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Addressing the challenge of expiring federal incentives for renewables

North American Clean Energy

Barbara Sands

17 May 2012


In the US, federal incentives have been the major driver in reducing the direct cost of renewable energy generation to customers. Between 2009 and 2011, the federal cash grant programme provided almost $10 billion to renewable facilities, reducing the direct cost to customers by approximately 30%. However, this programme expired at the end of 2011, and incentives for wind generation expire at the end of 2012, with others doing so soon after. Congress has extended these programmes in the past, but not without challenges. Over the last several months, there have been several attempts to include the extension of these incentives as part of other legislation.

At the same time that these incentive programmes are going away, the target level for renewable generation under state renewable portfolio standards (RPS) is starting to increase, with most programmes ramping up to achieve their maximum targets around 2020.

With the elimination of federal incentives for renewable generation, more than $20 billion, based on approximate capital costs of $2,000/KW in 2012 dollars for installed wind capacity, may be shifted from the federal level (i.e. all taxpayers) to the customers in states with RPS targets. The resulting rise in energy costs will test state, and by extension, regulator support for renewables, and participants across the sector will face a number of complex challenges from this evolving scenario.

Players across the supply chain will need to adapt.

Equipment manufacturers will come under pressure to improve performance.

Equipment manufacturers will come under pressure from renewable developers and operators to continue to reduce the cost of their equipment as well as the ongoing operation and maintenance costs. But assuming the current projected level of natural gas prices of about $4.50/MMBtu, the capital cost of wind projects would need to be at least 35% lower for wind generation to be competitive with new natural-gas-fired generation. The capital cost of solar projects would need to decrease by an even greater amount to be competitive. Given the magnitude of the equipment cost decreases already seen, this seems challenging. Manufacturers would need to decrease fixed capital costs and improve efficiency for a broad base of renewable generators (i.e., not a few selected resources located in the best wind regions) to become cost competitive across the US.

To be competitive, renewable developers will need to focus on sites and projects that provide the best economics.

Renewable generators are already grappling with the impact on power prices of the current and projected low cost of natural gas. Natural gas prices would need to almost triple from the current levels of less than $3.00/MMBtu for renewables to begin to be competitive on a total cost per MWh basis. In addition to low natural gas prices, previously proposed federal greenhouse gas legislation, which would increase the cost for generators using fossil fuel, is unlikely to be enacted and provide a boost to the renewable industry anytime soon.  Furthermore, it is important to note that comparing wind and most solar resources to natural gas-fired generators is not exactly an “apples” to “apples” comparison. Most of these renewable generators are intermittent resources, providing minimal capacity value and thereby requiring a utility to buy additional capacity to firm up the renewable resource. Additionally, many of the best sites for these resources may require significant transmission investment to deliver the renewable power to the load centres. The elimination of federal incentives will compound the economic challenge that renewable developers face in acquiring financing for future projects and selling renewable power.

Utilities will need to find a way to recover the high cost of renewables.

Many of the states’ renewable targets were established, and even increased, when state economies and budgets were stronger and commodity prices were higher. With the projected low price of natural gas and the expiring federal incentives, the price utilities pay for renewable energy purchases could potentially cost more than double the price they pay for their other energy purchases. This difference in cost could lead to potential prudence challenges in the coming years. As a result, utilities will place pressure on regulators to allow them to recover the higher cost of renewables in future rates, thereby passing these higher costs to customers. Ultimately, customer support will play an important role in determining the future of renewables.

Barbara Sands is a renewable energy expert with PA Consulting Group.

To read the article online, please click here.

For more information on PA’s expertise in Renewable Energy, please click here or contact us now.

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