Three energy realities that renewable advocates can’t answer
Renewable energy advocates like to stick to their talking points about wind and solar, but they never seem to address the elephant — or elephants — in the room when…
It looks like the fairy tales of endless declines in the cost of wind power are meeting an unpleasant reality. A recent study has found that the cost of wind power bought through power purchase agreements (PPAs) from independent power producers (IPPs) is increasing in the Midcontinent Independent Systems Operator (MISO) footprint, which includes Minnesota and 13 other states and one Canadian province.
According to the report:
“In Q3, the MISO market was the primary contributor, with a $4+ rise in prices, amounting to a 19% increase.”
The graph below is from the report and it shows wind PPA prices increasing from about $18 per megawatt hour (MWH) to approximately $26 per megawatt hour from quarter three 2018 to quarter three 2019, and increase of about 44 percent.
The important thing to remember about PPAs is that they do not reflect the cost of subsidies for wind that come in the form of the Production Tax Credit. This subsidy represents a value of $24 per MWh for the first ten years of a project, and this subsidy is adjusted for inflation. This means the true cost of wind power is not reflected in the PPA price.
Wind developers know this, and often spread the price reductions of the tax credit out over longer periods of the contract length, which is typically 20 years. According to the 2018 U.S. Wind Technology Report wind power PPA prices would be at least $15 per MWh higher than the reported PPA price. This would bring the unsubsidized cost of MISO PPA’s signed during Quarter 3 ($26/MWh) up to $41 per MWh.
However, the study had another interesting piece of information. The deal duration’s for PPAs has been falling:
“Deal terms became shorter from Q2 to Q3 2019: Wind project contract lengths dropped from 13.5 to 13.0 years, and solar contract lengths decreased from 14.0 to 13.9 years.”
Shorter contract terms has important implications for the subsidy. By dropping the length of the contract from 20 years to 13 years, wind developers they are effectively allowing themselves to increase the subsidy they receive from $12 per MWh to $18 per MWh. This means the unsubsidized cost of wind in MISO is $44 per megawatt hour.
These findings comport well with Xcel Energy’s projected costs for wind and solar in the future. The tax credits finish “rolling off” in 2023, and by 2024 the cost is about $43. By 2025, Xcel expects wind projects to cost $52 per MWh.
Wind PPA price increases very seem likely in the future as federal subsidies for wind phase down, and eventually expire. Time will tell whether the 44 percent increase in wind PPA prices from Q3 2018 to Q3 2019 was driven by wind operators discovering that wind turbines were less productive in 2018 than they were in 2017, or whether this represents an increase in demand for turbines as wind builders look to lock in the PTC for new projects.
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