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The U.S. wind energy industry added a record 13 GW of capacity to the grid in 2012 – a remarkable feat that highlights some of the finest and most disappointing attributes of this market. On the bright side, delivering on this demand bubble demonstrates just how much progress the U.S. value chain has made. Manufacturers, logistics providers and construction teams were able to bring more than 8 GW of wind farms online in the fourth quarter alone.

Unfortunately, the mad dash to get projects online was driven by the never-ending boom-and-bust cycle of the production tax credit (PTC). Asset owners, construction providers and turbine commissioning crews rushed to have their projects achieve commercial operation by Dec. 31, 2012, when the PTC was set to expire. Like many New Year’s Eve celebrations, the installation rush resulted in a hangover for the wind industry. This year is shaping up to be a yearlong hangover: MAKE Consulting’s forecast calls for U.S. wind power installations to drop by more than 80% compared to last year.

This forecast raises an important question: Is wind energy development dependent on government policy and incapable of supporting itself without federal incentives? The answer is a resounding “no.”

Wind energy is winning an uphill battle, achieving record-breaking levels of penetration in a power market where prices for natural gas are hovering near $3/MMBtu, and flatlined load growth has driven pricing for power purchase agreements below $40/MWh in many key wind regions across the U.S.

There are also state-level renewable portfolio standards (RPS), which were largely oversubscribed at the beginning of 2012, before the industry connected another 13 GW to the grid. MAKE estimates that state-level RPS demand will be around 1 GW per year from 2013 to 2020 if existing RPS programs are maintained and U.S. load growth remains in the 2% per annum range.

Why does wind energy development continue to flourish? Quite simply, the levelized cost of energy (LCOE) of wind power outperforms that of competing renewable energy technologies. Harnessing favorable site conditions with the wind industry’s latest technology, MAKE estimates that onshore wind in the U.S. is capable of delivering an unsubsidized LCOE in the range of $50/MWh to $60/MWh. That is 25% cheaper than solar PV, nearly 300% cheaper than concentrated solar power and on par with combined-cycle gas plants at today’s low natural-gas prices.

These results demonstrate how far turbine technology has come in just the last two years. Evolutionary advancements in onshore wind turbine technology have yielded performance increases of 15% in annual energy production, while turbine pricing has held steady over the past 24 months. GE Energy, the world’s largest wind turbine original equipment manufacturer (OEM) in terms of megawatts installed in 2012, set a new bar for capacity factor (50% at 7.5 m/s) with its 1.6-100 turbine.

In addition to GE, Vestas, Siemens, Gamesa and Nordex have all launched or announced new turbines with enlarged rotors. Gamesa has even broken the 200 W/m2 specific rating barrier with its new G114 turbine.

 

Policy in doubt

What will the future bring for wind energy? The industry will not be allowed to rest on its laurels. The boom-and-bust cycle of federal incentive mechanisms has proven to be detrimental to the market. With PTC fatigue setting in, many component OEMs have opted to mothball production capacity and/or exit the market altogether. In 2011, MAKE forecasted that tower and blade OEMs would be the first to feel the pinch. Since then, tower OEMs, such as DMI Industries and Katana Summit, have been acquired after experiencing financial troubles.

Industry contraction may aid sagging profit margins in certain parts of the supply chain, but it will not overcome negative LCOE impacts induced by a phase-out of the $0.022/kWh PTC. Industry participants must plan around this possible market scenario and formulate technology strategies that provide positive technology differentiation in order to avoid being crowded out of a 5 GW/year to 6 GW/year North American wind power market.

Intense rivalry among different types of energy technologies will help the wind industry maintain its breakneck pace of technology advancements. However, asset owners must maintain favorable project returns amid dwindling power prices in order to sustain the market. The challenge is significant, as low natural-gas prices are not expected to abate in the foreseeable future, and many of the best wind sites with access to transmission have already been developed.

Today’s turbine technology has succeeded in enabling the profitable development of project sites once considered undevelopable due to marginal wind resources. The next generation of wind turbines must continue to lower the costs of wind energy while preparing for the possibility of lost federal incentives.

To date, LCOE gains have been made by extending rotor diameters, fabricating taller towers and tailoring controls and drivetrain components to work within the acceptable design limits of existing turbine platforms. In many cases, this has required the use of expensive materials, such as carbon fiber pre-preg, in blade construction. In order to set the next cost-performance benchmark, the same wind turbine rotor must be made from less-expensive, production-friendly resins and reinforcement materials, such as those being developed by companies like BASF and Owens Corning.

Other companies, such as Siemens, are actively seeking materials to replace rare-earth elements, such as dysprosium, in their direct-drive generators. Meanwhile, GE went so far as to move back to doubly fed induction generator technology in the high-speed generator of its 2.75 MW platform.

 

The good news is that wind energy’s LCOE is already nearing grid parity in North America, despite the macroeconomic challenges facing today’s power market.

 

On the horizon

Of course, there are more radical departures from today’s typical turbine. Blade structures will remain at the forefront of innovation in the coming years, as new concepts – including new adaptations of segmented blades, advanced root joints and pultruded spars – reach commercialization. It is important to note that larger turbines, such as Nordex’s N117 and Alstom’s ECO122, are stretching the limits of onshore wind logistics – which inevitably leads to a debate over whether assembling turbines on-site or off-site is more economical.

GE made headlines when it acquired the intellectual-property rights to Advanced Tower Systems’ light-weight, lattice-style, space frame tower. However, the company has yet to demonstrate commercial traction with the product. Hybrid towers are becoming more mainstream as the demand for 100- to 120-meter towers increase, but new steel solutions are being developed, such as Keystone Engineering’s spiral welded tower.

These technologies will take time to commercialize, which represents a massive challenge for small technology specialists operating in a challenging economic climate. Government support for green technology is waning, and private investment for early-stage technologies is limited, especially for high-risk technologies lacking a strategic client partner.

Moreover, wind turbine OEM research and development budgets are being cut, especially for pure-play manufacturers. Licensing is an option, but it reduces the technical advantage if an innovative product is adopted by many credible OEMs. Acquisitions come into play at that point. However, financial weakness will deter most pure-play wind OEMs, thus presenting an advantage for more well-diversified industrial conglomerates.

Despite the near-term reprieve granted by the single-year extension of the PTC, the North American wind energy industry faces substantial challenges in the years to come. The good news is that wind energy’s LCOE is already nearing grid parity in North America, despite the macroeconomic challenges facing today’s power market. Additionally, many innovative concepts are moving swiftly toward commercialization, thus promising to make wind power even more competitive.

Wind energy is setting the margin on regional electricity prices today. Because wind does not have the risk of fuel-price escalation, with bold technology investment, it can continue to set the market prices for years to come.

 

Dan Shreve is a principal at market research firm MAKE Consulting, a strategic advisory firm that provides market intelligence and services. He can be reached at (781) 697-6486 or ds@make-consulting.com.

Industry At Large: Levelized Cost Of Energy

LCOE Gains Can Offset Potential Policy Pitfalls

By Dan Shreve

Despite the macroeconomic challenges in today’s power market, wind energy has achieved grid parity in several North American markets.

 

 

 

 

 

 

 

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