Wind - The Pivotal Resource

A Power Generation BlueBook Perspective

Wind is probably the most widely applicable renewable
technology that is also economically viable. This is evident in a
regional comparison of wind net present values relative to their
construction costs.

Areas that are already hot spots for developing wind—such as

New York, ERCOT, and Southern California—show up as top
performers. New England stands out, not only because it shows
the highest NPV, but also because this is the only offshore
location modeled, which explains the above average returns.

Other areas with significant wind potential, such as Wyoming

and North and South Dakota, do not fare as well. Despite good
access to wind, power prices in these regions are generally low
due to low cost coal-fired capacity that tends to keep prices, and
thus wind gross margins, below average.

Global Energy quantified the impact of meeting the renewable

portfolio standards adopted by 20 states and the District of
Columbia in a study entitled Renewable Energy: The Bottom Line
finding that the biggest obstacle to stronger performance by
wind power is the transmission constraints preventing many
projects from getting to market.

This Power Generation BlueBook perspective provides an

overview of the increasing competitiveness of wind generation
and a case study putting a wind project up against a typical
combined cycle generator. The results may surprise you.
3|METHODOLOGY

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 Wind: The Pivotal Resource

Transmission Constraints Limit the Economics of Wind

Power
What would significantly change the economics of regions with strong wind
potential would be new transmission capacity to move this renewable power into
the RPS states and/or more lucrative power markets (e.g., Colorado, Illinois and
California). For example, a government/industry consortium is now studying the
viability of moving Wyoming wind power into the Los Angeles region via a DC
intertie.

Figure 1
Average Technology NPVs Compared Against NPV of Construction Costs
(2004 $/kW)

SOURCE: Global Energy Decisions

But the Relative Economics of Wind Alternatives are

Strong
Figure 2 compares the relative economics of each of the regional wind project
cases. The graph captures the ongoing decline in levelized revenue requirement
based upon gains in efficiency and lower capital costs in future years. The
levelized revenue requirement (which includes a 13.25 percent after tax return on
equity) declines from the $160/kW-yr level to less than $120/kW-yr over the
study period. The drop in gross margin in the 2005-2009 period is a result of
downward pressure on power prices due to low gas prices.

As gas prices, and hence power prices, recover in the 2010-2015 period, all wind
projects become extremely attractive offering margins as high $20-$50 per
installed kW per year. The dramatic decline in the wind plants’ gross margins is
seen between 2014 and 2015 as a direct result of the expiration of the production
tax credit (PTC) at the end of this year. A plant coming on line in 2005 will be
able to utilize the PTC for a period of 10 years. If the PTC is renewed, as many
expect, PTC revenues for plants coming on line after 2005 could extend beyond
2014. For example, a plant coming on line in 2007 would then be able to collect
PTCs for the 2007-2016 period.

Global Energy Decisions | 1

 Wind: The Pivotal Resource

Global Energy Decisions | 2

 Wind: The Pivotal Resource

Figure 2
Annual Gross Margin for Wind Plants (2005-2024) (2004 $/kWh)

Figures 3 through 5 provide a more detailed view of projected annual gross

margins for wind facilities located offshore of Massachusetts, and onshore in
western Texas and Wyoming highlighting the magnitude of the impact of the
PTC. Levelized revenue requirements are also shown in these graphs. After an
initial decline in gross margins in the 2005-2009 that is largely driven by falling
natural gas prices, profitability increases from 2010 and onwards. This increase is
a result of several things:

• First, towards the end of this decade power markets start to recover from
their current overbuild resulting in tighter reserve margins and higher power
prices.
• Second, our projections include a gradual improvement in wind plant
technology that improves each plant’s capacity factor.
• Third, natural gas prices increase slightly in real terms over the 2009-
2024 period as a result of increasing gas demand. Figures 3 through 5 also
show that the levelized revenue requirements for a new plant decline
gradually over the 2005-2024 period, driven by a gradual decline in capital
costs and declining O&M costs.

