Producers of wind electricity were among those who followed last year’s Washington budget drama in hopes that alternative energy subsidies wouldn’t become a victim of spending cuts. Federal subsidies for wind generated electricity have been in existence since 1992. If congress doesn’t take any action to extend the subsidies or rework them by the end of 2012 the industry might find itself without federal backing for the first time in two decades. This leaves investors and potential investors in wind projects in limbo.
Along with the government subsidies for wind electricity many states have passed renewable energy mandates which required that a certain amount of electricity come from renewable sources. All of this has allowed wind technology and the wind industry to flourish in recent years. Energy produced from wind is approaching so-called “cost parity” with more traditional methods of generating electricity like coal.
Given the new economic realities, the real question for the wind power industry is whether or not the technologies have come far enough so that electricity from wind can continue to be competitive on a cost basis without the benefit of government funding. Can wind compete on cost on a level playing field with other energy sources?
The shale gas revolution in the natural gas industry and resulting drop in natural gas prices make it even tougher for renewable energy including wind power to compete on cost. Electricity rates in Texas have fallen substantially since 2008 due to the decrease in natural gas prices brought about by these often controversial techniques. Texas gets a large portion of its electricity from power plants that burn natural gas, as do a number of other states. This will make it even more challenging for wind to compete on a cost basis for at least the next several years.
This is an example of how long term energy planning often conflicts with short term economic conditions and pricing cycles. The longer natural gas remains so underpriced relative to other energy fuel sources the more electricity production will be shifted to natural gas. This could create a situation where electricity prices become susceptible to future price spikes in natural gas as the nation’s energy portfolio becomes less diversified. 2012 will be a pivotal year for wind and other renewable energy sources. Policy makers will have to determine if the public should continue subsidizing renewable energy while the free market will have to determine if there is even a place for renewable energy in the absence of subsidies.