WUEG January 2016 Newsletter

whartonundergradenergy

January 2016

January 2016 Newsletter

For comments, questions, or letters to the editor, please email

whartonundergradenergy@gmail.com and get the chance to be featured in next

month’s newsletter!

El Niño and Energy

Thomas Lee – Senior Member, Academic Committee

This year, El Niño has produced a warmer than

usual winter, significantly affecting energy

markets.

temperature anomaly, the current El Niño event is

already the most severe through this decade.

Normally, trade winds (the prevailing winds along

the tropics) blow east to west, induced by the

Coriolis Effect. Over the Pacific Ocean, this wind

pattern pushes surface water to move east to west

(from South America towards Southeast Asia). So

warmer surface water is piled downwards near

Asia and Australia, while colder deep water rises

around America through a process called

upwelling.

However, during El Niño (a.k.a. El Niño-Southern

Oscillation, or ENSO) these trade winds are

weakened or sometimes even reversed, meaning

the surface temperature in the eastern Pacific

(South America) is warmer than usual and vice

versa. This fundamentally changes atmospheric

weather patterns due to humidity and pressure

changes. As seen from National Oceanic and

Atmospheric Administration (NOAA) data of

Oceanic Niño Index (ONI) measuring sea surface

There are two mechanisms whereby ENSO can

affect energy markets. First, it causes a slight

increase in overall global temperatures that

contributes to a warmer winter; this effect

contributed to last year being the second warmest

year ever recorded. Specifically in the US, the

2015-2016 winter is estimated to be 15% warmer

whartonenergygroup.com 1


January 2016

than the last (conversely in the western US

temperatures are colder than last year). Second,

there are extreme weather events that are typical

during El Niño: floods in California and Texas,

drought in Australia and Japan, and failure of

monsoon rains in Indonesia and India. These may

drive supply chain disruptions; for example floods

in California have caused several power outages

this winter.

ENSO has a negative effect on natural gas prices.

This is due to decreased demand: natural gas is

primarily used for heating, and 49% of U.S.

households use natural gas heating. In general, a

common metric for measuring the effect of

weather on heating demand, as well as hedging

through weather derivatives, is the heating degree

day (HDD). Historically, the HDD in an El Nino

winter can be 12 to 20% lower than the preceding

cold winter. For this winter, EIA estimates that

residential natural gas consumption will decrease

6% for this winter compared to the last. Combined

with current supply and storage dynamics, the EIA

forecasts the average Henry Hub spot prices will be

13% lower than last winter. Due to utility purchase

contracts and the fact that residential prices also

contain a fixed component for operating and

transport costs, delivered residential natural gas

prices are expected to fall 4% on average.

Similarly, ENSO also puts downward pressure on

prices of heating oil (which is the second most

common space heating source in the Northeast

after natural gas). However, this winter the price of

heating oil (which is refined from petroleum) is

expected to decrease even more due to the fall in

crude oil prices. EIA’s October Short Term Energy

Outlook forecasted prices to decrease 15% from

last winter, but the current forecast is a 29%

decrease.

It is noteworthy that regional effects may differ

from the national pattern. For example, warmer

temperatures decreased snowpack formation in

the Pacific Northwest: by May 2015 Washington

and Oregon’s snowpack decreased to less than a

fifth of their 30-year average. This has decreased

hydroelectric generation by about a third

(compared to previous five years) in these two

states; thus more generation from natural gas

plants is required, in fact increasing about 50%

from last year. This effect is compounded with

decreased HDD in the western US.

“…following an extreme ENSO

event, such as this winter’s, there is

an increased probability of further

reversal to the opposite equatorial

Pacific pattern, known as La Niña.”

Retail electricity prices are less variable than these

heating fuels, due to the regulated structure of

power utility markets which utilizes power

purchase agreements (as well as the split between

generation, transmission, and distribution). EIA

estimates residential electricity prices are 1%

lower, along with 2% lower electricity

consumption versus last winter. The effect of

decreased heating on electricity markets is more

pronounced in the South, which has 63% of

households relying on electrical space heating. On

the wholesale side, the lower natural gas demand

pressure from the warmer winter means that

wholesale electricity markets should see less

volatility. In contrast, two winters ago saw extreme

winter cold in New England (due to polar vortex

effects) and natural gas pipeline constraints,

leading to very volatile wholesale price spikes.