Global Energy Decisions | 3

 Wind: The Pivotal Resource

Figure 3
Annual
450 Gross Margin vs. Revenue Requirements
New England Offshore Wind (2004 $/kW-yr)
400
200

$/kW-yr)
350
180

160
300

$/kW-yr)
(2004(2004
140
250
120

Margin
200
100
Margin 150
80
Gross

100
60
Gross

50
40

200
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
0
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

PTC Contribution
Energy Gross Margin PTC Contribution Levelized Revenue Requirement
Energy Gross Margin
Offshore Wind Levelized Revenue Requirement

Figure 4
Annual
450
Gross Margin vs. Revenue Requirements
West Texas Wind (2004 $/kW-yr)
400
180
$/kW-yr)

350
160
$/kW-yr)

300
140
(2004(2004

250
120
Margin

100
200
Margin

80
150
Gross

60
100
Gross

40
50

200
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
0
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

Energy Gross Margin PTC Contribution Levelized Revenue Requirement

Energy Gross Margin PTC Contribution Wind Levelized Revenue Requirement

Figure 5
Annual Gross Margin vs. Revenue Requirements
Wyoming
450 Wind (2004 $/kW-yr)
180
400
160
$/kW-yr)

350
$/kW-yr)

140
300
(2004

120
250
(2004

100
Margin

200
Margin

80
150
Gross

60
100
Gross

40
50
20
0
0 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

Energy Gross Margin PTC Contribution Levelized Revenue Requirement

Energy Gross Margin PTC Contribution Wind Levelized Revenue Requirement

Global Energy Decisions | 4

 Wind: The Pivotal Resource

With today’s technology, wind needs the PTC to be profitable. In several regions
not even the PTC is enough to push wind plants into the black, illustrating a clear
need for viable Renewable Energy Credit trading markets or other means of
additional revenues in order to make wind farms economically viable. Without
the PTC, significant improvements in cost and productivity of wind farms are
necessary before widespread, large-scale investments in wind can be expected. In
fact, even with the technology improvements and cost reductions that we expect
to see by 2020—combined with healthy power markets—wind is just barely able
to meet its levelized revenue requirements by 2020. In some areas like Wyoming,
the Dakotas, ComEd and other coal-dominated power markets, it is simply not
profitable on a head-to-head basis with installed coal capacity unless further
significant improvements are made to wind technology beyond those foreseen in
this study. However, for a utility planner making investment decisions in today’s
market, wind is clearly a viable choice.

Global Energy Case Study: Wind vs. Conventional

Capacity
To provide a perspective on the profitability of new wind powered assets, it is
helpful to compare it against installation of conventional capacity. Natural gas-
fired combined cycle technology has been the dominant technology for new
capacity—about 200,000 MW of capacity has been installed in North America
over the past 10 years. Figure 6 shows a comparison over the 2005-2024 period
between a new combined cycle station and a new wind plant in Western Texas, as
well as their respective levelized revenue requirements.

The figure below suggests that today it can be more attractive to build a new wind
plant than a combined cycle station—at least as long as the PTC remains intact.
However, by 2015 the ERCOT market is largely back to a long-term
supply/demand balance making entry of new conventional technologies
economically viable. At the same time, the expiration of the 10-year PTC by 2015
again makes wind profitability a challenge in the 2015-2024 period, despite
improved generating efficiency and lower overnight costs of construction.

Figure 6
The Relative Economics of Wind vs. Gas

Global Energy Decisions | 5

 Wind: The Pivotal Resource

The poor combined cycle performance relative to its levelized revenue

requirements illustrates the well-known merchant power overbuild that
stigmatizes many of today’s power markets and has been the cause of numerous
merchant bankruptcies. The figure also illustrates the importance of the PTC.
While western Texas is probably one of the most promising locations for new
wind facilities, development of new wind capacity depends critically on the
existence of the PTC and/or a viable REC market.

Finally, it is worth noting that with these plant cost projections, by 2020 a new
wind facility will be almost comparable to a new combined cycle station on a
levelized cost basis, illustrated by the gradual merger of the levelized revenue
requirements for a CC with that of wind.

Olof Bystrom, Ph.D, Project Manager, Global Energy Advisors l

obystrom@globalenergy.com
George Given, Vice President, Global Energy Advisors l ggiven@globalenergy.com
Gary L Hunt, President, Global energy Advisors l ghunt@globalenergy.com

Global Energy Decisions | 6