Economic Benefits

Falling costs for wind, and other top 5 takeaways from new Wall Street report

Falling costs for wind, and other top 5 takeaways from new Wall Street report
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The annual report on the cost of energy from financial services company Lazard is an eagerly awaited document in the energy business, and there’s a new one out this week. It closely follows the release of the 2013 Wind Technologies Market Report from the Department of Energy in August. For everyone who works in or supports wind energy, here’s what you most need to know:

1. The cost of wind power has decreased 58% over the past 5 years

Wind energy is one of the most affordable forms of electricity today, and the Lazard report shows that it is also the most cost-effective generation option for reducing carbon emissions. Lazard’s numbers show the levelized cost of energy for wind power has decreased 58% since 2009, and 15% in the last year alone.

(Source: Lazard's Levelized Cost of Energy Analysis – Version 8.0)

Technological improvements leading to higher capacity factors are responsible for much of this decline, as well as cost reductions from ramping up America’s wind manufacturing supply chain and avoiding the need to import so many big, heavy components from overseas.

2. Wind power purchase agreements are now at historic lows, saving consumers money

This backs up recent information from the U.S. Department of Energy showing reductions in wind turbine prices and installed project costs. The DOE 2013 Wind Technologies Market Report released last month revealed that wind power purchase agreements (PPAs) have reached historically low levels.

(Source: 2013 Department of Energy Wind Technologies Market Report)

These cost reductions are translating directly into consumer savings. For example, a recently announced PPA between Apex Clean Energy and the Grand River Dam Authority (GRDA) is expected to save GRDA customers about $50 million over the project’s lifetime. Xcel Energy’s Southwestern Public Service Co. announced that three PPAs for wind projects currently under construction will “result in savings of about $590 million, $100 million of which is to go to SPS’s New Mexico retail customers.” As wind prices fall, consumers are reaping the benefits.

3. Wind power is now the most cost-effective form of electricity generation for limiting carbon emissions

In fact, wind power is so cost-effective that it actually saves money as it reduces emissions, making it a win-win for consumers and the environment.

As regulators and policymakers move forward with limiting carbon emissions from power plants, the Lazard study shows that wind power is by far the lowest cost generation option for reducing emissions. Compared to new coal generation, wind saves money, resulting in a negative cost of reducing emissions. Lazard finds that wind actually saves $31 for every ton of carbon it saves by displacing new coal, while natural gas combined cycle saves only $10 for every ton it saves relative to new coal. As utilities and state regulators look for low-cost options to comply with EPA’s Clean Power Plan, Lazard’s data makes clear that wind energy should be near the top of their list.

(Source: Lazard's Levelized Cost of Energy Analysis – Version 8.0)

4. Wind power provides a valuable hedge against fossil fuel price volatility, protecting consumers

Utilities are able to lock in fixed, long-term contracts with wind power, protecting consumers against price spikes by providing a long-term hedge against volatile future prices for fuel. Natural gas prices, for example, spiked during last year’s polar vortex, severely straining many utilities. Wind over performed its projected output, meanwhile, helping keep the lights on for millions and at a fixed price.

As the DOE report shows, current wind PPA contracts remain significantly lower than the entire range of EIA’s future gas price forecasts for the next two decades. Wind will produce very large savings if gas prices increase as expected, but even if gas prices remain low, fixed-price wind will still produce savings.

(Source: 2013 Department of Energy Wind Technologies Market Report)

For example, last year the CEO of the Arkansas Electric Cooperative Corporation announced a 150 MW wind purchase by noting that "Low-cost wind energy provides AECC with a hedge against fluctuating natural gas energy prices…We will continue to pursue energy options that allow AECC’s member cooperatives to provide reliable electricity at the lowest possible cost.”

MidAmerican Energy announced its own large wind purchase by explaining, “The expansion is planned to be built at no net cost to the company’s customers and will help stabilize electric rates over the long term by providing a rate reduction totaling $10 million per year by 2017, commencing with a $3.3 million reduction in 2015.”

5. Policy support is still essential for the U.S. to keep scaling up renewable energy

The Lazard study also highlights the need for clear, long-term policy support for renewable energy. While projects located at some of the best wind resources in the country are now cost-competitive, it notes that this is still not the case in most regions. The most recent expiration of the Production Tax Credit (PTC) resulted in a 92% drop in new wind projects from 2012 to 2013.

(Source: AWEA website)

The PTC helps correct for flaws in our electricity market design that do not value wind’s benefits for protecting the environment and consumers. Wind energy creates billions of dollars in economic value by drastically reducing pollution that harms public health and the environment, but wind energy does not get paid for that even though consumers bear many of those costs.

Wind energy also protects consumers from price increases for fuel, but that is not accounted for in the highly regulated electricity market because other energy sources get to pass their fuel price increases directly on to consumers who have little choice in the matter.

Policies like the PTC correct for those market failures to reach a more efficient market outcome. The PTC has expired, however, for any project not started by the end of last year. An extension is now urgent to avoid shutting down the U.S. manufacturing base, and to ensure that more wind farms are built so that more consumers can benefit from these record low prices.

Economic Benefits

Emily Williams is Manager, Industry Data & Analysis for the American Wind Energy Association. In this position, she manages AWEA’s data collection and analytical agenda, including energy sector statistics, wind project and manufacturing data, and wind market economics.

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