U.S. to continue leading the way
Growth in the US expected to add +18 GW of renewable capacity per year until 2020 to meet environmental (RPS) targets and wind energy competitiveness, according to NREL. Incentives as PTCs and the prevalence of PPAs also play a key role.
Historically, the typical framework of wind development in the US has been decentralised, with no national feed-in tariff. It involves the combination of two key drivers of the top line:
- PTCs: production tax credits are the dominant form of wind remuneration in the US, and represent an extra source of revenue per unit of electricity ($23/MWh in 2015), over the first 10 years of the asset’s life. There are other mechanisms as well, such as ITCs, investment tax credits equal to 30% of the initial capex usable in lieu of PTCs.
- PPAs: long-term bilateral power purchase agreements by which a wind developer can sell its output at a fixed price, usually adjusted for inflation or a negotiated escalator. Demand for PPAs has been very strong, driven mainly by the need to meet renewable portfolio standards (RPS) targets but also from increasing improving relative competitiveness of wind energy.
The PPA + PTC combination allow wind energy companies to ‘lock-in’ a return over the life of the assets. The final goals targeted by the application of this framework involve cost competiveness and affordability, security of supply and environmental concerns.
LONG TERM VISIBILITY OF INCENTIVES
Historically, eligibility for production tax credits incentives has been made possible for a couple of years at a time, over a limited period, without any visibility on any further extensions. After many extensions in a ‘stop and go’ approach, companies required visibility on the investment horizon for wind energy companies. The President of the US signed in December 2015 the Consolidated Appropriations Act, 2016, which includes the extension of energy-related tax incentives for renewable energy in the country. As a result of this Act, wind energy projects that begin construction before January 1st 2020 will qualify for 10 years of Production Tax Credits (“PTC”) on the electricity output. Previous to this extension, PTCs were available for wind energy projects that had begun construction before January 1st 2015. The 5-year extension also includes a phase down according to which the PTC value shall be reduced by 20% in the case facility construction begins after December 31st, 2016, and before January 1st, 2018; by 40% if construction begins after December 31st, 2017, and before January 1st, 2019; and by 60% if construction begins after December 31st, 2018, and before January22020. Projects also have the option to choose, in lieu of the PTC, an Investment Tax Credit (“ITC”) on the project cost during the same period and with the same phase down percentages. This framework provides long-term visibility and an improved environment for the development of new wind and solar projects, thus creating conditions to allow EDPR to further execute competitive projects in the US and strengthen its presence in a country that is already its main growth market. PTCs are currently crucial, but their relative importance is likely set to decrease over time. The economics of wind power in the U.S. are rapidly improving, necessitating lower and lower PPA prices, to the point where wind is competitive on its own in some areas against other traditional technologies, on a ‘new-build’ basis. The various RPS and other environmental goals will still represent a substantial incentive, PTCs notwithstanding.
WIND ENERGY COMPETITIVENESS
The improving wind energy economics include decreasing capex and opex per MW, and even more per MWh due to the increase in load factors via technology improvements in wind turbines and also overall excellent wind resources in the US, especially in the regions with best resource available. In the west and east states, load factors are typically within 25-30%, while in the central states those are typically of 30-45%. This naturally makes wind energy further more competitive from a fundamental standpoint, even without incentives.
The renewable portfolio standards (RPS) are designed to require power suppliers to provide a minimum share of electricity from renewable sources, on a state-by-state basis. Such standards have increased and by 2015 a total of 31 states have binding RPS objectives, as shown in the table below, which excludes the 7 states with voluntary goals. Although those are implemented by states all-round the US, however a strong cluster is observed in the west/pacific cost and the north east. This typically represents 10% to 25% to be reached by 2020-25 for most states, and often foreseeing a gradual increase in the mandated percentage. Renewable Portfolio Standards (RPS) set penalties to utilities that do not procure a certain percentage of generation from renewable resources. Utilities can either invest directly in renewable generation assets, purchasing electricity from other renewable generators or purchase RECs. As a result, many utilities setup auction systems (RFPs) to seek long-term power purchase agreements with renewable energy generators. Due to the competitiveness of wind energy, this technology has received the largest share of awarded PPAs.
Moreover, the U.S. administration has also recently announced (August 2015) the Clean Power Plan by the U.S. Environmental Protection Agency (EPA), a plan to help cut carbon pollution from the power sector by 32% by 2030 (against 2005 levels). Power plants are responsible for about one-third of all US greenhouse gas emissions. This plan implies greater reliance on gas (CCGTs account for c. 40% of the planned reduction emissions), but also on alternative energy sources (c. 25% of the planned reduction emissions), and especially wind.
Demand growth in the U.S. market could still be motivated by other existing forces, primarily the planned coal capacity retirements, wind energy competitiveness as well as RPS compliance in several states. Approximately 42 GW of coal capacity has been announced to retire through 2020 of which we expect wind to absorb a significant share in the replacement of such retirements. Furthermore, renewable energy generation becomes more competitive as a direct result from coal retirement. A higher penetration of energy generated from natural gas can lead to more flexible grids, benefitting intermittent resources such as renewables. Regarding RPS targets in place to encourage renewable energy demand, we estimate 22 GW of wind will need to be added until 2020 in order to fulfil compliance with targets already established. From wind energy competitiveness alone, we believe an additional 7 GW can be added.