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Cost declines in wind and solar provide a “learning curve” for manufacturers

2012 February 23

In my first cross-post for BERC’s blog, I look at a new LCOE study by LBL.

It’s a tough time to be a solar or wind manufacturer. The industries are facing oversupply, intense competition, and squeezed margins, amidst the assured march of the cost of solar and wind energy down their respective industry learning curves.

The story of solar energy has been well told. Generous policy schemes in Europe led to skyrocketing demand while China’s dominance and scale in supply has led to great cost reductions over the last five years. The industry will pass the $1/watt mark in module costs (and $3/watt in system prices) very soon, with many populous places reaching solar grid parity within the next five years, including southern California.

The path for wind energy costs over the last decade has been more complex but the result equally potent. According to new research released by the Electricity Markets Group at Lawrence Berkeley National Laboratory (LBNL) in conjunction with the National Renewable Energy Laboratory (NREL), wind turbine prices in the U.S. have declined, on average, by nearly one-third since 2008, after doubling from 2002 through 2008 (summary slide pack found here). While turbine prices have declined, performance has been continually improving, a tell-tale sign of the so called “learning curve”. Additional improvements in operations and maintenance and financing conditions are pushing the levelized cost of wind energy (LCOE) to all new lows.

All told, LCOEs for US wind projects will fall by 24-39% to $33-65 per megawatt hour over the next year or two from their previous low, as shown in the figure below. The drop is quite precipitous for lower wind speeds (6 meters per second, class 5 on a scale of 1 to 7) due to particular breakthroughs in low-speed wind technology.

Courtesy of Lawrence Berkeley National Laboratory, National Renewable Energy Laboratory

A similar study, released at the end of last year by Bloomberg New Energy Finance, had similar findings on the drop in wind’s LCOE, concluding that “the best wind farms in the world already produce power as economically as coal, gas and nuclear generators; the average wind farm will be fully competitive by 2016.”

But what about the price increases for wind energy between 2002 and 2008? According to the lead researcher on the study, Ryan Wiser, increased capital costs and a move to lower wind speed sites were the main reasons. Turbine prices increased due to rises in the price of labor, raw materials, and turbine scaling. Wind turbines (and wind farms) got bigger both in terms of hub height and rotor diameter (think wingspan). This turbine scaling has been a key factor driving improved performance and increased capacity factors. In turn, developers took advantage of improved turbines to site projects in areas with lower wind speed – good news in an industry plagued by transmission and other siting limitations.

So are wind installations set to reach record highs given that costs are now at record lows? Not quite, at least not yet. Global wind installations did see another record year in 2011, albeit only slightly as the industry has plateaued in annual growth. The U.S. saw a decent uptick in installations and investment in 2011, mostly due to the fact that the generous 1603 Treasury cash grant expired on December 31. Most importantly, the expiration of the production tax credit (PTC) looms next at the end of 2012, even as the industry lobbies to make sure it is extended. Vestas is set to cut 2,335 jobs now, and says it will cut another 1,600 U.S. jobs if the PTC is not extended. As much as solar and wind costs have declined, policy still determines the headwinds of the industry.

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