A number of recent reports paint a bright future for the U.S. wind industry thanks to continuing cost declines, with reductions of more than 60 percent since 2009. This cost trajectory is attributable to, among other things, advanced manufacturing techniques, improved construction methods, larger turbine blades, economies of scale, and other advances in turbine technology.
While manufacturers and construction companies continue to bring down the cost of building and installing wind turbines, innovative technology enables turbines to access better wind speeds at higher elevations, capturing more of the wind’s energy and turning it into electricity with greater efficiency.
Wind energy has reached a pivotal cost position in the power sector. Many recent reports from a variety of consultants, research groups and banks highlight the positive outlook for the U.S. wind industry thanks to the compelling cost position of new wind projects compared to other forms of new power generation. This builds on several earlier reports that we’ve highlighted previously. Thanks to the low cost of wind combined with the current availability of the wind production tax credit (PTC), a number of utilities have recently announced plans for very large wind investments. Here’s a review of some of those reports, along with highlights of some of those utility announcements.
In an equity research note dated June 30, Goldman Sachs concluded that “when compared to other incremental sources of power, wind provides the lowest cost source of new capacity.” The investment bank calculated current wind levelized cost of electricity at $29/Megawatt Hour (MWh), compared to $38/MWh for natural gas combined-cycle plants and $57/MWh for utility-scale solar PV projects. For reference, a MWh provides enough electricity to power a typical home for a month. Goldman expects this comparative cost advantage to drive “robust” wind development into 2020.
Into the next decade, Goldman expects wind capacity factors to increase due to technology advancements while costs to continue to fall. In combination, the bank expects wind costs to fall in the $30-$35/MWh range as the PTC expires. In sum, Goldman finds “the economics of wind development remain compelling.”
On July 11, Macquiaire Research published new analysis showing wind to be cost competitive on a levelized cost basis in 2023, following the expiration of the PTC. Macquiaire projects wind costs to lie around $42/MWh compared to $66/MWh for natural gas combined-cycle plants. As the 2020s progress, wind continues to be cheaper than gas plants through the end of the decade.
Macquarie Research also looked at levelized cost of electricity comparisons in 2016 including the PTC. With the tax credit in place, Macquarie projects electricity from new wind projects to cost around $23/MWh compared to $50/MWh for new gas plants. Given U.S. wind energy’s cost position, Macquarie finds the U.S. to be the most attractive wind market in the world, surpassing both China and Europe.
More recently, Morgan Stanley published a report on July 27 concluding that wind and solar developments will perform strongly through the next decade regardless of who is elected president, primarily due to their economics. In the interior of the country, Morgan Stanley calculates the levelized cost of wind electricity at around $15-$25/MWh range – far lower than the cost of a new natural gas combined-cycle facility, which costs roughly $55-$65/MWh in the same region.
Bloomberg New Energy Finance
One of the first reports this summer highlighting wind’s cost competitiveness came from Bloomberg New Energy Finance (BNEF). On June 13, BNEF published an article noting that “in many regions, the lifetime cost of wind and solar is less than the cost of building new fossil fuel plants.”
BNEF see technological innovations driving much of wind’s cost declines. Larger turbine blades that are able to capture more wind – combined with smart technology that allows project developers to optimize turbine placement and operators to optimize production and predict component issues before they happen – enable wind projects to operate at higher capacity factors. These higher capacity factors mean wind turbines are generating more energy over a given time period. Given zero fuel costs and fixed capital costs, this lowers the levelized cost of wind generated electricity.
Looking forward, BNEF expects wind costs to fall even further. Globally, for every doubling of installed wind power capacity, prices fall 19 percent. At that rate “wind and solar will be the cheapest forms of producing electricity in most of the world by the 2030s.”
Other Data Confirm Wind’s Cost-effectiveness – LBNL, EIA, and Lazard
While this collection of new reports is a refreshing confirmation of wind’s low cost, the results are nothing new. Yesterday, Lawrence Berkeley National Laboratory (LBNL) released the latest version of its Wind Technologies Market Report. Besides a rich discussion of industry, technology, and performance trends, the report provides an insightful section tracking historical wind cost and power price trends. Documenting levelized power purchase agreement (PPA) prices going back to 1996, LBNL’s sample of wind power purchase agreements (PPAs) shows national average wind prices to be “around the $20/MWh level” compared to $70/MWh during the peak in 2009. The price trend has been consistently downward since 2009, with some variability in prices across different regions and projects, as one would expect.
LBNL attributes wind’s low price to two primary factors: 1) low wind turbine pricing pushing down installed project costs and 2) larger, more advanced turbine designs delivering increased output. Installed wind project costs in the U.S. in 2015 averaged roughly $1,690/kW, down 27 percent from peak installed costs back in 2009 and 2010. More interestingly, installed costs are down even as wind turbines grow larger and increase their rotor diameters, which tends to increase costs per kilowatt (kW). These technological advances are helping new wind turbines to capture more wind and perform more efficiently.
