U.S. wind power is on a roll, with wind farms sprouting like weeds. But in the near future, utilities may end up paying higher prices for wind capacity because state regulators are, in effect, imposing an artificial floor on national demand for generation fueled by renewable resources. At last count, at least 20 states had enacted some form of a Renewable Portfolio Standard (RPS). Some RPSs require utility resource plans to include a minimum amount of renewable energy by a date certain. Others insist that a certain share of a utility's sales 5%, for example-represent electricity generated by renewable "fuels" (including wind). If a utility's share falls short, it can fill the gap by buying renewable energy credits or certificates (RECs), denominated in kilowatt-hours, on the open market. By increasing the required share of green power over time, RPS policy attempts to push its states generation industry toward greater sustainability.
Early birds get best worms
Most utilities are serious about meeting their state-mandated RPS goals. But the current market leaders FPL Energy, Xcel Energy, and Southern California Edison embraced wind power long before they had to because they realized that doing so was a good business decision. The early adopters willingness to pay early wind power's cost premium over fossil-fueled generation has supported the industry's growth and allowed them to lock up the projects likely to have the lowest production costs. Latecomers, by contrast, will end up with RPS portfolios full of higher-priced capacity.
Why is future wind power capacity likely to cost more Economics 101 tells us that increased demand for anything raises its price, unless supply grows to fill the gap. Wind may be a renewable resource, but its supply how often and how strongly the breezes blow over the proposed site of a wind farm must be considered locally limited. More-efficient turbines will continue to lower wind power production costs, but not enough to offset the effect of market forces.
Accordingly, I'd advise state regulators to look to the near future, when choice wind farm sites will be in shorter supply. Regulators should recognize that, for example, ratcheting up RPS requirements before there is enough cost-effective wind power capacity for utilities to choose from could result in higher retail electricity prices.
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