Historically, U.S. renewable development was driven almost exclusively by renewable portfolio standards (RPS), state-level renewable mandates that have facilitated above-market compensation for renewable generation owners. In recent years, corporate demand has emerged as an increasingly important driver, with corporate off-takers accounting for more than 30% of the wind capacity power purchase agreements (PPAs) since 2015. This increase is often attributed to corporate sustainability commitments, but “being green” today is as much about economics as it is about environmental stewardship. As project economics have grown more compelling in recent years – particularly in the case of wind in the middle of the country – corporate investment has increased. With increasing disparity between the White House and left-leaning states’ clean energy policy agendas, declining power prices in wind and solar-rich regions, and the phasing out of tax incentives, the clean energy sector is poised for incremental support from the states via RPS, green solicitations, or other renewable demand drivers.
Wind development has exploded in the central U.S., where declining installation costs, capacity factors in excess of 50% for some projects, and the support of generous federal tax credits have more than compensated for the lack of binding RPS commitments in the central U.S. Texas and Oklahoma alone account for nearly 12.5 GW of new wind capacity since 2015, more than 50% of the U.S. wind capacity added in that time frame. Neither Texas nor Oklahoma features an (unmet) binding RPS, and the same can be said of Kansas, North Dakota, and Iowa, the states with the three next highest levels of wind capacity additions in the same time frame.
The primary driver behind this sustained surge in mid-America wind investment has been project economics, supported by low installation costs and improved technology. Since 2011, project capacity factors (led by projects in the wind-belt states mentioned above) have risen each year. U.S. projects installed in 2015 boast average capacity factors of 41% in 2016, higher than that of any other vintage. The seven wind projects (1,220 MW total) that came online in Oklahoma in 2015, for example, averaged an impressive 47% capacity factor in 2016.
Renewable investment interest from corporate off-takers, who account for an increasing percentage of the wind capacity that has come online, has grown along with expected returns on investment. Firms can strengthen their brand through sustainability investment, but the primary driver is economics. The corporate focus on “additionality” – renewable procurement that results in the addition of new renewable capacity – is often cited as evidence of a more stringent commitment to renewables, but it is as much a statement by corporate players that they believe they can go green and reduce their net energy bills at the same time. Why spend money on unbundled RECs (renewable energy credits), which by definition represent an additional cost on top of a company’s energy costs, when they believe they can fix their energy costs and earn a positive ROI by contracting with new projects.
The preferred contracting mechanism is the “virtual PPA,” financial contracts through which a corporate off-taker keeps the green attributes from a wind project but liquidates the actual electrons (which typically far exceed the corporation’s local demand) through a wholesale market.
Without geographic constraint, corporations have focused their investment where the economics are most compelling, as one would expect – utility-scale wind in the wind belt. According to Rocky Mountain Institute’s February 2018 Business Renewables Center Deal Tracker, 3,100 MW of corporate renewable energy PPAs were announced in 2017. Based on PA Consulting Group’s analysis, 90% were with wind projects, and with the exception of the PPA Goldman Sachs signed with a small project in Pennsylvania and the 200 MW PPA Apple signed with the Montague Wind facility in Oregon, all corporate wind PPAs announced in 2017 were signed with projects towards the middle of the country, with the most significant investments in Texas and Oklahoma.
A few large corporate solar deals have been completed, punctuated by the recent 315 MW Microsoft PPA with the Pleinmont 1 & 2 projects in Virginia, but these have been more the exception than the rule. Solar PV boasts a more rapidly declining cost curve, but lacks the scale potential of wind. With many of the best solar resources existing in areas that are currently non-ISO markets, virtual PPAs are not an option.
Many expect this corporate procurement trend to continue or even accelerate, but it is likely to be slowed by the declining production tax credits as well as power market fundamentals. As the Electric Reliability Council of Texas (ERCOT) and Southwest Power Pool (SPP) have grown more saturated with wind, power prices have declined significantly. All-hours power prices in ERCOT-West, a particularly wind-heavy zone, averaged $22.50/MWh in 2017, down nearly 30% since 2013, with negative pricing in many hours indicating excess quantities of wind power output.
Increasing renewable penetration levels also expand nodal versus zonal power basis differentials, raising the risk associated with future new build wind investment by corporations. When local renewable generation exceeds local load, it can expand a project’s power basis differential, as measured by the difference in price at a given renewable generator’s node (where the off-taker sells power into the wholesale market to offset its PPA costs) and the zonal price (the regional price of wholesale power). With financial hedges typically struck at the zonal price, increasing basis reduces the ability to effectively hedge a project’s actual energy revenues (which are driven by prices at the node), thereby increasing the risk (and effectively the cost) of a given project.
Corporations will continue to focus on wind while maximum production tax credits can be captured, but as renewable new build project economics decline, one can expect renewable investment to increasingly shift to states who offer support. In the absence of federal leadership, a number of states have stepped up their support for renewable energy development through increased RPS targets and state-mandated goals and renewable contract proceedings. Hawaii has enacted a 100% target, New York and California have each increased their binding clean energy targets to 50% renewables by 2030, and many other states are contemplating even more aggressive RPS targets. Coastal states are also seeking to diversify their renewable energy sources through offshore wind: Massachusetts has initiated procurement efforts that will target 1,600 MW of offshore wind by 2027 as part of the 2016 Massachusetts Energy Diversity Act and New York has stated a goal of 2,400 MW of offshore wind by 2030, with one third of that capacity to be sought through state-run solicitations in 2018 and 2019.
Corporate investment in wind will continue as long as tax credit-supported project economics allow. Investment will continue to pour into solar PV in spite of the impact of the tariffs that emerged from the recent Suniva trade flap, but over the coming years the sustainability void left by the Trump administration will likely be increasingly filled by state and local government programs. Renewable developers will be forced to once again look to coastal states, in spite of the higher costs and inferior resources. States will continue to accelerate their RPS targets and green tariff commitments, and ratepayers will continue to pay the price premiums where shareholders will not.