In the energy industry, knowledge about ENSO’s

characteristics is very valuable to risk managers as

well as market participants. While the effects of

this current El Niño should be almost over (since

ENSO usually starts between March and June and

20reaches peak intensity between November and

whartonenergygroup.com 2


January 2016

February), understanding this meteorological

phenomenon continues to be very important for

energy markets. For instance, following an

extreme ENSO event, such as this winter’s, there is

an increased probability of further reversal to the

opposite equatorial Pacific pattern, known as La

Niña. For example, this reversal occurred from the

strong El Niño of 1987-8 (which saw ONI of more

than 1.5) to the strong La Niña of 1988-9 (which

saw ONI of almost -2.5). Such reversal, with the

possibility of a much colder winter with increased

demand pressures, has ramifications ranging from

energy trading to disaster planning.

Moreover, according to a 2014 study by Cai et al in

Nature Climate Change, global climate change

may increase the frequency of extreme El Niño

events in the future. Warm winters, and their

possibly cold subsequent winters, are not going

away soon.

Bringing the US infrastructure into the 21st Century

Sam Collins – Member, Academic Committee

On January 12 th , President Obama dedicated a

portion of his State of the Union address to the

future of the U.S. transportation system focusing

on “how we can make technology work for us.”

Two days later, Secretary of Transportation

Anthony Foxx unveiled the president’s plan which

would include a 10 year, $4 billion initiative to

accelerate vehicle safety adoption through

autonomous vehicles as part of the FY17 budget.

“We are on the cusp of a new era in automotive

technology with enormous potential to save lives,

reduce greenhouse emissions, and transform

mobility for the American people,” said Secretary

Foxx. Secretary Foxx also unveiled the updated

policy guidelines that the National Highway Traffic

Safety Administration (NHTSA) wrote up in 2013

regarding autonomous vehicles.

“…the president’s plan [would]

include a 10 year, $4 billion initiative

to accelerate vehicle safety adoption

through autonomous vehicles…”

The DOT and NHTSA will work with industry

stakeholders, state partners, and other important

parties to develop guidelines regarding the safe

adoption of technology and process in which the

government and companies interact. In essence,

this is a four billion dollar plan to insure that

autonomous vehicles are regulated and safe for

consumers.

Companies like Volvo, Mercedes, and others are

committed to introducing an autonomous vehicle

before 2020, so this seems like smart decision by

the Obama administration, because the

government very rarely gets out ahead of

innovations. For example, companies like BMW

and Audi introduced vehicles in Europe that utilize

LED lasers headlights a few years prior which can

increase a driver’s visible range, can reduce energy

consumption, and can prevent other cars from

being blinded, yet this technology cannot be

brought into the US because of legislation from

1968 that remains unchanged.

The failure to adopt superior technology like LED

headlights is one reason why the government

continues to push for such initiatives like

autonomous cars and the Smart City Challenge.

The Smart City Challenge was introduced in late

2015 “to show what is possible when communities

use technology to connect transportation assets

into an interactive network. Funding up to $40

million in funding will go to one mid-size city that

puts forward bold, data-driven ideas [to make]

whartonenergygroup.com 3


January 2016

transportation safer, easier, and more

reliable.” The US Government plans to spend

hundreds of billions of dollars in infrastructure

improvements over the next decade, and these

initiatives signal a pivotal point for our

transportation network.

Sources: NHTSA.gov

Natural Gas: Following Oil’s Lead or Acting on its Own?

Max Isenberg – Senior Member, Academic Committee

While the spotlight on commodity prices remains

fixed to oil’s wild swings in the past year, natural

gas has experienced its own turmoil behind the

scenes. By the end of 2015, both supply and

demand for natural gas has conspired to drive

prices to a 15 year minimum to $2 per million

BTUs. What has caused this historic drop and what

could eventually cause price trends to reverse?

New Year, Same Story: Oversupply

Oil & Gas

Natural gas prices have been on a downward

trajectory ever since the proliferation of hydraulic

fracturing that has made the production of the

commodity far easier and more prevalent. With

formerly uneconomical shale deposits now prime

targets for production, supply has exploded,

providing a steady downward on prices. While the

realities of price have caused some cutback in what

producers are providing, the high capital costs and

investment put into production have not stopped,

bringing more gas to an oversaturated market.

