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Wind power: some lessons from 2006

by Jerome a Paris Mon Jun 4th, 2007 at 04:46:47 AM EST

The Department of Energy's Energy Efficiency and Renewable Energy (EERE) center has published its Annual Report on U.S. Wind Power Installation, Cost, and Performance Trends: 2006 (pdf - the graphs below come from the accompanying powerpoint presentation - also pdf).

I've cherry-picked a few tidbits of information that underline what are in my view interesting lessons from last year for the wind power sector.

Disclaimer: I finance wind farms. While that means in practice that I make sure that the projects I work on have as few vulnerabilities (technical, economic, legal, or political) as possible, I am naturally interested in the growth of the industry that underpins my job. So take this diary with the grain of salt you think it accordingly deserves.

From the diaries - afew


2006 was another good year for wind power, with a (via GWEC) 32% growth in capacity installed over the year:

For the second year running, the USA was the first country by MW installed in that year, although not the first by cumulative capacity, with Germany still far ahead, and Spain still ahead of it.

The strong position of China, and even more of India (home of manufacturer Suzlon, which has just won the battle to buy German manufacturer Repower, and purchased Belgian gearbox subcontractor Hansen last year) should be noted.

However, in terms of capacity relative to domestic electricity markets, the European pioneers (Denmark, then Germany and Spain) are still far ahead:

We're beginning to see countries where wind penetration is large enough to provide a visible portion of total electricity (and note - this is the fraction of actual kWh consumed, after taking into account the lower availability of wind power generation capacity) - and these numbers are set to keep on growing significantly in the coming years, as more capacity comes online. Even though most of market growth now comes from newcomers, like France or Canada, countries like Spain and Germany are still adding 10-15% new capacity to their existing stock each year. As I wrote in an earlier diary (No technical limitation to wind power penetration), there's still a lot to go before integration of wind into the grid becomes an issue. The EERE has a table which confirms this, with the additional cost of dealing with wind power between 0.2 and 0.5 c/kWh:

(Just for clarity: 1c/kWh is the same thing as $10/MWh)

To get back to the previous graph, using the word "pioneer" to describe today's wind leaders is not really adequate, as the undisputed pionner in the 80s was the USA, as the graph below shows: essentially ALL the wind power capacity built in the 80s was in the USA. That lead was abandoned, and in the 90s, Denmark (with manufacturers Vestas, Neg-Micon (now part of Vestas) and Bonus (now Siemens)) created the modern, large-scale version of the industry and never looked back.

In fact, what's been striking about the US wind industry has been the stop-and-go nature of its development in recent years, with boom years alternating with dead years.

That unhealthy trend, caused exclusively by the instability of the federal regulatory framework, has caused havoc in munfacturing processes (how do you run a big factory where demand is 100 one year, 0 the next, 150 the next - without knowing at the beginning of the yeat what it will be?!) and almost bankrupted several of the leading companies in the sector (Vestas had losses, Repower had to be bailed out, others were gobbled up by big outsiders like GE and Siemens). It's difficult enough for smallish companies in a heavy manufacturing sector to deal with rapid growth rates: 20-30% growth per year sound great, until you realize that betting on it being more or less each creates problems (immobilized capital from overoptimistic investment, or loss of markets from falling behind the competition); but if you have to additionally deal with uncertainty until the last minute on whether 20% of the market will exist or not...

That phenomenon was caused by the fact the the main regulatory support for wind in the US, the PTC, expired in 2001 and was only renewed very late, and only for 2 years at a time. For 2004 and 2005, the PTC was only renewed in spring 2004, which means that projects meant to be built that year had been suspended until that renewal, which led to no construction whatsoever for most of 2004, and a rush after that.

The lesson here is that a regulatory framework has to be stable - or at least to evolve in predictable ways. The PTC saga was the exact opposite, and has had one simple consequence: the reluctance of turbine manufacturers to set up factories in the US, in the face of uncertainty on the demand side.

This is all the more depressing that the PTC works fine - my bank and others finance lots of projects on its basis, and it is one of the cheapest support mechanisms around: it costs the federal budget 2c/kWh, when European support mechanisms are often in the 3-5c/kWh range).

As we are now speaking of prices, one of the most interesting graphs in the EERE report is this one, which shows that wind power is extremely competitive for power purchasers: the actual sale price of wind power has been in the lower half, or even below the range in which wholesale prices for electricity moved for the past 4 years:

In particular, wind power prices went down in 2005 when electricity prices, pushed up by record natural gas prices, were going sharply up: those utilities that had the foresight to enter into purchase agreements with wind producers saved a lot of money then, and still do now.

