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Fitch sees 'smooth sailing' for US wind energy over next several years

Q2: U.S. Solar and Wind Power by the Numbers

Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

Rate case activity slips, COVID-19 proceedings remain at the forefront in August


Fitch sees 'smooth sailing' for US wind energy over next several years

A recentfive-year extension of the federal production tax credit for U.S. wind power facilitieswill likely mean "smooth sailing" for the continued growth of wind generationover the next several years, according to a May 9 report from Fitch Ratings.But in the longer term there could be "headwinds" for the energy sourceas governmental subsidies decline, the report said.

Eventhose projects with access to the heaviest gusts of wind and thus the highest capacityfactors would "struggle" to be economic after the production tax creditis phased out, according to Fitch. Capital costs would have to fall below the average$1,700 per kW in 2014 for wind projects "to become cost competitive withoutsubsidies," the report said.

The productiontax credit has been central to recent impressive growth in wind capacity, with windsupplanting natural gas as the biggest source of new power capacity in 2015, accordingto recent numbers fromthe American Wind Energy Association. In December 2015, Congress extended the productiontax credit so that wind facilities that begin construction before Jan. 1, 2020,could cash in on it. But Congress implemented a phaseout in which the credit's valuefalls by 20% from 2017 to 2019. A project that begins construction in 2017 and completesit within four years willreceive 80% of the credit. If the project begins construction in 2018 it would get60%, and it would receive 40% if it starts building in 2019.

For awind project with a 45% capacity factor, offsetting each 20% in the credit wouldrequire a $170 reduction in capital cost per kilowatt of capacity, Fitch estimated.Projects in "the best wind resource regions" usually have more than 50%capacity factors on average, the report said.

In theshorter term, the tax credit extension means "stable" growth for wind,Fitch said. The reported cited a Wood Mackenzie forecast that after 8,100 MW ofnew wind capacity was added in 2015, another 5,500 MW will be installed in 2016,followed by 7,500 MW in 2017, with an ultimate doubling of capacity to nearly 150,000MW by 2035.

Improvementsin technology could help the wind industry avoid a crunch from the production taxcredit phaseout. A 5% increase in capacity factor could also offset the declinein value, Fitch found. The average nationwide wind capacity factor, which was 32.5%in 2015, has moved little over the past 10 years, but the technological progresshas been hidden by older wind projects that still run and "the rolloutof wind towers to sites with lower quality wind resources," two elements thatdrag down the average capacity factor.

Evolutionsin blade and turbine technology have allowed newer wind farms to produce great amountsof electricity. Citing U.S. Energy Information Administration data, Fitch reportedthat based on a project's "vintage year," capacity factors have gone upfrom a little over 25% in 1998 and 1999 to about 35% in 2013.