While the COVID-19 pandemic presents near-term headwinds to renewables, the longer-term prognosis remains favorable. One powerful driver for the sector is the clean or renewable energy targets set by a growing number of states.
Here, persistent low natural gas prices resulting from any economic slowdown have the potential to change some utilities’ investment decisions in favor of natural gas generation over renewables, although the likely extent is currently unclear. The EIA is continuing to forecast that renewables will grow to 38% of power supply by 2050, from 19% today, with natural gas declining slightly – to 36% from 37% at present – and coal losing out, dropping from 24% to 13%.
Broader market realignment
A longer-term transformation is also taking place, with regulated utilities set to increase their ownership of renewables and showing a reduced appetite for signing power purchase agreements (PPAs) with independent power producers (IPPs).
Historically, many utilities have relied on IPPs as their primary source of renewable energy, entering into long-term PPAs to meet state mandates and customer demand for clean power. As these mandates and demands continue to grow, utilities are rethinking those relationships.
A critical enabler of the IPP renewable model has been the inability of utilities to take advantage of renewable energy tax credits in the same way as IPPs. Put simply, because of tax normalization rules and traditional utility ratemaking, utilities are required to spread the benefits of the credits across the entire useful life of the project. While IPPs can realize their benefits upfront, often through the use of tax equity partnerships. This has made renewable power from IPPs cheaper than if the utilities owned the assets themselves.
However, utilities are exploring how they might access the same tax equity markets that IPPs use – and, so far, seem to be making progress on addressing the critical issues. While complexities exist, and each utility is in a different position, there appears to be a clear opportunity to close the renewable energy price gap with IPPs.
This is likely to change the US renewable landscape again, by enabling more utilities to develop renewables projects on their own balance sheets. IPPs will probably evolve as well, pursuing develop, build and operate models on behalf of utility clients – in which case, they would no longer own the renewable assets.
While utilities may encroach on the existing IPP business model, they face their own mounting pressures as well. One to watch is from Community Choice Aggregation (CCA) programs. These allow municipalities to procure power on behalf of their residents and businesses, and for their own needs, from alternative energy suppliers.
However, utilities are exploring how they might access the same tax equity markets that IPPs use – and, so far, seem to be making progress on addressing the critical issues. While complexities exist, and each utility is in a different position, there appears to be a clear opportunity to close the renewable energy price gap with IPPs.
These CCAs – which typically involve municipalities tapping power from renewable sources (often provided by IPPs) – are permitted in California, Illinois, Ohio, Massachusetts, New Jersey, New York and Rhode Island. In California, roughly 15% of the state’s load has moved from incumbent utilities to CCAs. The growth and increasing cost-competitiveness of energy storage is likely to accelerate this trend.
Looking ahead
The industry is lobbying hard for support from Congress as part of broader stimulus funding. Here, concerns about job losses from COVID-19 impacts will be central to any support; the SEIA has warned that 50% of the 250,000 jobs in the solar sector could be affected, while AWEA estimates that 35,000 wind-energy jobs are under threat.
Such support from Congress could take a number of forms, ranging from a further extension of PTC and ITC deadlines, to making these tax credits refundable in some form or another.
One area with a potentially unique claim for support is offshore wind. As the technology is less mature than its onshore equivalent, while also offering significant promise in terms of capacity addition and job creation, there is some momentum on Capitol Hill behind special treatment for the offshore sector. AWEA forecasts the market to grow from almost zero at present to 20-30GW by 2030.
Energy storage is also set for strong growth. The sector achieved record deployment in the last quarter of 2019, with 186MW/364MWh of new capacity added, according to figures from the Energy Storage Association. They and Wood Mackenzie forecast that the market will grow from annual deployment of 523MW in 2019 to 7.3GW in 2025, with growth largely driven by utility procurement.
While COVID-19 undoubtedly poses challenges and headwinds in the near term, declining costs, technological advances and financial innovation will generate tailwinds for a sector already benefitting from strong user demand and a clear environmental imperative.
Summary
The COVID-19 pandemic is having a significant impact on the US renewables sector, complicating or delaying some wind and solar installations. In the long term, however, penetration of renewable energy across US power markets will continue to grow, and its ownership and investment landscape will be transformed.
