Editor’s Note: Philip Totaro, founder and CEO of Totaro & Associates, recently posted the article “YieldCos & Component Reliability Will Boost Wind Demand Beyond 2016” on LinkedIn’s Pulse news page. In it, he argues that the presumed post-2016 wind demand drop -off doesn’t take the growth of YieldCos into account, which may create demand incentives for new projects. His article is re-posted here.
Recently published market projections based on economic forecasts appear to be underestimating the potential of the wind market. The presumption, especially for the US market, is that the latest potential expiration of the production tax credit (PTC) will result in steep drop-offs in wind capacity additions beyond 2016.
However, the picture appears quite different looking at things from a market push / pull standpoint.
The popularity and growth of YieldCos is certainly creating a demand incentive for new projects, and there will be a need to continue project development in the out years. While there is potential to spark significant M&A resulting from these financial and investment structures, capacity additions are a long-term necessity for the success of YieldCos.
In the meantime, as tax equity finance enabled by the PTC becomes less viable, the rise of debt finance will enable continued cultivation of the markets, but with a potentially higher cost of money.
Investment banks, now experienced with renewable energy investments as an asset class are looking to lower the weighted average cost of capital (WACC) to make debt finance more attractive.
There is significant potential impact from wind turbine component reliability enhancement to affect a confidence boost on the part of overly-conservative project financiers who price risk of component failure into the WACC.
A greater focus on component reliability enhancement by the wind supply chain will result in a 3X potential levelized cost of energy (LCOE) reduction versus focusing on technology innovations to improve performance alone.
While technological innovation will still have it’s place in wind, we have come down the LCOE curve to the extent that more time and greater investment are necessary to extract the same amount of cost reduction. Therefore, in order to drive continued improvement, we will see significantly more R&D expenditure invested in areas that will reduce capital and operating costs in addition to performance boosts.
Our analysis has suggested that there is still approximately 25% reduction in onshore wind CapEx possible through technology innovation, and . The resultant LCOE benefit will be determined by the extent of performance enhancement achieved.
Similarly, OpEx cost reductions appear to have an even greater potential at ~33% reduction in the next 10 years.
CapEx and OpEx reducing innovations developed by smaller entitles will still continue to have their place in the future of the industry, but a compelling argument needs to be made for an immature, technology readiness level (TRL) 3 innovation to have a significant impact on LCOE.
We expect that TRL 6 technologies and above will be the ones which major entities adopt and incorporate into their product architectures, due to commercialization costs and project finance risks related to market acceptance of new technology. Investors are more likely to believe in new technology developed in conjunction with a major turbine partner or developer, as opposed to those which are developed without specific commercial application in mind.
Ultimately, continued investment in innovation will show quantifiable results which reduce need and dependence on the PTC, but also enables future turbine sales. Our estimates for the US market show capacity additions of 6 GW or more for wind from 2017 onward as the market stabilizes and new component reliability enhancing innovations improve LCOE in a more debt-finance friendly world.
Stay tuned for follow research on this topic as we explore the technology trends and market impact of innovations throughout the rest of this year. To find out more or get in touch please visit www.totaro-associates.com for our latest research.
By: Philip Totaro, founder and CEO of Totaro & Associates
Filed Under: Uncategorized