Renewable Cost Parity: Is Wind Competitive With Gas?

By Dave Levitan

Wind turbines spin in Washington state. Proponents of wind power say it is now largely cost competitive with natural gas. Credit: Preconscious Eye/flickr

The wind power industry in the United States had an off year in 2010 in terms of new installations, but the American Wind Energy Association (AWEA) greeted the new year with an optimistic statement: that wind power is now largely cost competitive with natural gas. “If you’re going to build a new wind farm, it is going to be competitive with any other new form of generation,” says Elizabeth Salerno, AWEA’s director of industry data and analysis.

But what does “competitive” really mean? Are renewable forms of generation, such as wind, actually on their way to catching up with fossil fuels in economic terms?

Experts have suggested that natural gas, with its apparently smaller climate impact and widespread availability within the United States, could temporarily replace coal on our way to a cleaner energy future. But recent reports have called some of gas’s benefits into question; could the economics and the science suggest a coming turn against the so-called “bridge fuel?”

Salerno points to several recent power purchase agreements where wind power has been sold in the surprisingly low range of five to six cents per kilowatt-hour, as well as independent industry data, to suggest wind’s growing competitiveness with natural gas. The government, though, doesn’t quite agree on the claim of cost parity: the most recent Energy Information Administration estimates place the cost of a new onshore wind installation at 9.7 cents per kilowatt-hour, and a new advanced cycle natural gas plant at 6.3 cents per kilowatt-hour.

“Cost parity is the holy grail of renewable energy,” says Michael Livermore, executive director of New York University’s Institute for Policy Integrity. “But there is cost parity with subsidies, and there is cost parity without subsidies. If this is happening without subsidies, then that means that wind power is going to explode, regardless of what the government does. I doubt that’s what really is going on.”

AWEA’s statement of competitiveness with natural gas does include the federal incentives for wind power, primarily the renewable energy production tax credit. The credit can lower the price of wind power by 2.2 cents per kilowatt-hour, and is currently set to expire at the end of 2012. Including this straightforward subsidy, and excluding various other factors from the wind power economics equation can lead one to make the claim of cost parity, some experts say.

Jay Apt, a professor of technology and executive director of Carnegie Mellon’s Electricity Industry Center, notes that wind in certain areas requires massive transmission line projects, as well as backup generators — often powered by natural gas 

— to smooth out wind’s variability (the wind doesn’t blow all the time, and gas and other sources can kick in and provide power on those occasions). The claim of cost parity does not include these costs (though at least one utility, the Bonneville Power Authority, charges wind developers for the variability of the energy source).

“Wind is certainly the most competitive of all the low-carbon sources of power,” says Apt. “But to say that it is the same price as natural gas… is probably dependent very heavily on specially picking the subsidies to include and the other costs to exclude.”

Leaks of methane - a potent greenhouse gas - are a by-product of natural gas production. In addition, other emissions are generated when extracting the fuel from the ground, putting natural gas' reputation of being a cleaner fuel in question. Credit: iStock

Salerno points out, though, that fossil fuels also benefit from enormous federal incentives, though not in such a handy cents-per-kilowatt-hour form. Instead, subsidies are applied at the point of drilling or mining, and many are permanent rather than temporary features of the tax code.

Of course, it is not just policy that has changed the economics of wind power development in recent years. Technological innovation and economies of scale also help, and if natural gas turns out to be less attractive from a carbon perspective than previously thought, there is a chance that could play a role in boosting wind energy as well.

A ProPublica report recently discussed indications that natural gas’s reputation as a cleaner fossil fuel could be misleading. The frequently cited claim that a natural gas plant has about half of the climate impacts of a coal plant might be based on false assumptions, because it fails to take into account leaks of methane — a potent greenhouse gas 

— from gas infrastructure, as well as other emissions generated when extracting natural gas from the ground, ProPublica reported. These findings cast doubt on the idea of spending billions to move from coal to gas as a bridge toward a renewable energy future.

However, the possibility that natural gas may have a greater environmental impact than previously thought might not change relative costs on short time scales.

“If we had something that looked like a rational system, then yes, it would matter how good or bad natural gas is for the environment,” NYU’s Livermore says.

“If it was worse than otherwise expected, then more permits would be required for natural gas under a cap and trade system. But since we don’t have any way of pricing carbon in the system, then merely learning that natural gas is worse for the environment doesn’t actually lead to any consequences for natural gas production and use at all.”

Still, market pressures make it wise for utilities to consider what sort of environmental regulations might eventually enter into force, and the new information could play a role in improving wind and other renewable sources’ position.

As Salerno says, wind is “a great hedge. If you’re a utility, you don’t know what environmental regulations are going to look like, you don’t know what fuel prices are going to look like, there is no guarantee on any of those.”

AWEA foresees utilities following such logic this year: more than 5,600 megawatts (MW) of wind were under construction at the start of 2011 (the total currently online around the country is about 42,000 MW, enough to power more than nine million homes), and the group thinks there will be an increase in total installations versus last year.