Note - the prices above for wind power are those for the sale of electricity only; wind power producers also earn the PTC discussed above, equal to $19/MWh last year. But that means that wind power is fully competitive without subsidies with power prices in the $50-60/MWh range - and that's, of course, without taking into account the fact that wind causes no pollution and no carbon emissions.

Two trends are driving wind power prices: lower O&M costs and slightly increasing construction costs.

As noted in the EERE report, O&M costs have gone down from $30/MWh for turebines built in the 80s to $8/MWh for turbines built in the last few years. As the report notes, it is still hard to tell how much of that is simply a reflection that older turbines require more maintenance, and how much is a genuine lowering of costs, but the trend is down (and I have in house studies which I cannot post here which make the same point on Danish turbines).

On the initial investment side, costs have been going up somewhat lately. This reflects two things - one is the scarcity of turbines, as manufacturers, made wary by earlier years, have not anticipated demand growth and need to catch up with production capacities - and sell their available models for more today; the other is that, like in all industrial sectors, the cost of raw materials that are used have gone up, which impacts prices.

The report by EERE suggests that the economies of scale from building large windfarms are not that big, which should be an encouragement for people to team up, as they have in Denmark and Germany, to invest in one or two windfarms in their community if they have the space to do so - and most rural areas could do that.

Anyway, the conclusions I draw from all if this are as follows:

  • windpower is booming, and is reaching a stage where it becomes a noticeable source of electricity in a number of countries. This is not the time to stop supporting it - it's time to make the essential part of electricity production: any kWh from wind lessens the need for coal-fired plants - or for nuclear. As such, the US is still really far behind and needs a sustained effort to catch up. Germany has twice the capacity with one twentieth of the land;

  • windpower still depends on having a stable and clear regulatory framework. It is close to being competitive in absolute terms, but given the powers of incumbency of other power sources (gas, coal, nuclear), and the more or less hidden subsidies that go with it, it still requires a lot of support - including grassroots support. That matters to get the manufacturing capacity and the local jobs that come with wind power;

  • windpower is a good bet for utilities: its cost will not increase with the price of gas and oil, and is already lower than other sources. It is a perfect business hedge against oil & gas dependence.

And it looks, and is, peaceful energy:

Display:
by Jerome a Paris (etg@eurotrib.com) on Sun Jun 3rd, 2007 at 08:31:43 AM EST
http://www.dailykos.com/story/2007/6/3/9238/43159

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Jun 3rd, 2007 at 09:03:47 AM EST
[ Parent ]
windpower is [...] reaching a stage where it becomes a noticeable source of electricity in a number of countries.

Which is really great and what ultimately matters.

Just don't build the damn things near me.

P.s. A large fraction of Swedish wind power projects have been suspended in the last year as turbine prices have shot up due to the scarcity of manufacturing capacity. In the long run it should work okay, but this tells us that the wind potential is weaker in Sweden than in other countries as the limited number of turbines are not deployed here, in spite of generous subsidies.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sun Jun 3rd, 2007 at 12:10:20 PM EST
[ Parent ]
are you willing to sit in the dark instead?  Shoulder your share of the burden maybe?
by HiD on Mon Jun 4th, 2007 at 05:44:19 AM EST
[ Parent ]
No, he'll happily live next to a nuclear reactor.

Can the last politician to go out the revolving door please turn the lights off?
by Migeru (migeru at eurotrib dot com) on Mon Jun 4th, 2007 at 05:45:03 AM EST
[ Parent ]
Exactly. And they can store the spent fuel in my basement if they feel like it.

By the way, I just read an interesting article. Swedish wind power is 1 TWh per year. Geothermal energy (heat pumps) is 10 TWh. Wind still gets 10 times the publicity. Wind farms are just so much more sexy and photogenic than some small holes in the ground.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Jun 4th, 2007 at 08:01:11 AM EST
[ Parent ]
I almost said you'd happily use cooling water from a reactor as hot water for your home ;-)

Can the last politician to go out the revolving door please turn the lights off?
by Migeru (migeru at eurotrib dot com) on Mon Jun 4th, 2007 at 08:45:38 AM EST
[ Parent ]
Might as well if the @!&% reactor is close enough to cook you anyway if something goes wrong.  They have been selling vacation and retirement homes near the Lake Anna plant near here for years.  Lots of folks share the lake with the reactors.  Spooky.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears
by Gringo (stargazing camel at aoldotcom) on Mon Jun 4th, 2007 at 10:41:15 PM EST
[ Parent ]
The staff at Forsmark nuclear power plant often bath in the cooling water which is released into a lagoon before it enters the sea. The water is about 30 degrees Celsius in the summer, and never goes below 10 degrees, even in winter. So with a sauna close at hand, you can bath there all the year round. :)

Ah, and I remember when they prematurely shut down the two 600 MW reactors at Barsebäck, the local fishermen complained noisily. Rare fish from more southern waters flourished just outside the plant. Not any more. :(

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Jun 5th, 2007 at 08:34:29 AM EST
[ Parent ]
Do you know that most salmon-farms in France are located in the effluents of EDF nuclear plants ? They don't advertise this too much, but it's no secret either. Serious boost to productivity.