Additionally, inventories remain 15-20% higher

than last winter, suggesting the gas being

produced isn’t being used as quickly.

Demand: The Short and Long Term Story

Natural gas prices have fallen as the mild winter

has reduced demand in the US market. With many

parts of the East Coast not experiencing below

freezing temperatures until just this month,

demand for gas heating stayed far below previous

winters. Meteorologists anticipate a strong El Nino

to persist, moderating the harsh cold in most of

the United States that usually causes large spikes

in demand.

Longer term demand for natural gas remains

difficult to predict. As has been the case since the

rapid expansion of fracking, domestic natural gas

prices have fallen far below that in other markets

such as Asia and Europe. This has incentivized

whartonenergygroup.com 4


January 2016

exportation of liquefied natural gas (LNG), which

allows producers facing low domestic prices to

take advantage of higher prices for gas overseas.

On the one hand, new markets for American

natural gas may create new competition for

domestic purchasers, thus increasing prices here at

home and closing the spread between foreign and

domestic prices. However, hints of an economic

slowdown in Eastern Asia (especially China, Japan,

and South Korea), Europe, and elsewhere may kill

the profitability of LNG before further export

capacity is brought online. India’s renegotiation of

a major LNG contract that resulted in a 50% drop

in price is indicative of how exporting to

developing economies is also becoming

significantly less attractive.

Rebound in sight?

While supply has slowly started to retract,

increases in price may not materialize. The mild

weather and threats of global recession have put

brakes on the quantity of gas needed around the

world. Barring a dramatic supply pullback or a

resurgence in key developing markets for natural

gas, the story of natural gas prices may not change

from the past few years: a slow, steady march

lower.

Sources: Marketwatch, NaturalGasIntel.com,

Bloomberg, Forbes, Wall Street Journal

Saudi Aramco’s Listing Is Exciting but Unlikely

Jose del Solar – Member, Academic Committee

Saudi Aramco is estimated to be worth over 13

times more than the world’s second most valuable

company. Aramco sits on about 261 billion barrels

of oil, controlling one fifth of the world’s reserves.

But the monopoly’s importance to the Saudi

people is more than just economic. It has been at

the center of Saudi Arabia’s history, politics, and

foreign affairs since it was nationalized in 1980. So

it came as a shock to many when Muhammad bin

Salman, the country’s prince, discussed the

possibility of floating Saudi Aramco shares amid

extremely low oil prices and a growing budget

deficit.

Aramco is currently among the most secretive

companies on earth and does not publish its

accounts, revenues, or profits. There are also

questions about why the company appears to own

a fleet of jets, soccer stadiums, and hospitals. But

the listing of Aramco would certainly make the

company more transparent. The move would give

investors a better understanding of the company’s

operations and true value. Aramco’s Chairman,

Khalid al-Falih, said that the decision would

include upstream, which is the exploration and

production sector of the oil and gas industry. This

means that the listing would give investors access

to both the country’s 261 billion barrels of oil

reserves and 263 trillion cubic feet of gas.

“…the listing would give investors

access to both the country’s 261

billion barrels of oil reserves and 263

trillion cubic feet of gas.”

Not everyone is happy about this decision. Saudi

Arabia is already taking heat for its recent oil

reforms. Last year the country forced OPEC to

maintain oil production amid plummeting prices,

causing oil to fall to its current levels. Most oil

producing countries are losing money on every

barrel of oil they produce, and Saudi Arabia is not

generating enough revenue to sustain its

expenditures. The idea was to neutralize the threat

from higher-cost producers, particularly the U.S.

whartonenergygroup.com 5


January 2016

shale industry, but the move appears to have

failed, only harming oil producing countries.

But there is certainly logic to privatizing Aramco,

and it fits the recent trend of denationalization.

For one, it would serve as a way for Saudi Arabia to

‘ride out’ this period of low revenues. Furthermore,

due to the pressure renewables have recently

placed of Saudi Arabia’s oil industry, some say the

listing could also serve as a way for the country to

cash before the world moves away from fossil

fuels.