LBNL notes that wind turbines installed in 2014 had a capacity factor of 41 percent during 2015, compared to just 31 percent for projects built in the period from 2004 to 2011, one of the main reasons that PPA prices and levelized costs per MWh continue to fall. As shown in the chart below, the increase in capacity factor has been very rapid over the last several years of project installations. The report finds that this increase in output has been driven by both the move to larger turbines and by siting turbines in areas with higher wind resources, the latter being driven in part by recent grid upgrades.
Earlier this month, the Energy Information Administration (EIA) also released its widely-used estimate of wind energy costs. EIA reports an average installed cost for wind of $1,536/kW, much lower than its cost assumption in recent years. EIA’s estimate for the capacity factor of new wind projects has also significantly increased from prior years. As a result, EIA shows wind as having a levelized cost of $58.50/MWh without incentives, which is down significantly from $73.60/MWh last year.
This levelized wind cost is about the same as its estimate of $56.40/MWh for conventional combined cycle gas generation or $55.80/MWh for “advanced combined cycle.” Notably, EIA’s analysis understates the real-world cost of gas combined cycle generation by assuming that the plant will operate at a very high 87 percent capacity factor, thereby diluting the fixed costs across more MWh, even though the average natural gas combined cycle plant had a capacity factor of 56.3 percent in 2015. Correcting to the actual average capacity factor yields a gas combined cycle cost that is $8-9/MWh higher than indicated by EIA’s levelized cost figures, and higher than wind’s levelized cost. EIA also reports an average weighted wind cost of $34/MWh after accounting for the value of the PTC.
While EIA fixed the flaws in its assumptions that have previously caused it to overestimate wind costs and underestimate wind plant capacity factors, other flaws in its analysis cause it to still underestimate wind deployment going forward. Despite 60 percent cost reductions over the last seven years, and NREL projections of 20 percent or more cost declines for wind energy through 2030, EIA inexplicably assumes that wind energy is a mature technology that only sees five percent cost reductions through 2035, while other technologies like solar, nuclear, and even many types of gas generation are assumed to experience many times larger cost reductions. As a result, EIA’s report still greatly underestimates wind energy deployment, particularly in the 2020’s and beyond.
Lazard, a Wall Street investment firm, also found new wind generation to be the lowest cost energy source in its latest annual levelized cost of energy analysis. At the low end, Lazard calculates the levelized cost of wind energy without the PTC at $32/MWh compared to utility-scale solar PV at $50/MWh and gas combined-cycle at $52/MWh, without accounting for incentives. With incentives, Lazard finds wind pricing available as low as $14/MWh. Lazard also reports regional ranges for wind costs, which show wind to be competitive in nearly all regions.
A number of utilities are capitalizing on wind’s low cost
As shown in the following chart from NREL’s February report, time is of the essence for utilities seeking to lock in maximum savings for their customers. Prices for wind purchases from projects that begin construction this year are likely to be at an all-time low, thanks to the combined impact of the full value PTC and recent wind cost reductions. Forward-looking utilities buying wind this year are locking in prices at the lowest point on that V-shaped price curve before the PTC begins to decline in value.
Utilities across the country are aggressively pursuing wind investments and purchases to capitalize on recent reductions in wind costs and the full value PTC:
-Kansas City Power and Light recently announced a 500 MW wind PPA, noting “This tax credit allows KCP&L to pass savings along to customers, keeping rates lower than would otherwise be possible.”
-Appalachian Power announced a 120 MW wind PPA in June, explaining “The extension … of the wind PTC provides cost advantages to wind energy resources constructed over the next five years and makes this agreement cost-effective for Appalachian Power customers.”
-MidAmerican Energy recently announced a $3.6 billion, 2,000 MW investment in wind, explaining that “Investments of this scale are viable because federal production tax credits are at their highest level.”
-Xcel Energy Colorado made a similar announcement for a $1 billion, 600 MW wind investment.
-Earlier this year, PacifiCorp and Portland General Electric both announced RFPs for renewable resources, with Portland General noting it was doing so now “in order to procure renewable resources to maximize the economic value of available tax credits on behalf of our customers.”
-WPPI Energy also announced a 100 MW RFP in June, stating that “With the recent extension of federal renewable energy tax credits, we anticipate that bidders might be able to offer renewables to cost-effectively fill our need for future power supply resources.”
In sum, thanks to improved turbine technology, wind energy now consistently ranks as the lowest-cost source of new electricity generation across the country, providing a bright future for the U.S. wind industry.