Here we continue our assessment of the commercial viability of ocean based electricity generation. As we have outlined in a previous post, the first step in such an assessment is establishing the market requirements for the eventual widespread adoption of the technology. In another post we defined the primary market need as that for renewable energy generation driven by Renewable Portfolio Standards, estimating a US Pacific coast only market demand for $230B of new generation assets by 2030. We’ve also briefly explored some limitations of existing technologies that will eventually be painful to utilities which are required to provide customers with renewably sourced electricity. Here we complete our assessment of future market requirements for wave energy systems by looking at the economics of wind and solar electricity systems to better understand wave energy's path to cost parity.
Electric utilities are some of the most conservative businesses in the world. They are not typically the first in the pool with regards to new and untried technologies. That is why, over the past ten years or so, Independent Power Producers (IPPs) and project development groups have taken the reins in leading wind and solar into the mainstream. Utilities have been more than happy to step back and allow these entities to take on the high risks associated with early adoption of renewable technologies. In exchange, they have provided the long-term financial assurance needed for developers to obtain project financing by guaranteeing the price paid for the electricity from such developments for periods up to 20 years through Power Purchase Agreements (PPAs). They have been willing to do so, even though they could produce equivalent electricity from existing fossil fueled assets for lower costs, for a number of reasons. First, most utilities recognize the public and private market drivers that make increased renewables an inevitability and such arrangements have allowed them an opportunity to learn about these new technologies and how the electricity produced can be integrated into existing portfolios. Second, utilities appreciate the fact that renewables reduce long term risks associated with the volatile cost of fossil fuels needed to produce traditional electricity. These partnerships have led to the relative boom in wind and solar installations reflected in the chart below showing the historical progression of electricity generation by the two technologies (Source: US Energy and Information Administration).
This experimental-learning stage is coming to a close as electricity produced by wind and solar accounted for 4.6% and 0.6% of total generation in the United States in 2015, respectively. Going forward utilities will be forced by state and federal energy policies to greatly accelerate the adoption of renewable generation in order to meet future targets. Fortunately, these partnerships, fostered under an umbrella of supportive public policy, have driven technology costs down, as is evidenced by the following graph showing the evolution of PPA prices over the past 10 years. PPAs reflect the total cost of ownership and operation of the development at hand, plus a small profit margin for the developer (Sources: Lawrence Berkeley Lab Ref. 1 and 2).
Reductions in the price paid for solar electricity have been due to learning curve reductions in manufacturing and installation costs. Recent reductions in prices paid for wind electricity are the result of higher capacity factors driven primarily by a focus on installation sites in geographic regions with the highest wind energy resources and by technology advancements including taller towers that subject turbines to more consistent and energetic winds. It is important to note that the PPA prices shown inherently include the effects of federal and state financial subsidies that can offset as much as 50% of capital costs for either technology.
It is also informative to note the capital costs that are reflected in these PPA agreements, as shown in the chart below (Source: Lazard). The reader should note that despite level capital costs for wind and solar, PPA prices for wind remain significantly lower than those for solar reflecting the approximate capacity factors for the two technologies of 30% and 20%, respectively.
And so we arrive at the point of this survey; a target for the cost of electricity produced by wave energy technologies in order for systems to be cost competitive with solar and wind within a reasonable time frame. Ideally the time frame would also match the time frame associated with the market realization of the limitations of existing renewable technologies as their levels of penetration increase. As shown by the example of wind’s advantage over solar at equal capital costs, capacity factor is of utmost importance. Wave energy is blessed with a more consistent and predictable resource and so we are able to target a capacity factor of between 35% and 45%. It is reasonable to assume that such a positive differential in capacity factor will be equally offset by higher maintenance costs due to ocean based deployment. It is also reasonable to assume that future cost improvements in wind and solar will be equally offset by expiring public subsidies and solar energy value deflation. With these assumptions in hand, and following learning rates similar to what other technologies have experienced, the following chart demonstrates a feasible path to competitive wave energy by 2021.
So how close are we to this target in 2016? One source of verified data will be the detailed techno-economic performance assessments that are on-going as part of the Department of Energy’s Wave Energy Prize. These results are expected in November. One other data point available is a recent project funding award announcement for Finland’s AW-Energy. AW-Energy is in the planning stage for a Portuguese project intended to provide a rated capacity of 5.6 MW at a project cost of $27M, equating to a capital cost of $4,800 / MW, in good agreement with the projected path above. Time will tell if AW is able to meet that projected budget. The project is exemplary for two reasons. First, all other announced projects display much less favorable economics. Second, AW is utilizing an oscillating wave surge converter (OWSC) technology similar to that being developed by Harvest. We strongly believe that the industry will soon coalesce around the fact that wave surge collector technologies are the most cost effective of the myriad of wave energy technologies available.
In our next post we will examine how the DOE is using the Wave Energy Prize results to assess techno-economic performance of next generation technologies and provide a detailed breakdown of structural wave energy costs of our current generation device.