Focusing on its socioeconomic impact, a recent assessment by the main Spanish Labour Union ‘Comisiones Obreras,’ suggests some 190,000 jobs have been created in the renewable industry in Spain, of which 90,000 are direct jobs, and some 100,000 indirect. Half of those direct jobs are in the wind sector. Worldwide, some studies estimate more than 2.2 million jobs in the renewable sector.

The US, meanwhile, hit a record 5.3 GW installed in 2007, accounting for close to 30% of the country’s new power-producing capacity that year. US wind capacity grew almost by 50% in 2007, reaching 16.8 GW in December. The US will probably overtake Germany as global leader by 2010, depending on policy delivery. Over a quarter of all new capacity in 2007, more than 5 GW, was installed in Asia. A particularly strong market, China added almost 3.5 GW of new wind capacity in 2007, representing market growth of 156% over 2006, and – with over 6 GW at the end of 2007 – now ranks fifth in installed capacity. Based on current growth rates, the Chinese Renewable Energy Industry Association (CREIA) forecasts a capacity of around 50 GW by 2015.

Worldwide, not only was some 220 TWh was produced by wind turbines last year (equal to the total energy consumption in Spain), but power prices are declining by up to 10% in competitive electricity markets thanks to wind generation.

Challenges for the future

According to the International Energy Agency, energy demand in 2030 will be nearly twice that of 1990. At the same time, the IEA also places the installed capacity of wind energy at up to 538 GW by 2030. This implies 1440 TWh of wind energy generated annually or up to 5% of the total electricity generated worldwide by 2030. Compare that with 2004, when it represented only 0.47%.

In terms of the total new capacity installed in the European Union, wind power will reach 32% in the period between 2010 and 2020, and a 46% in the decade to 2030, according to the European Wind Energy Association (EWEA). Today, wind production meets 3.7% of electricity demand in the EU and has been the second largest technology in terms of capacity increase for the last eight years, second only to natural gas.

Despite this impressive progress, there are challenges to resolve, on several fronts. Action that needs to be is technical – related to infrastructure, turbines and such like, for instance reactive energy and voltage dips; economic, including reducing investment costs and maximizing availability; and in energy management such as real-time operation, control centres, and enhanced prediction.

In terms of wind integration, the key issue is maximizing the potential integration of wind through strengthening and extending the grid infrastructure, and installing more and better interconnections; principally it’s also a matter of working to make wind production a truly manageable, and therefore reliable, source of power everywhere.

Promoters and suppliers are working together to overcome such technical difficulties. In parallel, administrative and planning procedures and grid access issues must take into account requirements for future growth in wind energy. These cause some of the bottlenecks that could hold back massive wind development in maturing markets. Attention has to be focused on these issues by everyone involved in the sector.

In our own case, at Iberdrola Renewables, we have a multinational management team with vast experience in the electricity sector. Our approach to wind is to maximize availability of installed capacity, optimize facilities’ technical performance over their useful life, and improve wind energy integration in the grid.

For the past 10 years the company has been investing in control centres, in the learning the best methods of predicting production, in the management of reactive energy and voltage dips. This is the way to ensure the highest possible quality of our electricity, maximum efficiency and longest possible asset life – and provide the grounds for future developments.

To wrap up, wind energy has become a huge industry worldwide. This is, happily, today a great opportunity for all agents in the industry. And in particular for intelligent, forward-looking, creative, innovative, strong and responsible companies – such as our own.

Carlos Gascó Travesedo is Head of the Prospective Unit at Iberdrola Renewable Energies

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