Headwinds against wind energy

UTKU GÜLMEDEN – HAKAN İRGİT

A new study on wind energy published in Nature and Climate Change in September 2012 concluded that there is enough energy available in the winds to provide 100 times the amount of electricity the world uses today. The study, conducted by a team from the Lawrence Livermore National Laboratory and the Carnegie Institute, takes a scientific perspective to analyze the limits of what is possible, and considers wind potential from both surface and atmospheric winds. Surface winds would be accessed by wind turbines, and high-altitude winds would be accessed by technology that combines turbines and kites. Think about those flights when the tail wind whisks you from New York to Istanbul in less than nine hours. The study concludes that the future of wind energy will be determined by economic, political and technical constraints, rather than geophysical limits.

While the study is instructive on the potential for wind resources from a scientific perspective, wind energy, as well as many other renewable sources of energy, face headwinds today.

The fundamental issue with wind energy is that the technology costs are high and total installed costs are not on par with competitive technologies, such as natural gas or coal-fired power plants. Wind energy becomes competitive after accounting for all the government subsidies. Those mostly take the form of feed-in-tariffs, which are guaranteed above-market wholesale prices (similar to Turkish agricultural subsidies) or tax credits, such as the American Production Tax Credit (PTC) that provides US $0.022 tax credit per kWh of production.

The good news is that the technology costs for wind energy have been falling. According to a recent report by the United States Department of Energy (DOE), turbine prices have fallen by approximately 25 percent since 2008. Also, thanks to advances in technology such as larger rotor diameters, capacity factors have been going up, so projects are more economic. Despite all the improvements in technology, there are three major challenges.

First, power prices in the United States have been down, mostly from the shale gas revolution and the resulting rock-bottom prices in natural gas. Low wholesale prices simply make wind energy uneconomic, even after accounting for all the subsidies.

Second, the current macroeconomic environment is not helping the case for wind energy. The recent economic downturn has reduced industrial and commercial power demand in the developed world with many utilities showing revenue declines, the U.S. being one example. Utilities responded by revising generation forecasts and scrapping plans for new capacity. Potential for a slowdown in the U.S. and the impact of the European debt crisis add to the macroeconomic uncertainty, and make overall capacity planning difficult for energy companies.

Finally, as a direct consequence of the macroeconomic environment, the political and regulatory environment is uncertain around the world, and many renewables subsidies, feed-in-tariffs and tax credits are expected to shrink. In the U.S., the production tax credit for wind power, for example, is expected to expire at the end of this year. There are differing political views about government support for renewables, and uncertainty about the future direction of energy policy. The story is similar in much of the rest of the developed world. Many European governments, which had built large wind capacities, had to roll back feed-in-tariffs and renegotiate contracts with renewables producers to lower high consumer energy prices and shrink their budget deficits. In countries like Spain and Portugal, with budgetary pressures mounting, high unemployment and declining incomes for most of the population, subsidies are a tough argument to make.

In short, wind energy will face challenges in the developed world until the macroeconomic uncertainty resolves.

Industry players – energy companies, turbine manufacturers and investors – need to engage in scenario planning about the future and rethink how the changing industry dynamics will impact their strategies. Some may focus their attention on the emerging markets such as Turkey, Eastern Europe, China and Brazil, with potential for near-term demand. Others may focus on selective opportunities in the developed world. For example, Japan recently implemented a new feed-in-tariff for renewable energy sources, and may become the next frontier for renewables. There may also be opportunities for asset acquisitions, as companies swap assets and enter new markets. Despite all the headwinds, wind technology will continue to improve, and wind energy will always have its place in a balanced energy mix. It may still be a good bet for those who are diligent and patient.

Utku Gülmeden is a senior manager with Accenture’s Strategy and Resources Industry Practice in New York. Hakan İrgit is a senior executive with Accenture in Istanbul and the Resources Industry Lead in Turkey.