Natural gas prices and low wholesale electricity prices are creating headwinds for large-scale renewable projects such as wind.
A combination of relatively low natural gas prices and efforts to roll back or end renewable portfolio standards (RPS) in several states is placing pressure on renewable energy in the U.S. At the same time, however, developers remain mindful of the need to begin construction this year on large-scale wind power projects to take advantage of a production tax credit (PTC) extension approved by Congress earlier this year.
Those were key themes discussed during a session at ELECTRIC POWER 2013 on market forces impacting renewable energy finance and development. Much of the discussion focused on large-scale wind projects.
With the PTC extension in place, Mid-American Energy Co. said in early May that it plans to add up to 1,050 MW of wind generation capacity in Iowa, representing as many as 656 wind turbines, by the end of 2015. The proposed new capacity needs state regulatory approval. MidAmerican estimated that by January 2016 it may be able to generate almost 40% of its January retail output from wind, including the proposed additions.
“Capturing the PTC is important,” said David Streicker, an attorney with Polsinelli Shugart and conference session moderator. He said it is unlikely for wind projects not under construction by the end of the year to move forward since PTC eligibility is linked to construction. He said that last year, more than 13 GW of wind capacity was brought online, representing a capital investment of $25 billion. A report in mid-May from SNL Energy said that around 8 GW of new capacity was brought online in the fourth quarter alone. By contrast, SNL said the first-quarter 2013 wind capacity addition was the wind industry’s worst since 2006. Around 384 MW of capacity was installed, down from more than 1,900 MW in the same quarter a year ago.
The boom-and-bust nature of the wind industry helps illustrate the important role played by the PTC and the industry’s continuing vulnerability to changes in public policy such as renewable portfolio standards, the ELECTRIC POWER audience was told.
“The Achilles heel of RPS is that it’s a mandate,” said Mark Pruitt, principal with the Illinois Community Choice Aggregation Network and former director of the Illinois Power Agency. “It is always going to be tenuous to count on an RPS.”
Bill Smith, executive director of MISO States, said regional operating rules allow negative market prices as a way to signal generators to cut production. Smith said it’s difficult, however, for a baseload nuclear power plant to cut its output in the face of negative pricing. In those instances, nuclear operators pay “because they can’t shut.” Wind generators, by contrast, can still afford to pay negative prices and remain connected to the grid as long as the payment they make is less than what they earn through PTC payments.
Pruitt said challenges to state RPS policies stem in part from the fact that lower natural gas prices and reduced electricity demand have hit wholesale electric power prices and kept them low. This in turn has widened the gap between market prices and the cost of renewable energy, rendering long-term power purchase agreements economically unattractive in some instances. At the same time, questions are arising over renewable energy’s ability to fill gaps left by retiring fossil-fueled generating units, particularly given how flexible and relatively low cost natural gas–fired generation can be.
“What’s best, low carbon or no carbon?” Pruitt asked, saying that renewable energy sources’ intermittency adds to that evaluation. In its favor, wind energy can act as a price hedge against natural gas because the renewable resource has a zero fuel cost over its lifetime.
Pruitt outlined four ways that RPSs can be modified to protect them from challenge. First, standards can promote uniform and marketwide participation with a common set of rules. Second, they can promote cost-based competition. Third, RPS standards can adopt a “big tent” approach and eliminate set-asides that benefit specific technologies. And fourth, RPS designs can be designed better. He cited the current Illinois RPS as being so complex it could bankrupt some companies and said the standard is “divorced from the reality of the market.” He said the Iowa RPS, by contrast, is more successful because it is less complicated and sets more readily achievable goals.
— David Wagman is POWER’s executive editor.