Factors Driving Growth of U.S. Wind Power 1997-2007

Wind Power Growth in U.S.
1997 - 2007

Robert Safuto, Andrew Royne and Jong Kyu Chung
December 2008

What economic factors have driven
development of wind power?
Between 1997 and 2007, wind generation capacity has
grown at a faster rate than any other type of electric
power generation

Copyright 2008, Robert Safuto, Andrew Royne and Jong Kyu Chu. All rights reserved.

Agenda

1 Wind and Electric Power

2 Economic Factors

3 Observations and Conclusions

4 Limitations and Data Sources


Wind and Electric Power


Supply and Demand
Who demands wind power
?
• End use consumers demand electricity but cannot choose the
generation technology used to send power to their home or business.

• Utilities demand wind power in order to satisfy a variety of desires
including economic benefit and regulatory compliance.

• Governments also demand wind power in order to satisfy the
requirements of legislation at the state and federal level.

Who supplies wind power?

• Utilities responsible for delivering power to customers.

• Independent generators seeking to gain economic benefits.


Substitution
Wind power may be used by utilities and independent
producers as a substitute for other forms of electric
generation, such as natural gas, nuclear, coal and other
renewable sources of generation.


Wind vs. Fossil Fuels
Wind Power Fossil Fuels
• Zero fuel costs • Volatile fuel costs
• Zero emissions • Substantial emissions
• Moderately reliable • Extremely reliable
• Location sensitive • Location flexible


U.S. Compared To World


Economic Factors

Regulatory
Legislation Subsidies Prices Environment


Legislation
Renewable Portfolio Standard (RPS)
State level policy that requires a certain amount of
electricity production by utility companies from renewable
energy sources.


Subsidies
The Energy Policy Act of 1992 included a provision that
allowed for a 1.5 cents per kilowatt hour production tax
credit (PTC) indexed to 1993 dollars.


Fuel Prices
Fuel prices rose sharply over the ten year period
ending in 2007.


Electricity Prices
Retail electricity prices have risen steadily along with
fuel prices, but they have risen at a slower rate than fuel
prices.


Regulatory Environment
Action by the Federal Energy Regulatory Commission (FERC) in
1996 opened the door to allow outside investors to site power
projects in formerly closed markets around the U.S.
1996 - New England 1998 - California 2000 - Texas 2002 - Midwest

1999 - New York
1997 - Pennsylvania-Jersey-Maryland (PJM)


Regulatory Environment
Wind supply in competitive vs. non-competitive markets.
Capacity added since 1997.


Wind Capacity By State
Six of the top ten wind producing states (Texas, California,
Iowa, Minnesota, Oklahoma and New York) belong to
competitive wholesale electricity markets.


Observations and Conclusions


The Effect of Fuel Prices
Fossil fuel prices have risen faster than retail electric rates, making
generation with zero fuel costs a more attractive option for project
developers. The PTC subsidy provides added incentive by
enhancing these returns.


The Effect of Electric Rates
Wind development has been most robust in the areas where
electric rate increases have been the steepest.
Regional U.S. Retail Electric Rates

60%

Includes Texas
50%

Includes California
40%

30%
% Change

20%

10%

0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-10%

New England Middle Atlantic East North Central West North Central
South Atlantic East South Central West South Central Mountain
Pacific U.S.Average


The Effect of RPS
Wind capacity development tracks upward at the same
time that RPS adoption accelerates.

RPS legislation has created a certain level of demand
for renewable resources at the state level.


Markets, RPS and Wind Resources
The states with the most abundant wind resources
(Nebraska, Kansas, South Dakota and North Dakota) are
not among the leaders in wind power capacity.

Wind Resource Map RPS Map

These states have not passed an RPS and they do not
belong to competitive electric markets.

Conclusions
Investors and politicians are most responsible for the rapid
development of wind power in the U.S.

• Politicians, likely concerned with rising fuel prices and electric rates,
have created demand (via RPS), opened access to markets and provided
generous financial incentives (via the PTC) for wind power.
• Energy investors have seized the opportunity to realize above market
returns on investment for wind power projects by building wind farms
which also help utilities to meet the demands of state RPS programs.
900% 40%

800%

700%
30%

Electric Rate Growth
Wind / RPS Growth

600%

500%
20%
400%

300%
10%
200%

100%

0% 0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Wind RPS Electricity Rates


Limitations
• Electric markets are regional so economics will vary based on electric
rates, state level incentives and availability of wind resources.

• Wholesale electric market prices and long-term contracts may effect
returns on wind projects.

• Improved technology likely to have an impact on increases in wind
capacity.

• Availability of capital will impact all types of electric power projects.

• Renewable energy credit markets provide additional economic
incentives to wind developers.

• Public opinions with respect to environmental issues may influence
investment decisions by utilities.


Data Sources
Electric Generation: http://www.eia.doe.gov/cneaf/electricity/epa/epat3p2.html

Electric Prices: http://www.eia.doe.gov/cneaf/electricity/epm/table5_6_b.html,
http://www.eia.doe.gov/cneaf/electricity/epa/epat7p4.html

Fuel Prices: Natural Gas - http://tonto.eia.doe.gov/dnav/pet/hist/n9190us3m.htm, Oil -
http://tonto.eia.doe.gov/dnav/pet/hist/wtotusaw.htm
, Coal - http://www.eia.doe.gov/emeu/aer/txt/ptb0708.html

Commodity Costs: http://www.eia.doe.gov/oiaf/aeo/otheranalysis/aeo_2008analysispapers/epc.html

Generation Capacity: http://www.eia.doe.gov/cneaf/electricity/epa/existing_capacity_state.xls,
http://www.eia.doe.gov/emeu/aer/pdf/pages/sec8_42.pdf

Regulatory: http://ferc.gov/market-oversight/mkt-electric/overview.asp

Renewable Portfolio Standards: http://www.pewclimate.org/what_s_being_done/in_the_states/rps.cfm,
http://apps1.eere.energy.gov/states/maps/renewable_portfolio_states.cfm

Subsidies: http://www.irs.gov/pub/irs-pdf/f8838.pdf

Wind and RPS
Maps: http://www.windpoweringamerica.gov/wind_maps.asp, http://www.dsireusa.org/documents/SummaryMap
s/RPS_Map.ppt

World Wind Capacity: http://www.ewea.org/fileadmin/ewea_documents/documents/Statistics/gwec/stats2007.pdf


Factors Driving Growth of U.S. Wind Power 1997-2007

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