The company’s valuation has taken a hit under

current low oil prices, so floating the shares would

not be a good way to maximize returns. It would

also not be beneficial to the ruling family.

International investors would have a say in the

country’s ‘crown jewel’ industry, diminishing the

royal family’s power. But perhaps more

importantly, the unprecedented level of

transparency required for a successful flotation

would hinder bribery, random purchases, and

funding the royal family’s extravagant lifestyle. All

in all, a listing seems unlikely.

Sources: The Economist, Forbes, The Guardian

Oil Woes in Kazakhstan Highlight a Regime’s Illegitimacy

Mark Rinder – Member, Academic Committee

The city of Astana rises from the flat, deserted

Kazakh Steppe as if a mirage, displaying futuristic

architecture and imposing monuments.

Designated the capital of Kazakhstan in 1997,

Astana was intended to symbolize a new era of

modernity for the country through its excessively

luxurious planning. During Kazakhstan’s years of

oil-driven prosperity, a contented population

condoned its leader’s financial excesses and

autocratic ways, but as global commodity prices

continue to plummet, President Nursultan

Nazarbayev will have to not only slow construction

in his showcase metropolis, but also face new

questions about his right to rule.

Kazakhstan’s declining oil revenue has placed a

strain on the nation’s economy, triggering 45

percent depreciation in the national currency.

Furthermore, the oil-backed National Fund is

being rapidly drained as the government fails to

curb spending despite decreased earnings. In the

past eighteen months, the fund has fallen from $77

billion to $64 billion, yet the government continues

to draw $9.5 billion annually to finance its

expenditure. With yearly returns of only 1.96

percent, compared with 9.6 percent average

returns for other sovereign-wealth funds, the

Kazakh National Fund is on its way to complete

exhaustion.

Berik Otemurat, leader of the Kazakh central

bank’s National Investment Corporation, pointed

out this very fact in a recent Wall Street Journal

interview, calling for reduced spending, increased

tax collection, and more investment in higher-yield

assets. Five days after predicting complete

depletion of the National Fund within the next

whartonenergygroup.com 6


January 2016

seven years, Otemurat was dismissed from his

post.

With Otemurat removed, Nazarbayev’s regime has

silenced one source of embarrassing criticism, but

still cannot rest assured of its continued

dominance. Due to concerns regarding growing

discontent over the country’s worsening economic

situation, Nazarbayev’s ruling party has requested

to reschedule early 2017’s parliamentary elections

to a date prior to the end of this winter. The move

is a clear attempt to harness Nazarbayev’s

overwhelming support base before it grows

increasingly frustrated with the government’s

neglect of the economic situation.

During times of prosperity, the dictators of lowprofile

nations like Kazakhstan’s Nazarbayev face

few threats to their power; when the population is

fed, it is more willing to turn a blind eye to

illegitimate democracy and human rights

violations. However, as the financial security of

Kazakhstan’s people hangs in the balance, it is

likely that Nazarbayev will grow more desperate

and have to work harder to maintain absolute

control. Nazarbayev is not too threatened at the

moment, but if Kazakhstan continues to exhaust

its declining oil revenue, the country may be

headed towards widespread unrest in the near

future.

Sources: The Wall Street Journal, Financial Times,

The New York Times

Norway’s Oil Fund and Macroeconomic Stabilization

Frank Geng – Member, Academic Committee

In early January, Norwegian’s Government Pension

Fund Global (aka the Oil Fund) began considering

increasing its portfolio’s exposure to global equity

markets. This comes in a time when fund managers

feel returns are steadily slowing down. Norway’s

sovereign wealth fund is different from other pension

funds of other countries in that it’s funded by profits

from Norway’s petroleum sector. Statoil, for

example, the national oil company, has seen 10% of

its work force laid off in the recent oil price plunge.

Bente Nyland, director general of the Norwegian

Petroleum Directorate told Bloomberg that,

Norway’s oil industry is “in a crisis now, we can’t deny

that”.

“Since 1971…oil revenue has

increased GDP-per-capita more than

30 times.”

So why is this all important? Well, the Oil Fund’s

move should prove to be a good example of a

macroeconomic solution to the boom-bust cycle of

something like the oil sector. In the current economic

environment, oil and gas make up roughly a quarter

of Norway’s GDP and half of its total exports.

