The 50 GW Renewable Scenario by Steven Taub Cambridge Energy Research Associates

The idea that renewable energy is poised for significant growth should not surprise anyone. The potential is so large partly because renewable energy is such a small piece of the U.S. energy landscape today. Despite its small size, however, renewables are what is now on the margin, and one of the basic tenets of economics is that what is on the margin is what really matters.

How much growth will there be? One approach to answering that question is to aggregate the amount of new investment necessary to comply with the various state renewable energy portfolio standards, the new capacity supported by the public benefits funds, and the capacity needed to supply green pricing and green power marketing efforts. Based on CERA's analysis, this adds up to about 10 GW by 2010, which would increase the existing installed renewable capacity of 17 GW by about 60%.

If that was all there was, renewables would be an interesting niche, but hardly worth getting too excited over. But the true potential is much greater. A plausible scenario can be envisioned that would approach 50 GW by 2010. Such rapid growth, of course, would depend on many factors. One is an expansion of the state and federal supports that underlie the renewables market: state and/or federal renewable portfolio standards, net metering capabilities, interconnection standards, and extension of the federal production tax credit.

Consumer choice is another important factor that could spur future growth. While competitive power marketing is stalled at about 5.5% of customers served by competitive providers, many of those customers have opted for a green power offering. There are more than 100 such programs around the U.S.

The key driver of both the economics and the policy of renewable energy in the U.S. is the natural gas market. The tremendous growth in gas demand is colliding head-on with a supply shortage born of a mature resource base combined with restrictions on exploration. Instead of the growth needed to keep up with demand, total North American gas supply is expected to be flat and then start shrinking around 2007. The result, as seen already, is a dramatic rise in gas prices, from $2.00-2.50/MMBtu throughout the 1990s to over $5.00 today.

Renewable energy will benefit from this price volatility because higher gas prices make renewables more competitive. Wind power, biomass co-firing in coal plants, incremental hydroelectricity from existing dams, geothermal power, and biomass-fueled CHP can compete with combined-cycle gas turbine plants at $5.00/MMBtu, especially with support provided by the federal production tax credit.

Wind power will benefit most from the high gas prices because, unlike geothermal, hydro, or biomass, there is a large untapped base of economically attractive resources. Further, wind power costs are expected to fall by about 25% by 2010. But it can't all be wind. Reaching the 50 GW mark would probably require 10 GW or more of non-wind renewable capacity as well.

How much of an impact could renewables have on the gas market? In a recent CERA study, the 10 GW of new renewables that existing policies imply could cut gas consumption by about 0.8 BCF per day in 2010, which is about 1% of the total. This is the gas market equivalent of one liquefied natural gas terminal or a mild winter – not a tremendous change – but still quite significant. Tight supplies will magnify the effect that these small demand changes have on prices, and the more optimistic scenario will have a much greater effect. Clearly, the gas market situation makes the aggressive 50 GW renewables scenario much more likely to happen.

So the opportunity for renewables is large. But the future role of renewables in the U.S. electricity industry will depend on many unpredictable economic, technological and political factors. Short-term events – such as a mild weather cycle or a large gas field discovery – can obscure the long-term trend and delay the response. Economics, particularly the creditworthiness of utilities signing long-term contracts, is another large uncertainty.

But the biggest uncertainty is politics. What will happen with FERC's efforts to restructure the power markets and encourage investment in the transmission system? Will Americans who support renewable energy in the abstract accept the steel, concrete and fiberglass reality of it in their communities? Will Congress agree to open new lands to exploration in an effort to preempt a gas market crisis?

Furthermore, the renewable energy industry is on the cusp of a cultural shift every bit as wrenching as the change in the business environment. As renewable energy becomes a big energy business, it is going to look more and more like other big energy businesses. Competing in renewable energy will increasingly demand corporate structures and strong capitalization. Projects will be larger, more complicated, and more integrated with the broader energy markets. Consolidation will continue, and even accelerate. People will need to be able to think about renewables differently and in a more integrated way than they have in the past to succeed in this environment.

So is the 50 GW scenario feasible? Maybe. Action to formulate and enact policies favorable to renewable energy is critical to reaching the desired 50 GW level, but the devil is in the details. Policymakers should understand that effective measures must provide a stable, predictable environment, and they must be broadly based to ensure the best chance of meeting the ambitious goals.

Steven Taub is a Director at CERA, specializing in emerging technologies, electric transmission and distribution, retail energy, and quantitative analysis. He can be reached at staub@cera.com.

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