trending Market Intelligence /marketintelligence/en/news-insights/trending/1i8ff8xh1cosgyqyu7wuqw2 content esgSubNav
In This List

Wind energy the 'best investment in the Southwest'

Video

S&P Capital IQ Pro | Powered by Expert Insights

Blog

Insight Weekly: Soaring food prices; bankruptcies reach new low; insurtech M&A to accelerate

Blog

Essential Energy Insights - November 2021

Blog

European Energy Insights October 2021


Wind energy the 'best investment in the Southwest'

While solar and natural gas power plant developers compete to fill the void being left by retiring coal generation in the Southwestern U.S., wind energy may be the better bet in the region.

"If you ask me which is the best investment in the Southwest, I'd say it's a good wind resource," said Steve Piper, energy research director at S&P Global Market Intelligence, in a recent presentation in San Francisco.

A wind farm in New Mexico with a 44% capacity factor, for instance, would easily surpass its minimum investment return threshold needed to service project debt and get "well into the sustainable return level" within its first few years of operation, according to an analysis of project economics. Developers have taken note of such opportunities. On Oct. 3, the same day Piper gave his presentation, New Mexico energy regulators approved Pattern Energy Group Inc.'s ambitious plan to build 2,200 MW of wind capacity in the state.

By comparison, earnings for solar photovoltaic projects in the Desert Southwest "are just sustainable ... but are more likely to be over that debt return threshold than [combined-cycle natural gas plants]," Piper said. Absent the declining coal generation in the region, most notably the anticipated retirement of the 2,250-MW Navajo power plant in Arizona, "there's no reason to build a gas plant in this area of the country," he added.

SNL Image

In California, meanwhile, "aggressive renewable portfolio standards are crowding out conventional generation," Piper said. "Conventional generation doesn't really have a chance in this market, particularly combined cycle," he said, citing weak returns that have put pressure on gas power plant developers like company CXA La Paloma LLC, which blamed California's "oversupplied" market after it filed for bankruptcy in December 2016.

Both wind and solar, by contrast, can surpass minimum return thresholds "despite a saturated market," Piper said.

Nevertheless, Piper expects gas to replace the lion's share of an estimated 29 GW of coal retiring across the United States by 2022. The combination of low natural gas prices and renewables that "are also bending the wholesale price curve lower" will erode coal's share of U.S. power generation capacity to 19% by 2028 from 27% in 2016, he estimated.

"Last year, I would say that the only coal plants that were safe were sitting right on top of a coal mine," Piper said. "This year I'm not so sure."

Gas capacity will edge up to 45% in 2028 from 44% of U.S. generating capacity in 2016, he forecast, while wind and solar combined will jump to 18% from 8% over the same period. S&P Global Market Intelligence is tracking nearly 150 GW of planned wind and solar capacity additions through 2025.

Limiting the growth of all resources, however, are "low load growth, distributed generation and oversupply of generating facilities generally," Piper concluded.