Wind energy gusts to become a potential powerhouse
Pricing parity brings this clean energy to the forefront
Here is a statement that those of us in the renewable energy industry thought we wouldn’t hear for quite some time: wind power is now competitive with conventional generation technologies across the top global markets. Without subsidies. How did this happen? And more importantly, can wind power keep it up?
- The world's lowest-cost energy source for power generation
- Investors are more willing to put money into wind power
- The key trends
- Dutch point of view
The world’s lowest-cost energy source for power generation
First, the good news. The unsubsidized levelized cost of energy (LCOE) for utility-scale onshore wind generation has dropped even with or below most other generation technologies in much of the world. From a price perspective, onshore wind has become the world’s lowest-cost energy source for power generation, with an unsubsidized LCOE range of US$29-56 per megawatt hour (MWh), lower than natural gas, the cheapest fossil fuel at US$41–74 per MWh. In addition, recent auction prices in Brazil, Canada, Germany, India, Mexico, and Morocco suggest that the several projects being commissioned from 2019 onwards will be delivering electricity for an LCOE equivalent of US$30 per MWh or less. More good news is that battery storage and other innovations are making wind power more reliable and less intermittent—a factor critical to competing with conventional sources.
This is making wind a potential powerhouse in the energy space—and countries around the world are taking note. A total of 121 countries have now deployed 520 gigawatts (GW) of onshore wind power—more than double the 2011 capacity of 216 GW. Not surprisingly, the lowest costs for wind power are in the countries with the leading deployment. In line with the decreasing LCOE for wind farms, transaction prices have also decreased accordingly. For example, the installed capacity multiple for onshore wind farms have decreased from US$2.0m per MW in 2008 to US$1.6m per MW in the beginning of 2018.
Investors are more willing to put money into wind power
One reason for this exciting development is the price, quality, and technology of components. As parts have become cheaper and efficiency has increased—mostly due to more effective turbines—prices have fallen. The LCOE’s and prices of onshore and offshore wind power have fallen noticeably over the past 10 years, whereas prices for conventional sources and nonintermittent renewables have remained flat or gone up. Increased competition among developers has also led to cost-cutting. And as the risks of wind, particularly offshore wind, have reduced, investors are more willing to put money into this resource, lowering the overall cost of capital.
These factors have also contributed to tremendous progress for offshore wind assets, which have already surpassed the 2020 industry targets for LCOE. In April 2016, the lowest bid yet was achieved for an offshore wind power project in Europe—with two bids made at zero euros—receiving only the wholesale power price and precluding subsidies from operations.
The key trends that should keep wind power prices at parity with conventional sources
The trend toward lower prices doesn’t look like it’s going to stop anytime soon. The International Renewable Energy Agency expects that the global weighted average LCOE for offshore wind alone will realize a reduction of 35 percent by 2025. There are a few key trends that should keep wind power prices at parity with conventional sources, if not lower:
- Grid integration: Intermittency always seemed to be an argument against wind. But experience has shown renewables not to be as difficult or costly to integrate as anticipated. What’s more, they can strengthen grid resilience and reliability and provide essential grid services. And because wind has zero marginal generation costs, they displace more expensive generators and reduce electricity prices.
- Emerging markets: Upgrading, or “repowering,” wind turbines in the developed world is pulling global average costs downward by raising capacity factors. As this happens, many conventional sources will start operating at lower capacity factors, causing the LCOEs of both existing and new-build conventional projects to increase. This means the cost of wind plants could eventually be not only lower than the cost of new conventional plants, but also lower than the cost of continuing to run existing plants globally. Also, developing world costs could fall as these markets draw more attention from global developers.
- New technology: The deployment of wind power is now being accelerated by such advanced technologies as automation, artificial intelligence (AI), advanced materials and manufacturing, and blockchain. The applications are wide-ranging, from streamlining the production and operation of renewables (automation and advanced manufacturing) and optimizing wind use (AI in weather forecasting), to improving the market for renewables (blockchain). These technologies will undoubtedly serve to reduce costs for years to come.
It's important to note that offshore wind pricing is not yet at the level of competitiveness of onshore. Offshore’s higher capex—larger and more expensive foundations, difficult installation environment, and higher transport costs—is a contributing factor as well as the less developed supply chains for this industry. And technologies that can withstand offshore’s rough conditions are still being tested and are not providing the cost benefits apparent with onshore.
The rapid development towards zero subsidies bids for wind projects in the Netherlands
This development is also very visible in the Netherlands. In 2013 the Energy Agreement (energieakkoord) was concluded in which a required subsidy for the offshore wind projects of € 0.0915 per kWh was taken into account. The first auction, for Borssele I & II, was won in 2016 by Ørsted with an astounding offer of € 0,0437 per kWh. So in a period of about three years the level of required subsidies almost halved. This development continued with the auction of Borssele III & IV, which was won by the Blauwwind consortium of Shell, Eneco, Diamond Generating Company and Van Oord. Blauwwind was willing to develop the project with a subsidy of € 0.0245 per kWh. Again the subsidy level almost halved.
With the tender of Hollandse Kust in 2018 the sector was anxious to see whether this trend would continue. And it did magnificently. Several zero subsidy bids were issued after which the Dutch Government awarded the tender to Nuon/Vattenfall.
It is fair to say that the zero subsidies bids were not only the result of the earlier mentioned developments, but also benefitted from the arrangements with TenneT, the Dutch transmission system operator. TenneT has been appointed as the offshore grid operator in the Netherlands, and as such has an important role in the realization of the Energy Agreement. TenneT facilitates the offshore-connections with a standardized concept of 700 MW per connection. This standardized concept lowered risks for developers regarding grid connection and also allowed for a better comparison of the bids. Others view that the low threshold of entering the auction, illustrated by no required bid bonds or other guarantees in the applications, offered applicants a cheap option to enter the auction with a zero subsidy bid. Current developments show that this option has not been called with the first auction as construction of Borssele I & II has started.
The future is bright for wind power. And demand is only set to grow as cities, communities, emerging markets, and corporations increasingly seek reliable, affordable and clean energy sources. With wind’s price parity now achieved, the affordable part of that equation is no longer prohibitive. It may feel like it was a long time coming, but it appears that wind power has finally arrived.
To learn more about pricing and overall trends in wind power and renewables, please see the Deloitte reports, Global Renewable Energy Trends and A market approach for valuing onshore and offshore wind farm assets.
If you have any questions or would like to discuss opportunities, please contact me.