© OECD/IEA 2014 © OECD/IEA 2014

Wind Power in the Electricity Mix Today and Tomorrow

Dr. Paolo Frankl Head, Renewable Energy Division International Energy Agency

Intercontinental Wind Power Congress 2015, Istanbul, 1 April 2015

© OECD/IEA 2014

In 2040…

1. Wind larger than coal worldwide?

2. First source of electricity in Europe?

Yes! According to the WEO 2014 450 Scenario

© OECD/IEA 2014

Strong momentum for renewable electricity

Renewable electricity projected to scale up by 45% from 2013 to 2020

Global renewable electricity production, historical and projected

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5%

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30%

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

TWh

Hydropower Bioenergy Onshore wind

Offshore wind Solar PV Geothermal

STE/CSP Ocean % total generation (right axis)

Historical data and estimates Forecast

Natural gas 2013

Nuclear 2013

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Different barriers in different regions limit deployment

Renewables account for 80% of new generation in OECD

Limited upside in stable markets with slow demand and growing policy risks

Cumulative change in gross power generation by source and region, 2013-20

Renewables are largest new generation source in non-OECD, but meet only 35% of growth

Large upside for dynamic markets with fast-growing demand

Still barriers in access to grids and financing

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Renewable generation Conventional generation

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Non-OECD

Renewable generation Conventional generation

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Renewables contribute to energy security in Europe

0

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Total wind (onshore + offshore) annual capacity additions (GW)

Wind growth continues to strengthen in emerging markets

This map is without prejudice to the status of or sovereignty over any territory to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

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Non-OECD Americas

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Global RE capacity additions led by wind

Still up & downs in additional capacities; due to policy uncertainties, integration and financing challenges in some areas

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Onshore wind markets today, drivers of tomorrow

US: RPS with long-term PPAs as low as USD 25/MWh (USD 48 with PTC)

Brazil: Tenders with long-term PPAs • USD 50-57/MWh • Up to 50% capacity factors • good financing from BNDES

Latin America: Tenders with long-term PPAs • USD 62-75/MWh, • 40-50% capacity

factors

South Africa: Gov. procurement with long-term PPAs • USD 65/MWh • Grid connection

issues

EU: FiT, FiP, GC or CfD • 2020 RE targets • Uncertainty in 2030 • USD 75-110/MWh

China: FiT + long-term gov. capacity targets • good financing • grid integration

problems • USD 60-80/MWh

India: REC and local FiT+ tax incentives with gov. targets • grid integration

problems • USD 65-80/MWh

Slow demand growth* Dynamic demand growth*

* Compound annual average growth rate 2012-20 , slow <2%, dynamic ≥2%; region average used where country data unavailable This map is without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

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Silent technological revolution of wind – unlocking more sites

New turbine technology makes low-medium wind sites bankable unlocking more capacity to be exploited

Source: Wiser et al. 2012.

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Still large difference in investment costs (CAPEX) among different markets

Market competition, supply chain, administrative and regulatory policies drive cost differences in addition to topological difficulties

China and India have lowest CAPEXs globally with high competition in supply chain and low construction and grid connection costs

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Brazil China Germany India Japan Turkey USA

USD/

kW

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Cost of financing very important factor in levelized energy costs

Economic and non-economic barriers to effect risk premium and overall energy cost of a renewable project

FITs and PPAs usually decrease risk premium while grid connection problems and social acceptance to increase premium

Policy uncertainty risks difficult to manage by investors and challenging for financiers

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Brazil

China

Germany

India

Japan

South Africa

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USA

WACC - 2014 (real)

Typical onshore wind WACC (real terms in 2014)

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Large ranges in LCOEs persist Offshore wind costs higher but decreasing

Lower onshore LCOEs values already possible in exceptional sites with good financing

Can offshore wind have the same success story of onshore wind?

Latest tender prices indicate an ambitious cost reduction goals in 2019-2020. Long-term policy framework is an important factor to achieve significant cost reductions.

Typical onshore wind LCOEs (2006-2020) Typical offshore wind LCOEs (2006-2020)

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UK CfD Denmark Horns Rev 3

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/MWh

Brazil PPAs US PPAsHorns Rev 3 project PPA does not include grid connection costs (+15-25%).

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Even with lower oil and gas prices, renewable electricity can be price competitive

Weighted average annual renewable investment costs, historical and projected

Note: Based on EGC median case, LCOE for OCGT is calculated using a 15% capacity factor and 7% discount rate and LCOE for CCGT is calculated using a 65% capacity factor and 7% discount rate. No carbon pricing is included in LCOEs.

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USD/MWh

USD/MMBTU

LCOE New OCGT

LCOE New CCGT

Japan: avg

contracted spot

LNG, Jan 2015

USA: avg HH

spot, Jan 2015

EU: avg NG

import, Jan 2015

Japan: avg

contracted spot

LNG, Mar 2014

Solar PV LCOE ranges Onshore wind LCOE ranges

Japan

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Grid Integration is the key challenge

“Renewable energies such as sun, hydro or wind cannot

cover more than 4% of our electricity consumption – even in the long run” (Die Zeit, 1993).

