TODAY’S STUDY: The Untapped Mid-Level Wind Potential
Analysis Of Commercial And Industrial Wind Energy Demand In The United States
Dan Shreve, August 2019 (American Wind Energy Association and Wood Mackenzie)
On June 19, 2019, the Environmental Protection Agency (EPA) finalized the repeal of the Obama administration’s Clean Power Plan, placing added pressure on state legislatures and corporate America to lead the fight on climate change.
United States commercial and industrial (C&I) firms have answered the bell, signing agreements facilitating the buildout of more than ten GW of renewable power generation through 2018. This comes after a record setting 2018, where more than six GW of power purchase agreements (PPAs) were inked by industry leaders such as AT&T, General Motors and Facebook. Wood Mackenzie estimates that up to 85GW of renewable energy demand exists within the Fortune 1000 through 2030.
Activity within the C&I sector has been on the rise for years, due in large part to consumer buying behaviour and the excellent project economics and hedging opportunities afforded by production tax credit (PTC)-enabled wind and investment tax credit (ITC)-enabled solar projects. The scale and breadth of C&I procurement is spreading as financial instruments supporting the sector become more sophisticated and help limit the risks of corporate power purchase agreements. Pioneering companies like Microsoft, Google and Facebook have blazed a trail for scores of companies seeking to shrink or eliminate their carbon footprints and served as a catalyst for the development of peer groups such as the RE100 and EPA Green Partners Program. These programs have become increasingly important to the development of the C&I sector as corporate branding is increasingly harnessing the environmental stewardship activities of industry leaders around the world.
The question at hand is whether this momentum can be maintained over the long term. A myriad of challenges lies ahead, most notably the loss of the PTC, which lessens the economic attractiveness of wind energy projects and further exposes those plants to the vagaries of a power grid undergoing a substantial transition towards increased renewables penetration. C&I demand has been focused thus far in areas where renewables penetration is highest, and thus will be exposed to increased volume and shape risk, which can prove highly detrimental to project economics.
Storage is emerging as a potential remedy to this situation, however storage deployment trends are favouring solar power over wind given ITC access, smaller project size and a more predictable generation profile.
A separate but similar concern is the ability to engage smaller electricity consumers. Transactional costs associated with C&I engagement in the renewables sector are not insignificant, and no clear line of sight exists to the development of “cookie-cutter” contracts. Credit risk also looms large for smaller companies and hedging that risk with shorter engagements or increased yields may limit the attractiveness of the proposal for the developer and end user, respectively. Utility green tariff programs may be able to solve this issue and aid in catalysing C&I market growth.
Finally, there is an interesting dynamic associated with the greening of the grid via RE100 initiatives. A sweeping federal initiative on decarbonization would serve as a short-term disruptor to the C&I movement. However, any such federal action would create a ground swell of new renewables demand that would far outstrip the current outlook for C&I focused renewables procurement. This RE100 scenario is not considered in this report.
In summary, many of the puzzle pieces are in place. Corporate peer pressure is building, especially in the United States where the failure of federal policy has galvanized the efforts of industry leaders. The cost of renewable energy continues to fall, offering a tremendous long-term hedge against power price inflation. The advent of new financial instruments is further reducing operational risks associated with renewable energy power generation and allowing smaller corporations to join the fray. The energy transition is progressing, and the electrification of transportation, HVAC and a variety of industrial processes will increasingly focus corporate attention on how they procure power. Wind is well positioned to take advantage of these opportunities.
C&I Wind And Solar Demand Forecast Through 2030
Power market dynamics and the continued reduction of solar power’s LCOE are suppressing wind energy demand in the long term. Long-term regional outlooks that inform our analysis are as follows:
The ERCOT market has undergone tremendous change over the last few years. The market will see a continued increase in wind farm development to maximize remaining tax incentives and increasingly leverage hedging instruments. Solar capacity will exponentially increase as economics only look to improve over the forecast. Changes to market design are expected to be needed to properly assign value to thermal generators and incent new capacity to cope with sustained electricity demand growth and shrinking reserve margins.
Transmission limitations are increasingly causing ERCOT West to price lower than the rest of the market, with additional pressure in the Panhandle through 2021. Surplus wind generation drives this discount through the mid term, with solar additions compounding this impact in the long term.
