Interesting Times Ahead for American Wind Power
- August 8, 2018
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With the gradual phase-out of the production tax credit already underway, the next few years will tell us whether wind power will remain a single-digit energy source or whether it is destined for bigger things. Here are four things I will be watching as this story unfolds:
Investment after PTC phase-out
The US may be the best country on earth to deploy wind power. It has excellent wind resources (particularly the central plains), lots of open space to deploy wind farms, low benchmark interest rates favouring the construction of capital-intensive technologies like wind power, and plentiful natural gas to run backup dispatchable power plants.
As a result, US wind power has the best chance to thrive in a post-subsidy environment. We can only hope that the economically destructive boom-bust cycles associated with subsidized deployment do not repeat themselves (below).
Replacement of retired turbines
A significant fraction of US wind turbines are now approaching the end of their economic lifetimes as operating costs increase and performance decreases with age, while value continues to decline with more new wind capacity being brought online. There are several important questions about the wind retirement process:
Will old wind farms be retired or repowered? Repowering will be more economical, but the tower heights of older wind farms are likely too low for economic reuse.
What will retirements/repowering cost? Taking down and recycling or disposing of the turbine and the tower can be a costly process. On the other hand, repowering can be cheaper than constructing a new turbine from scratch.
Can wind power continue to grow as retirements accelerate? Up to now, all new builds led to an increase in installed capacity, but increasing retirements each year will require significant new installations just to maintain the installed base.
How much will the average capacity factor increase as old turbines are replaced by new ones? Wind power has made great progress in increasing capacity factors (below) and replacing old turbines with new ones on the best sites could therefore significantly increase value.
Broader power system modifications
Despite many years of strong growth, wind power still provides only about 6% of electricity consumption and 2.6% of primary energy consumption in the US. If wind power is to make the contribution that renewable energy advocates envision, this share will have to increase many-fold.
Increasing wind market share beyond the current level is not just about building more wind turbines. Further increases in wind consumption will require large grid expansions to transport wind power from the windiest regions to other demand centres across the country. Currently, central states already get 30+% of their electricity from wind (below), greatly reducing the value of wind power.
The key question is whether post-subsidy wind can be attractive enough to drive these massive grid expansion investments. Only time will tell.
While the PTC phase-out will slow wind power down, the introduction of CO2 pricing will provide a welcome boost. When will the US get meaningful CO2 pricing? Certainly not under a Trump presidency, but who knows what happens in the next election.
A European study found that moderate CO2 prices are best for wind power because it will increase the operating costs of dispatchable thermal power plants. When CO2 prices become high, however, decarbonized dispatchable plants will be required, causing wind value factors to fall. As shown below, this leads to a peak in optimal wind market share at a CO2 price around €30/ton.
The question of CO2 pricing is a longer-term issue though. As outlined in the preceding points, wind power has more pressing matters to attend to. We are certainly in for an interesting couple of years.