Today: Portugal and Denmark >90% vRE share for several days

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Large-scale integration accomplished today, but more to come

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Japan

Brazil

India (South)

France

Sweden

ERCOT

NW Europe

Italy

Great Britain

Germany

Iberia

Ireland

Denmark

Wind PV Additional Wind 2012-18 Additional PV 2012-18

Share of v-Re on annual electricity generation

• Instantaneous shares

reaching 60% and above • Higher shares locally: e.g. wind in Tamil Nadu (India) approx. 13%

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Integration vs. transformation

Classical view: VRE are integrated into the rest

Integration costs: balancing, adequacy, grid

More accurate view: entire system is re-optimised

Total system costs

Integration is actually about transformation

Remaining system

VRE

Power system • Generation • Grids • Storage • Demand Side Integration

© OECD/IEA 2014

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low grid costs

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Transformed generation &

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Cost-effective integration means transformation of power system

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Large shares of VRE can be integrated cost-effectively

Significant optimization on both fixed and variable costs

Test System / IMRES Model

45% VRE penetration

Grid cost

DSI

Fixed VRE

Emissions

Fuel

Startup

Fixed

non-VRE

+40%

+10-15%

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2. Make better use of

what you have

Op

eratio

ns

1. Let wind and solar play their

part

3. Take a system wide-strategic

approach to investments!

System friendly

VRE

Technology spread

Geographic spread

Design of power

plants

Three pillars of system transformation

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Investm

ents

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Policy uncertainty remains a major barrier to deployment –an example from US

Policy uncertainty over the extension of production tax credit to result in boom and bust cycles.

13 GW deployed in 2012, only 1 GW in 2013 and 4.8 GW in 2014

US annual onshore wind additions

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GW

Result of expiration of

production tax credit in previous year

?

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Retroactive policies to be avoided at all times

Romania introduced 6 GCs for PV and 3 for onshore wind…both technologies boomed with generous incentives

Too expensive! Government changed bending retroactively. Some projects will still be built but bust cycle in 2014.

WACC for wind projects estimated to increase from 9% to 14%

Romania solar PV and onshore wind LCOE vs GCs and market price

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EUR/MW

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Utility-scale PV LCOE and wholesale market price + GCs

Solar PV LCOE Market price +GCs for Solar PV

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Onshore wind LCOE and wholesale market price + GCs

Min Market price Market price + GCs for Onshore wind

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What has not worked (yet)

Low carbon prices insufficient to trigger investment in low-C technologies

Fossil fuel subsidies act as an incentive to emit

Other barriers persist, e.g. policy uncertainty in OECD countries and access to grids and markets in some non OECD countries

EU ETS carbon price (EUR per tonne)

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Despite major efforts, fossil-fuel subsidies remain a major issue

Economic value of fossil-fuel subsidies by fuel

In 2013, the global value of fossil-fuel subsidies that artificially lower end-use prices was estimated at $548 billion, $25 billion lower than the previous year

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600 Billion dollars (nominal)

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Electricity

Coal Gas Oil

IEA average crude oil import price (right axis)

2007 2008 2009 2010 2011 2012 2013

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The entire global CO2 budget to 2100 is used up by 2040 – Paris must send a strong signal for increasing low-carbon investment four times beyond current levels

The 2 °C goal – last chance in Paris?

World CO2 budget for 2 °C ~2300 Gt

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Share of budget used in Central Scenario

1900-2012

2012-2040

Average annual low-carbon investment, 2014-2040

Central Scenario

For 2°C target

2013

CCS

Nuclear

Renewables

Efficiency

The entire global CO2 budget to 2100 is used up by 2040

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Designing future power markets

© OECD/IEA 2014 23

Short-term price signals to reflect

the value of power and

flexibility at all time

Wholesale spot power markets unlikely to deliver on:

Various ways to combine the following three elements:

Financing capital-intensive (variable) renewables

Flexible power systems assets with uncertain

capacity factors

Long-term price signals to attract

investment in high-Capex

technologies

Pricing of externalities to achieve energy

security and climate goals

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2011 6DS 2DS hi-Ren

The mix today:

Fossils: 68%

Renewables: 20%

The mix in 2050 (2DS/hi-REN):

Fossils: 20%/12%

Renewables: 65%/79%

A 2DS requires deep transformation of the electricity mix

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Wind power to provide 15% to 18% of global electricity

China, Europe and the USA together account for two thirds

Wind power deployment to 2050

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India Eastern Europe and FSU Latin America hiRen (TWh)

share of total hiRen (share)

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Concluding remarks

High levels of financial support no longer required for RE electricity (wind in particular) if appropriate market and regulatory framework in place

However, solutions to future development rest in policy makers’ hands Policy risk main barrier to investment

Electricity markets sub-optimal today for low-carbon generation

Policies and market design should focus on fostering Competition,

Innovation

Flexible energy systems

Pricing of carbon and other externalities