Wind industry will be cushioned by five trends when key tax credit expires, WoodMac says
Energize Weekly, August 22, 2018
The federal wind production tax credit, which has been a key driver in the development of U.S. wind power projects is set to expire, but energy consultant Wood Mackenzie says there are five factors that will cushion its loss.
The production tax credit (PTC), which grants a credit for each kilowatt-hour a wind project generates in its first 10 years of operation, was first created in 1992. The first time Congress let it lapse in 1999 led to a near halt in projects. Since then it has lapsed several times before renewal leading to boom-bust cycles.
In 2015, the PTC extension included a stepped-down, phase-out with the value of the credit being reduced 40 percent in 2022 and 60 percent in 2023 before ending completely in 2024.
Nevertheless, Wood Mackenzie has identified five trends and policies that will “sustain demand for new wind capacity additions in the market.”
1. Sustained pace of coal retirements
While the Trump administration is trying to bolster the coal mining industry and maintain coal-fired power plants, “economic realities will continue to underpin a robust pace of coal retirements,” Wood Mackenzie said. Between 2018 and 2027, 66 gigawatts (GW) of coal-fired generation is projected to be shut. Wind will play a role in meeting supply gaps as utilities are increasingly willing to rate-base wind generation, even above and beyond state-set renewable energy portfolio requirements.
2. Supportive state renewable energy standards
State renewable energy standards (RES) will continue to provide key demand after the PTC phaseout. “While RES is not the driver it once was and the pace of RES policy strengthening has fallen under the Trump administration after a rash of expansions in 2016, Arizona, California, and Massachusetts are currently close to passing significant RES expansion measures,” Wood Mackenzie said. The RES is especially important in states with less than optimal wind and less competitive costs compared to other generation sources.
3. A burgeoning offshore wind sector
There have been three state-level successful competitive solicitations for offshore wind capacity, awarding contracts for approximately 1.8 GW of offshore projects in federal waters off the coasts of four states.
On August 1, Avangrid and Copenhagen Infrastructure Partners announced an 8.9 cents a kilowatt-hour price for their 800-megawatt Vineyard Wind project off the coast of Massachusetts. Wood Mackenzie notes that while future projects won’t be able to leverage the tax credits as effectively as the Vineyard project it still represents a “huge leap” in U.S. efforts to close the gap with European offshore wind pricing.
There are solicitations for projects in New York and New Jersey in the next 24 months, so that offshore wind will ramp up just in time to cushion some of the blow to installation volume caused by the PTC phaseout.
4. Steady wind power cost reductions
It will take a decade for wind power prices to return to the low levels they have achieved with 2.3-cents-a-kilowatt-hour credit the PTC offered. Nevertheless, steady cost reductions from technology improvements, the adoption of bigger turbines with larger blades and a sweeping supply chain reorganization will keep wind competitive on a pure-cost basis in much of the U.S. “wind-belt” region during and after the PTC phaseout, Wood Mackenzie said.
When the phaseout is compete in 2024, wind will still be cheaper in 20 states than new combined-cycle natural gas facilities on a levelized cost of energy basis. That figure will grow to 28 states by 2027. Solar photovoltaic installations, however, will be a strong competitor as its cost reductions will proceed faster than wind’s while solar has an extended phaseout of its tax credit that starts in 2024.
5. Evolving battery storage solutions
Battery storage costs will continue to fall with technological innovation and as supply chains and manufacturing processes mature. Regulatory initiatives are also underway to better integrate batteries into the grid and value storage capacity. “As battery costs fall, especially for four- and eight-hour battery solutions, the natural gas peaking model grows increasingly ripe for a disruption that will create new opportunities for wind capacity additions,” Wood Mackenzie said.