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Wind’s fight with fossil fuel is transitioning to crafting a strategy to cope with solar. As the energy transition unfolds in the United States, it introduces new power market dynamics that fundamentally favor solar power over wind.
Solar power represents the largest threat to the U.S. wind industry, as is clearly illustrated in Wood Mackenzie’s latest five-year forecast. In order to counteract this threat, the wind industry must be focused on the following:
- Ambitious technology advancement for onshore applications to keep pace with solar levelized cost of electricity (LCOE) developments
- Development of infrastructure that supports the growth of the U.S. offshore wind market
- Support of high-voltage transmission that can alleviate congestion issues that are negatively impacting power price dynamics
- Development of technology and remuneration frameworks for long-duration storage applications specifically geared toward wind farms
The first portion of our analysis is informed by the net cost of new entry for wind and solar. Net CONE goes one step beyond LCOE, introducing the impacts of renewables penetration and the subsequent impact on local power prices to derive the attractiveness of one technology versus another.
In the simplest terms, net CONE is an estimate of the “missing money” needed by a new generator in its first year of operation to make it economically viable to build a power plant. CONE is primarily based on the reference technology’s capital, operating and other appropriate costs and its expected operating performance. Net CONE subtracts the energy, ancillary services, capacity and tax credit revenue from CONE to highlight if a project is in the money or not.
The implications of this metric are significant from a strategic standpoint. Although wind and solar power will share similar LCOEs, the time at which they are generating that low-cost power differs substantially, both from an hourly perspective, as well as a daily or even monthly perspective.
One of wind’s biggest issues has always been its diurnal pattern, which does not always line up well with peak power demands, hourly and seasonally. Wind resource is typically strongest in the morning and evenings, when load demand is lower, as well as in spring and winter months when load demand is also lower.
Power prices fluctuate as a function of supply/demand, and in periods of lower demand the system is at low utilization, causing prices to drop (sometime going negative) and pressuring power plants with poor cost positions.
In aggregate over the course of a year, net CONE will trend toward positive, indicating that it is not economical to build a power plant in that region until supply/demand imbalances are corrected.
These curves are obviously not set in stone, but it has been largely established that load demand is not expected to grow substantially in the coming years, and the LCOE of wind and solar are on more stable trajectories (wind slightly more than solar) given the maturity of both technologies.
So, what can change the primary parameters of this analysis, and how does it impact the fortunes of wind versus solar?
Public policy that alters the subsidized LCOE of either technology will have a meaningful impact on CONE. The phaseout of the federal Production Tax Credit (PTC) is upon us, and the economics of wind in the United States will suffer as a result.
The evolution of wind turbine technology and lower weighted average cost of capital allowed by movement away from tax equity finance will aid in recovering some of that lost PTC benefit, but not all of it.
The solar market is under similar stress, as solar stakeholders must cope with a phase-down of the federal Investment Tax Credit through 2022, after which it remains at a constant 10 percent in perpetuity. The PTC is not expected to be renewed, so solar will have an advantage over wind with respect to federal public policy.
At the state level, the most noteworthy policy deals with offshore wind energy carve-outs in the Northeast that will override net CONE issues and thus are not considered here.
Load curves are central to net CONE, and the rapid evolution of utility-scale battery technology can reshape those curves. Industry participants have become deeply familiar with the infamous California duck curve and thus understand the issues that arise when wind and solar power penetration levels increase.
The deployment of energy storage can aid in alleviating the supply/demand imbalances discussed above by shifting oversupply from variable energy resources (VERs) like wind and solar to times when those VERs are not available.
Lithium-ion battery technology defines the commercial use case for utility-scale storage, and is generally viable for ancillary services (frequency regulation) and short-term load arbitrage applications (<8 MWh). A battery’s value is defined by its ability to create revenue by charging during periods when supply is high and prices are low and then discharging when supply is low and prices are high.
The frequency of this charge/discharge cycle is critical to revenue, and here solar power is more suitable for economic development, as solar’s generation profile is more consistent on a daily, weekly and monthly basis. A storage asset co-located at a wind facility may not be able to execute a full charge/discharge cycle for days or weeks at a time. Further, a storage asset co-located with a solar plant is able to leverage the benefits of the aforementioned ITC.
Outside of the power market economics, it is clear that end-user demographics are changing, with commercial and industrial buyers becoming increasingly important to overall demand for both wind and solar. C&I buyers represented 20 percent of U.S. wind demand in 2018.
Demand drivers for C&I buyers vary, but in general most companies are seeking to promote their environmental sustainability efforts to gain favor from their clients, and also to hedge against rising electricity costs. C&I buyers are exceptionally risk-averse and largely technology-agnostic, and instead are focused on cost certainty.
Wind has curried favor with C&I buyers for years due to its lower LCOE and tremendous scale, which was important for large-scale power users. However, with solar's LCOE converging with wind’s, the scales are tipping toward solar adoption.
Solar has far less risk from the previously discussed weather/resource perspective, as well as an operational perspective. Solar’s smaller scale and ability to take advantage of pockets of transmission availability also provide some added advantages for smaller C&I buyers that may not be able to absorb the power from a 100+ megawatt wind farm.
Finally, land intensity remains a key differentiator between wind and solar that can override many of the arguments highlighted above.
Solar requires 5 to 7 acres per megawatt, while wind’s direct land use is ~0.75 acres per megawatt. The differences are material, but utility-scale wind and solar are both experiencing permitting issues in areas with seemingly abundant land resources.
Regardless, the focus of this argument is not on the wide-open spaces of the U.S., but rather the urban population centers on the East and West Coasts. It is not feasible to build large-scale wind plants or solar plants in urban locations, though the opportunity to place distributed solar assets on commercial rooftops and residential dwellings is feasible.
Offshore wind is emerging as viable alternative, but a great deal of investment must be placed in supporting infrastructure and supply chain resources to reach the next level of cost reduction for offshore wind.
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Dan Shreve is Global Head of Wind Energy Research for Wood Mackenzie Power & Renewables. Dan will be presenting at an invite-only breakfast briefing at AWEA's WindPower 2019. Email power@woodmac.com to inquire about attending.
Visit WoodMac on the WindPower 2019 expo floor at Booth #4533.