Renewable Energy Looking beyond wind and solar
Our view: We recently hosted a panel discussion with Wendy Franks, Executive Vice President, Strategy and Investment Management at Northland Power (NPI), and Jeff Norman, Chief Development Officer at Algonquin Power & Utilities (AQN). The discussion touched on how wind and solar technologies have advanced over the years in terms of cost, efficiency and broad adoption, and explored the emergence of new technologies that could follow a similar trajectory, including energy storage, renewable natural gas (RNG), and hydrogen. We have highlighted some key themes below.
Wind and solar costs have declined significantly over the last decade. Since 2010, the cost of developing onshore wind and solar projects has declined significantly. With respect to the power price required to make a project economic, developers are now able to earn a reasonable return on solar projects with power prices between US$30-40/MWh over the life of the project, representing a decline of over 85% since 2010. Onshore wind projects have also seen a substantial improvement in economics. In areas with good wind resources, an adequate return can be realized at US$20-50/MWh, representing a ~68% drop from where it was in 2010. The reduction in cost for both technologies has significantly increased the number of economically viable opportunities around the world. Wind and solar technologies continue to improve, but the pace of cost decline will likely slow. Between the two technologies, wind has a competitive advantage in a subset of markets, but solar is expected to gain greater penetration over time. Please see Exhibit 1 on page 2 for a chart that clearly shows the decrease in U.S. renewable PPA pricing form 2008 through 2019, segmented by technology.
Energy storage will be a focus, and batteries offer a near-term solution for grid stability. Global electricity grids are changing at a rapid pace from both the accelerated development of intermittent renewable projects and the implementation of net carbon zero targets, leading to the phasing out of coal (baseload) in some regions. Northland Power believes that the market should not rely on a significant increase in supply of new natural gas peakers to balance the grid, as the cost of capital for these projects may rise materially over time due to increased decarbonization pressures. As such, grid operators will need to explore energy storage solutions such as batteries to stabilize the grid. The cost of batteries has continued to decline and companies are increasingly looking at opportunities to develop battery storage paired with wind and solar, or as a standalone utility scale storage facility. The increased demand for battery storage could offer a significant avenue of growth for renewable developers.
RNG opportunities are here today, while hydrogen opportunities are still years away. Northland Power sees renewable fuels (e.g., RNG and hydrogen) playing a key role in decarbonization. There are currently many RNG opportunities in the market, providing attractive returns and long-term offtake contracts in some regions. However, securing long-term homogenous feedstock remains a key risk. Algonquin highlighted the opportunity to potentially add RNG assets into the regulated rate base. With respect to hydrogen, both companies see a huge opportunity likely towards the back half of the decade, as more time is required for the technology to be commercially viable.
Investment Ideas: We believe Algonquin Power & Utilities (TSX: AQN) will benefit from the growth in renewable development activity in the U.S., in addition to decarbonization initiatives that could lead to rate base growth in its regulated utilities. We see Northland Power (TSX: NPI) continuing to benefit from the adoption of offshore wind in new geographies, and management has a team closely following the latest developments in storage and renewable fuels, which could lead to larger opportunities. We believe two small RNG developers, Green Impact Partners (TSXV: GIP) and EverGen Infrastructure (TSXV: EVGN), offer investors exposure to the RNG sector. GIP has a farm RNG project under construction, and EVGN owns a small operating RNG facility, with near-term plans to expand its production capacity.