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Report: wind can still be long-term hedge against gas price increases

The study, conducted by the Lawrence Berkeley National Laboratory (LBNL), investigates whether wind can still serve as a cost-effective hedge against rising natural gas prices, given the significant reduction in gas prices in recent years, coupled with expectations that gas prices will remain low.

Expanding production of the United States’ shale gas reserves in recent years has put downward pressure on natural gas prices, prompting massive fuel-switching from coal- to gas-fired generation. Though arguably a near-term positive for both consumers and the environment, this “dash for gas” – and, specifically, its corresponding suppression of wholesale power prices – has made it harder for wind and other renewable power technologies to compete on price alone (despite recent improvements in their cost and performance).

The cost of wind power may vary from region to region, but the best onshore wind farms in the world already produce power as economically as coal, gas and nuclear. However, the drop in gas prices in the US means wind power now finds it more difficult to compete with gas-fired generation on the basis of price. It may increasingly need to rely on other attributes, such as its “portfolio” or “hedge” value, as justification for continued deployment in the power mix.

Drawing on a sizable sample of long-term power purchase agreements (“PPAs”) between existing wind projects and utilities in the U.S., the Lawrence Berkeley National Laboratory report compares wind power prices that have been contractually locked in for decades to come with a range of long-term natural gas price projections. It finds that – even within today’s low gas price environment – wind power can still provide a cost-effective long-term hedge against many of the higher-priced future natural gas scenarios being contemplated.

According to the report, this finding is particularly evident among the more-recent contracts in the PPA sample, whose power sales prices better reflect recent improvements in the cost and performance of wind power.

With shale gas likely to keep a lid on domestic natural gas prices in the near-term, the report’s focus is decidedly long-term in nature. “Short-term gas price risk can already be effectively hedged using conventional hedging instruments like futures, options, and bilateral physical supply contracts, but these instruments come up short when one tries to lock in prices over longer durations,” notes report author and LBNL Research Scientist Mark Bolinger. “It is over these longer durations where inherently stable-priced generation sources like wind power hold a rather unique competitive advantage.”

A copy of the report – titled “Revisiting the Long-Term Hedge Value of Wind Power in An Era of Low Natural Gas Prices” – along with a slide deck summarizing the work, can be downloaded here.

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