A loss of industrial load, energy efficiency and distributed generation restrain growth. The market remains overbuilt throughout much of the next decade, with capacity prices failing to rise until new firm capacity is eventually needed post 2030. Solar and wind generation increase market share through the forecast period (from 4% in 2019 to almost 20% by 2040) due in large part to long-term carbon pricing impacts on coal. Wind capacity is expected to double between 2019 and 2040, while solar increases around 20x, albeit from a very small level.
Siting/permitting/NIMBY issues are hindering long-term transmission expansion, resulting in significant congestion in COMED, Dominion, BG&E, and PJM East and driving significant increases in energy storage deployment. Transmission issues also hamper wind growth in the region.
Southeast demand grows at a healthy average growth rate, but load growth minus renewables remains flat and begins to decline over the forecast period once carbon begins to be priced in. In particular, SERC Southeast and FRCC grow by more than 8% on average above the national growth rate, while demand in SERC North lags the regional average.
On the supply side, the generation mix changes from being a predominantly gas + coal + nuclear-based mix to a gas + solar mix due in large part to the poor wind resource in the region. SERC remains a net importing region with underutilized, abundant and low-cost gas generation flowing from PJM, Dominion, MISO South and SPP South.
The Northeast power markets already have some of the lowest carbon intensity in NERC yet many of the states and provinces in this area have some of the most aggressive goals in North America for continued decarbonisation. New York and New England will find it challenging to meet their renewable energy and decarbonisation goals. Poor insolation means that solar has relatively low capacity factors, particularly during winter months. Onshore wind farms and transmission lines are frequently opposed by the public, even though the public supports renewable energy as a concept. There is great potential for offshore wind power.
Excluding hydropower, natural gas is the primary dispatchable generation resource in the Northeast. However, natural gas infrastructure also faces public opposition, and a lack of pipeline capacity during winter months leads to very high gas prices at times, particularly in New England. During these periods, both markets have a strong preference to import power rather than run native gas-fired generation.
Decarbonisation efforts will erode the total addressable market for both new and existing thermal resources. Coal is largely on the way out with cheap minemouth plants in the Rockies being the final stronghold. Gas generation continues to grow with growing flexibility needs but will be perpetually capped by renewables additions.
Incremental growth in demand will overwhelmingly be met with new renewable additions. However, as solar load-carrying capabilities falter in saturated markets, resource adequacy requirements will incent a combination of gas and battery storage. Capacity values in WECC are already undergoing an evolution to reflect the value of flexibility and possibly resiliency. Improved operational data for solar and wind will likely uncover even more reliability shadow costs to be accounted for.
Solar and wind generation are complimentary and largely grow together in WECC, albeit in a fairly segregated manner. Initiatives such as CAISO EIM aim to reap the benefits of diverse generation patterns across large swaths of geography. However, native renewable requirements continue to reshape hourly flow patterns, which will likely strand many assets built to serve CAISO from afar.
In summary, the regional biases for solar demand are largely as expected with demand surpassing wind in the southeast and southwest of the U. However, solar’s strength in the Midwest is eye-opening. The ability for wind to overcome regional resource bias in the southeast is extremely limited without the aid of long-haul transmission, while activities in the southwest will be challenged simply due to the strength of the solar resource in the region
A core focus on increasing wind’s competitiveness in the Midwest through the adoption of taller tower technology and larger turbines may aid in recouping market share, but Wood Mackenzie LCOE assumptions are already bullish for this region. Northeast renewables will largely be dominated by offshore wind, where there may be the potential to farm down equity share to multiple large-scale C&I buyers, but the higher cost of offshore wind energy limits that likelihood until the sector further matures post-2030.
Absent of a step change in turbine performance or cost reductions, it is increasingly obvious that for wind to compete amidst ever increasing renewables penetration, a longterm energy storage solution must be developed to cope with wind’s weekly and seasonal boom/bust cycle. Pumped hydro resources are ideal, but rather limited in the United States. Gravity storage solutions are emerging as a means to provide “synthetic hydro”. This technology along with thermal and compressed air storage are in their infancy, however, and are not likely to impact demand in the current forecast period. Power-to- gas applications may also be a boon to wind energy but are likewise post-2030 developments.
A reduction in solar’s market share could also be realised if the ITC were to expire or existing tariffs against solar modules were to be maintained long term. To date, the solar market has been able to overcome tariff impacts, but the market will be tested as the ITC phases out.