U.S. renewables market

U.S. renewables market

Electricity Supply and Demand Trends

According to the 2016 Annual Energy Outlook published by U.S. Energy Information Administration (EIA), U.S. demand for electric power is expected to grow by 1.0% per year. This is an increase over its 2015 outlook which projected demand growing at 0.8% per year. Demand is affected primarily by population growth and economic activity. Due to advancements in energy efficiency, demand growth has been slower than GDP growth in recent years and this is not expected to change.

Electricity generation capacity totaling 392 gigawatts (GW) is expected to be added from 2016 to 2040. In the near-term, capacity additions are replacing retiring coal-fired plants, largely due to low natural gas prices and implementation of the Mercury Air Toxic Standards. Coal-fired capacity will decline from 284 GW in 2015 to 215 GW in 2040, with much of that capacity gone by 2025. As seen in Figure 1, renewables will supply much of that growth, although natural gas will grow significantly as well. In the next 10 years, 97 GW of renewable and 44 GW of natural gas capacity will be added to the grid. The steady growth of natural gas capacity is necessary to maintain baseload generation and provide grid reliability, since wind and solar resources are not always available. The actual mix of future power generation will depend to a significant extent on future natural gas prices. Today, gas-powered plants compete with coal for dispatch decisions. Increasingly, in the longer term, they will compete with wind and solar capacity.

Despite the commonly-held view that coal is rapidly disappearing, power generation from coal actually will remain relatively flat over the next two decades. It is certainly true that few, if any, new coal plants will be built. As seen in Figure 2, however, coal will generate more electricity than renewables in the U.S., even in the year 2040. Of course, its share of the total will shrink—from 33% to 26%.

In summary, renewable energy has grown rapidly and will continue to grow. But even two decades from now, renewables will provide less electricity in the U.S. than either natural gas or coal.

Wind and Solar

Wind and solar energy are the only two renewable sources adding meaningful capacity in the United States for the foreseeable future. The EIA expects wind and solar capacity to increase by 4% per year from 2016 to 2040, adding almost 230 GW of generating capacity over this period.

Projected growth is a robust 10% per year for the next four years, but then slows to 3% annually from 2021 on. Many investors may find this modest level of growth surprising.
Solar power provides the largest increase in renewable capacity, from 25 GW in 2015 to more than 202 GW in 2040. Solar installations have benefitted from significant reductions in technology costs in recent years. Since 2008, the cost of solar photovoltaic (PV) panels has fallen about 80%. At the same time, the efficiency of the panels has risen, leading to greater solar energy production at lower costs.

Wind, however, has been trending in the opposite direction and the expected increases in wind capacity are much smaller. Wind will be hampered by the need to access wind sites farther from existing transmission lines or with less favorable development characteristics. In addition, wind subsidies phase out faster and sooner than solar (see Tax Credits below). With slowing growth in wind and faster growth in solar additions, solar capacity is expected to surpass wind capacity in 2033.

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Inquiries or comments concerning this article may be addressed to:
Jay Yoder, CFA
Managing Director
Pavilion Alternatives Group, LLC


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