To address the challenge of expiring federal incentives for renewables, players across the supply chain will need to adapt, says Barbara Sands, renewable energy expert at PA Consulting Group. Equipment manufacturers, renewable developers and utilities will each need to face this issue, and Sands points out the ways in which each is likely to adapt to remain competitive.

Federal incentives have been the major driver in reducing the direct cost of renewable energy generation to customers. Between 2009 and 2011, the federal cash grant program provided almost $10 billion to renewable facilities (according to US Dept. of Treasury), reducing the direct cost to customers by approximately 30%. However, the popular cash grant program expired at the end of 2011, and wind grants will expire at the end of 2012, with others to follow soon after. Yet at the same time, the target level for renewable generation under state renewable portfolio standards (RPS) is starting to increase, with most programs ramping up to achieve their maximum targets around 2020.

Sands explains that with the elimination of federal incentives for renewable generation, more than $20 billion(Based on approximate capital costs of $2,000/KW in 2012 dollars for installed wind capacity) may be shifted from the federal level (i.e. all taxpayers) to the customers in states with RPS targets. The resulting rise in energy costs will test state, and by extension, regulator support for renewables, and participants across the sector will face a number of complex challenges from this evolving scenario.

With the federal grant incentives program for renewable energy expiring, players across the supply chain will need to adapt, and are likely to do so in the following ways, says Sands:

1. Equipment manufacturers will come under pressure to improve performance.

Equipment manufacturers will come under pressure from renewable developers and operators to continue to reduce the cost of their equipment. But assuming the current projected level of natural gas prices of about $4.50/MMBtu, the capital cost of wind projects would need to be at least 35% lower for wind generation to be competitive with new natural-gas-fired generation. The capital cost of solar projects would need to decrease by an even greater amount. Given the equipment cost decreases already seen, this seems challenging. Manufacturers would need to decrease fixed capital costs and improve efficiency to become cost competitive.

2. Renewable developers will need to focus on sites and projects that provide the best economics

Renewable generators are already grappling with the impact on power prices of the current and projected low cost of natural gas. Natural gas prices would need to almost triple from the current levels of less than $3.00/MMBtu for renewables to begin to be competitive on a total cost per MWh basis. The elimination of federal incentives will compound the economic challenge that renewable developers face in acquiring financing for future projects and selling renewable power.

3. Utilities will need to find a way to recover the high cost of renewables.

If utilities’ renewable energy purchases end up costing more than double the available price of energy, many will fear prudence challenges in the coming years. And as a result, this places pressure on regulators to allow them to recover the higher cost of renewables in future rates, thereby passing these costs to customers.

Says Sands, “the US renewable market is becoming increasingly challenging, and players across the supply chain will need to adapt to survive.”