Shifting Winds: A New Era of Renewable Investment and Growth

The breeze has shifted over the U.S. wind industry – and, few have noticed. The prevailing wisdom over the past 20 years has been that federal subsidies, such as the production tax credit (PTC) and more recently the investment tax credit (ITC), have been the primary drivers of wind generation development. On the surface, the boom and bust development cycle of wind – driven by the continual expiration and renewal of the PTC – supports this view. While federal subsidies have certainly been a major historical driver of U.S. wind industry growth, it is presumptuous to assume that federal policy mechanisms will continue to play this role.

In less than a decade, several market shifts have meant wind has encountered heightened competition from other energy alternatives. Natural gas prices and solar installation costs have decreased to around one-third of 2008 and 2009 levels, respectively. That shift has drastically reduced the cost of competing gas and solar generation supply while the cost of wind generation has decreased by only a moderate amount. In addition, energy policies are increasingly favoring solar relative to wind generation. States with renewable portfolio standards (RPS) and/or net energy metering (NEM) regulations are witnessing higher solar growth trends than for wind.

While U.S. wind capacity additions peaked in 2012, U.S. solar capacity additions have been accelerating for the past half-decade. As a result, new solar installations will have exceeded wind installations in at least three of the last four years (see Figure 1).

Figure 1: U.S. Wind and Solar Capacity Additions (Cumulative GW since 2010)

Source: GTM Research, Solar Energy Industries Association, American Wind Energy Association and PA Consulting Group research.

A driver of the growth in solar has been the ITC and related pools of tax equity financing. The ITC was first introduced in the Energy Policy Act of 2005, and has been extended multiple times (including as part of the American Recovery and Reinvestment Act signed into law in early 2009). As enacted, the 30 percent ITC will decline to 10 percent for commercial, third-party-owned or utility-scale installations and to zero for residential customer-owned facilities installed after Dec. 31, 2016. If the ITC is not extended, we project solar growth will slow for several years immediately following the reduction, but will return to pre-2017 levels over a two to four year period. That trend will primarily be the result of continued capital cost declines in the solar modules. While the effect of the need to generate additional up-front equity without the ITC should not be overlooked, it is also important to note that the increasing trend of vertical integration in the solar industry has allowed some solar companies to maintain their margins while reducing installed costs.

Energy resource alternatives to wind have experienced significant cost declines; however, it is the changes in relative costs of different renewable options that has underpinned the growth in solar. Five years ago, wind generation had significant cost advantages over solar and was competitive with generation alternatives such as natural gas. We estimate the levelized costs of wind, solar and natural gas combined-cycle generation in 2010 were generally $90, $185 and $75 per MWh, respectively (See Figure 2). These relative economics made wind the select growth technology in the U.S. renewable sector despite the fact that wind technology was relatively mature.

Figure 2: Levelized Cost of Energy for Various Technologies in the U.S. ($/MWh – 2015 real dollars)

Source: PA Consulting Group

The decline in both natural gas prices and solar installation costs has now eroded the major cost advantage wind generation had relative to solar and has not improved the competitiveness of wind relative to natural gas combined cycle generation. Largely driven by the continued decline in solar installation costs, utility-scale solar generation is projected to have major cost advantages over wind generation. Additionally, distributed (i.e., non-utility scale) solar generation is projected to continue to grow as it capitalizes on NEM benefits for customers.

In contrast, wind generation costs have the potential to increase considerably with the lapsing of the PTC as illustrated in Figure 2. Currently, a wind generator needs to have commenced construction by Jan. 1, 2015, to be eligible for the PTC. In contrast, the ITC for solar generators continues, at a decreased level of 10 percent, for installations after Dec. 31, 2016.

These conditions add up to a picture where, with or without federal renewable tax incentives, solar generation is projected to cost less than wind generation in the long term, creating some very real challenges for the future of wind generation in the U.S.

Lead image: Finger pushing a wind energy button. Credit: Shutterstock.

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PA Consulting Group is a consulting, technology and innovation firm. We define success as achieving exceptional results that have a lasting impact on businesses, communities and individuals worldwide. Matt Mooren is an energy professional with expertise in power market economics, power market operations, natural gas-power- coal market dynamics, energy policy, and valuation of physical and financial assets. His twelve years of consulting experience include providing clients merger and acquisition, financing, restructuring, litigation, and strategic guidance in a variety of contexts. Mr. Mooren is experienced in the economic assessment of power and utility organizations, wholesale electricity markets, electricity market regulations, environmental regulations and compliance options, natural gas market fundamentals, renewable investment opportunities, all types of power generating facilities, power and natural gas contracts (including contract structuring and negotiations), energy management and trading operations, and trading book positions. Mr. Mooren relies on fundamental energy market knowledge and experience to assist a variety of clients, including retail electric service providers, private equity participants, independent power producers, global corporations, investment banks, renewable developers, lawyers, and rating agencies.   Zach Pollock is an energy professional with over five years of research and advisory experience in the energy industry, including specific knowledge of electric utilities and clean technology. He has authored several industry leading reports on grid modernization initiatives including advanced metering infrastructure, data and analytics, and distributed energy resources as well as served as a trusted advisor to utility clients, equipment manufacturers and software providers. Zach holds a Master’s of Science from Columbia University in Sustainability Management and graduated Cum Laude from Cornell University with a Bachelor’s of Science in Natural Resources.   David Cherney is an experienced energy professional in PA’s Energy Capital Markets Practice, with expertise in public policy analysis, electricity market dynamics, and program evaluation. His power market consulting experience spans merger and acquisition, litigation, and strategic guidance contexts. Dr. Cherney is experienced in electricity market regulations and policy (in both regulated and deregulated markets), expert testimony preparation, and bridging research and analytics to practice. His clients include retail electric service providers, private equity groups, independent power producers, global corporations, and investment banks. Dr. Cherney is well published having authored more than 20 publications in scholarly journals, technical book chapters, and popular outlets. He holds a Ph.D. from the University of Colorado-Boulder, a Master’s degree from Yale University, and a B.A. from Claremont McKenna College.   Barbara Sands provides over 20 years of experience in the energy industry with a specific focus on asset valuations and the renewable markets. She is a certified appraiser with the American Society of Appraisers (ASA). Through managing the valuation process for numerous renewable and non-renewable power assets, she has applied her knowledge of wholesale electric markets with a specific focus on the underlying key drivers of value. She has provided strategic guidance for electric utilities on conventional and renewable resource planning and competitive rate design issues. Her expertise also includes the development and application of electric market modeling tools including renewable specific models. She has evaluated the value, risk and opportunities of long term purchase power agreements for both buyers and sellers. She serves as an Independent Evaluator of renewable-specific contract solicitations by a California utility. Ms. Sands has a BS in mechanical engineering and is an Accredited Member in the ASA.

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