US must step up to PTC challenge


May 23, 2016

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With its vibrant nightlife and exciting cuisine, New Orleans has a reputation as a party city.

There could not be a more appropriate venue for the American Wind Energy Association’s annual Windpower conference this week. The industry has been celebrating for the last six months after the US government unexpectedly extended the production tax credit late last year. This gives investors, developers and manufacturers certainty through to 2020. We expect there to be a good mood around the News Orleans event for this reason.

But it will not be all fun. The five-year extension of the PTC is exciting. It is a lot more than most industry experts expected 12 months ago. It has also laid down the major challenge to the wind industry that new wind farms from 2021 must be able to produce power at the same price they currently produce it with the PTC, and ideally even less. Wind has to front up to this challenge or it risks losing out to other sources including natural gas.

The PTC extension is only good if the industry can grasp the opportunity that it presents.

There are good reasons to be positive. In its annual report on the state of the US market last month, AWEA said that the cost of wind power in the US in 2015 was two-thirds lower than in 2009. A large part of this is due to improved turbines, and more can be done.

Manufacturers are optimistic that they can do it. For them, the five-year extension means two equipment development cycles and more confidence to invest in research now. Over time, this is likely to mean more efficient equipment at lower costs, which should help drive down the levelized cost of energy to the level that the industry has to reach. Game on!

It may not result in short-term savings for developers, as manufacturers charge a premium for their new more-efficient machines but, in the long-term, competition and innovation can only be a good thing. Efficiency is only set to rise and costs are only set to fall. There is no sense in those manufacturers pricing turbines at prices few are willing to pay. These firms have as much of a vested interest in the fast growth of wind as anyone.

To see how far the US wind industry must go in the next five years, we need to look at a few figures. Bloomberg New Energy Finance reported in October that US wind farms are producing power at a levelized cost of energy of $80/MWh compared to $65/MWh for oil and gas, though with state-by-state variations. The gap is closing but needs to disappear.

This is with PTC support of $23/MWh for the first ten years, which is being cut gradually and there will be no support offered to projects where construction starts in 2021.

From the situation a year ago, this is a nice problem to have.

Surviving in a post-PTC world is not the only challenge facing the industry. Investors are likely to look sceptically at renewables deals over the short-term following the high-profile implosion of SunEdison, which could affect money coming into the sector. And then there are issues with transmission, wildlife protection, and regulation in the US offshore sector.

But most of these concerns only exist because developers are able to build projects that make financial sense. Responding to the PTC challenge is key if schemes are to continue to make financial sense. The industry must now step up to this challenge.

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