As the possibility that federal renewable energy incentives – such as the production tax credit (PTC) for wind power – will not be extended inches closer and closer to reality, participants in the industry supply chain need to start finding ways to adapt.
According to Barbara Sands, renewable energy expert at PA Consulting Group, if federal renewable energy incentives such as the PTC expire, more than $20 billion (based on approximate capital costs of $2,000/kW in 2012 for installed wind capacity) will be shifted from the federal level to the state level – in other words, from all U.S. taxpayers to just customers in states with renewable portfolio standards.
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, Sands says.
Wind developers, equipment manufacturers and utilities will all need to face this issue, but proactive planning can help ensure they are still able to be profitable, experts say.
Wind energy developers, for example, will need to focus on sites and projects that provide the best economics. The elimination of federal incentives will compound the economic challenge that renewable energy developers face in acquiring financing for future projects and selling renewable power.
In addition, wind energy developers are already grappling with the impact on power prices of the current and projected low cost of natural gas. In fact, natural-gas prices would need to almost triple from the current levels of less than $3.00/MMBtu for renewable energy to begin to be competitive on a total cost-per-megawatt basis, according to PA Consulting.
Likewise, utilities will need to find a way to recover the high cost of renewables. If utilities' renewable energy purchases end up costing more than double the available price of energy, many will fear challenges in the coming years. As a result, pressure will be placed on regulators to allow them to recover the higher cost of renewable energy in future rates, thereby passing these costs on to customers.
The lack of federal incentives will also have a chain reaction on equipment manufacturers, which will come under pressure from wind energy developers and wind farm operators to both improve their products' performance and reduce the cost of their equipment.
However, 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, PA Consulting says.
Therefore, manufacturers will need to decrease fixed capital costs and improve efficiency to become cost-competitive.