Pierre
by Pierre on Tue Jun 5th, 2007 at 09:55:20 AM EST
[ Parent ]
We had a small subterranean reactor, about 50 MW, supplying both hot water and power in the Stockholm suburb Farsta. It was shut down in 1973 due to low oil prices. Whoops.

Anyway, when it was shut down and replaced with oil the locals complained thy couldn't hang their clothing out to dry anymore, as it became covered in soot.

Several times it has been argued we should heat our cities with the cooling water of our big reactors, but due to political reasons it never happens. We'll see what happens post peak.


Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Jun 5th, 2007 at 08:36:00 AM EST
[ Parent ]
http://www.theoildrum.com/node/2617

Interesting discussions on both dKos and TOD.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Jun 4th, 2007 at 06:15:43 AM EST
[ Parent ]
Wind power: some lessons from 2006
The lesson here is that a regulatory framework has to be stable - or at least to evolve in predictable ways. The PTC saga was the exact opposite, and has had one simple consequence: the reluctance of turbine manufacturers to set up factories in the US, in the face of uncertainty on the demand side.

As I am sure you well know, this also was the fatal flaw in the (too successful?) subsidizing scheme for small-scale windmill projects (MEP subsidy) for the Netherlands under Balkenende II which was abruptly cut last year, August 2006, to the potential detriment of possibly hundreds of projects and the frustrations of both environmental organisations and wind industry.

DutchNews article

I did wonder: surely there must have been a more reasonable solution than just cutting the subsidy overnight. There was a government revenue gap growing because of the scheme's success, true - yet why not funnel in some extra money and cool down the subsidy a bit to stabilise the progression at a lower pace.

IMHI, making it stop because the 9% target had been reached was the lousiest excuse Wijn (now ex-minister of Economic Affairs) could pick and just showed how invested the government was in a renewable energy policy.

Jerome, you're the banker here - thoughts?

by Nomad on Sun Jun 3rd, 2007 at 10:48:44 AM EST
raise the taxes on the non renewable generation to keep tax flows constant.

makes the renewables more desirable and the others less.

by HiD on Mon Jun 4th, 2007 at 05:45:37 AM EST
[ Parent ]
For the acronym-impaired:

PTC = Production Tax Credit

http://www.ucsusa.org/clean_energy/clean_energy_policies/production-tax-credit-for-renewable-energy. html

I note that the USA PTC is not available to residential producers, coupled with your note about no evidence of economy of scale it might be something that can be improved upon?

What is the regulatory framework currently in France?

I've read EDF currently has to buy offshore wind kWh at 0.13 euros and onshore wind kWh at 0.082 euros for the first ten years (lower after that).

by Laurent GUERBY on Sun Jun 3rd, 2007 at 12:21:14 PM EST
  • feed-in tariffs
    producers that quality as 'renewable' get the right to sell to the grid all their production at a guaranteed price (Germany, France, Portugal);
  • green certificates
    producers that quality as 'renewable' get the right to sell 'green certificates' in addition to their electricity (which they must sell on the market like other producers). Green certificates have a value created either by a minimum price paid for them by regulation (Spain, the Netherlands, Belgium) or because non-renewable producers have an obligation to purchase a given volume of them (Australia, UK, Italy);
  • tax support
    producers that quality as 'renewable' get the right to tax breaks linked to initial investment costs (the Netherlands) or to actual production volumes (US federal PTC)


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Jun 4th, 2007 at 06:14:52 AM EST
[ Parent ]
thanks for this summary Jerome.  Ive forwarded the link to my Co-op's board via the only member I consider honest.  Feel like a trip to Hawaii to make a pitch?
by HiD on Mon Jun 4th, 2007 at 05:47:09 AM EST
The report by EERE suggests that the economies of scale from building large windfarms are not that big, which should be an encouragement for people to team up, as they have in Denmark and Germany, to invest in one or two windfarms in their community if they have the space to do so - and most rural areas could do that.

Large roundabouts could have one in the middle.

Can the last politician to go out the revolving door please turn the lights off?

by Migeru (migeru at eurotrib dot com) on Mon Jun 4th, 2007 at 08:47:57 AM EST


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