Texas renewable prices remain low as national average increases

(October 5, 2020)

After years of declining prices, the cost of power purchase agreements (PPAs) for renewables such as solar and wind power has begun to increase. However, the marketplace overseen by ERCOT, which accounts for the vast majority of the Lone Star State, continues to enjoy the lowest prices for wind energy in the country by far.

The P25 solar index, which includes the most competitive 25th percentile of solar power generation, saw prices for PPAs rise by 3.1 percent in the second quarter of 2020 compared to Q2 in 2019. Wind power rose even more sharply, with the P25 index increasing by 13.5 percent over the same period.

Rob Collier, Vice President of Developer Relations at LevelTen Energy, which gathered the data, believes the price uptick could be the start of a new trend.

“We won’t see the decreases that we saw a couple of years ago. I don’t think we’re going to return to that world,” explained Collier. “Looking long-term, renewables will still be extremely competitive compared to fossil fuels, but we are in a leveling off, if not a slight increase, over the next couple of quarters.”

The latest figures mark a reverse in the declining renewable prices noted over recent years. But energy costs vary widely in different parts of the country.

In the ERCOT market, for example, the most competitive 10th percentile of wind PPAs came in at just $14.3 per megawatt hour. This is less than a third of the cost of wind power in California, where the most competitive 10th percentile cost $47.8 per megawatt hour. California offers the cheapest PPAs for solar at around $22 per megawatt hour, with Texas not far behind.

The ERCOT market’s ability to provide such low prices for wind energy is first and foremost linked to its position as the largest wind energy generator in the country. Wind developers benefited from a major buildout of transmission infrastructure during the 2000s that helped transfer energy from the sparsely populated western part of Texas, where the wind blows strongest, to population centers.

The second factor benefiting wind PPA prices is federal tax credits for renewables. However, LevelTen expects that PPA prices will begin to rise as these credits are phased out over the coming years.

The low prices for renewables in the Texas market have attracted substantial levels of corporate investment. 5.5 gigawatts of corporate renewable energy purchases were finalized in Texas in 2019, according to Bloomberg New Energy Finance.

The corporate deals often take the form of so-called virtual PPAs. Instead of physically using the energy, an investor purchases a virtual PPA from a renewable energy developer and receives credits, which can be used to boost the company’s renewable energy footprint. Once the developer has completed the renewables project with the help of virtual PPA financing, they can supply the energy to the electricity grid.

Virtual PPAs have become popular among large tech companies, such as Facebook and Google. In August, Google finalized an agreement with Candela Renewables for 140 megawatts of solar power as part of a virtual PPA.

The Google deal is indicative of a shift towards virtual PPAs for solar power in Texas over the past two years. While virtual PPAs for wind power have traditionally dominated the market and can be purchased for a cheaper price, Bloomberg NEF reported around 80 percent of the 5.5 gigawatts of corporate investments in renewables during 2019 went to solar projects.

Solar offers an attractive investment opportunity because it can take advantage of the spikes in power prices that occur during periods of peak demand on summer afternoons. When energy prices rise above the agreed level noted in a virtual PPA, the investor makes a profit on the difference. This has helped give solar an edge over wind power, which typically achieves its highest levels of power generation at night, when energy demand is lower.

Kyle Harrison, a sustainability analyst at Bloomberg NEF, argues that increased investment in more profitable solar virtual PPAs “represents a growing sophistication among buyers.”

Although the threatened loss of federal tax credits appears to be pushing prices for renewables up slightly, Harrison is confident about the sector’s future. In late 2019, he argued that even if federal tax credits come to an end, the corporate renewables market will be “strong enough to survive without subsidies.”

Harrison added, “A lot of tech companies, for example, even if they’ve already reached their goals, their electricity demand continues to grow as they continue to build factories and data centers.”

Jordan Smith is a freelance journalist and translator covering issues related to energy, the environment, and politics. His work has appeared on the independent news site Opposing Views and at the Canadian Labour Institute.

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