Countries facing similar crises in this depressed oil

price climate and rising shale production should note

the viability of a sovereign wealth fund.

The decision to increase the fund’s stake in equity

markets comes directly as a result of its slowing

diversification process into real estate. In 2011,

Norges Bank Investment Management (NBIM),

which runs the fund alongside the Norwegian Central

Bank, decided to commit $6 billion a year into real

estate. For roughly two years, the fund’s strategy

seemed to be working, with real estate returns

hitting an average 7% annual returns. After 2013, the

real-estate rush triggered by new massive investors,

including the fund, caused a sharp increase in

property prices and seemed to have overheated the

market. And now, as real estate returns are almost

half of what they had been in 2013 and as low longterm

interest rates are hitting the fund’s large stake

in bonds, the fund is considering shifting its

investment focus into equities. Under its current

whartonenergygroup.com 7


January 2016

rules, the fund’s portfolio consists of 60% in shares,

35% in bonds, and 5% in real estate.

On the one hand, the decision shows prudent

thinking on the part of NBIM to attempt to life

returns by taking on more risk. On the other, it points

to a broader question of how to best use surplus

derived from a country’s natural resources. And

Norway is indeed an example of oil surplus. Since

1971, when Norway first started extracting oil from

the continental shelf, oil revenue has increased GDP

per-capita more than 30 times. This kind of story is

not atypical of countries with an abundance of oil

and the necessary extractive capacity. Unlike many

countries, however, it does not squander its oil

profits. The concept of a sovereign in theory seems

to have sound reasoning as an economic stabilizing

mechanism. In downturns, it would counter-cyclically

spend and in upturns, it would build-up its reserves.

And especially in a scenario where oil prices probably

will stay depressed as OPEC and new shale-oil

producers continue to supply the glut, a sovereign

wealth fund could easily fill the financial gap that oil

firms are facing while at the same time stabilize

government revenues.

In the end, oil seems to be on both ends of the

revenue-expenditure equation. Norway needs to

recognize the weaknesses of its industry model. The

bureaucratization of the oil industry undermines the

state capitalism approach that Norway takes to

corporate culture and thereby efficiency—it will be

difficult to rely on oil revenues if the industry refuses

to adapt. On the other side, as the Norwegian

government is clearly in a mood to reexamine its

spending priorities, it might be helpful to look at its

welfare policies. Understandably, Norway follows the

Nordic model of welfare, though in a time when

government revenue is getting squeezed, the NBIM

and the Pension Fund might be better uses of state

funds. For other countries, it will be important to

notice that this oil crisis has at the very least provided

an opportunity to observe over the next few years

the efficacy of a sovereign fund’s investment

flexibility in macroeconomic stabilization.

Sources: WSJ, The Economist, Norskpetroleum.no

Future or Fiction: Space-Based Solar Power

Anika Ranginani – Member, Academic Committee

A recurring column discussing new technologies in the context of “Future vs. Fiction”.

If you Google “Space-Based Solar Power” you are

sure to find images of large photovoltaic cells

floating in space and light rays with an unrealistic

illustration of Earth in the background—more

science fiction than science.

Space-Based Solar Power (SBSP) is a concept that

scientists have considered from a theoretical

perspective as early as the 1960’s. The idea is to

shoot satellites that can self-assemble into space,

then use mirrors and solar panels that convert the

power into either a microwave or a laser to send

back to Earth. Because the solar radiation does not

have to go through the atmosphere before it

reaches the panels, this method could theoretically

reduce the typical 30% loss in energy. A page on

the National Space Society website is dedicated to

the possibilities associated with SBSP.

whartonenergygroup.com 8


January 2016

If space-based solar power became a reality, it

would literally open a new frontier in the energy

industry. Unsurprisingly, however, there’s a catch.

It costs approximately $4,600 to launch one

kilogram of material into space, something that

quickly adds up when trying to place a solar power

station in space. Even aside from that, scientists

would still need to resolve many technical

challenges.

Despite all the difficulties with creating spacebased

solar power and sending it back to Earth,

many researches are investing in the potential of

the technology. Stanford Researches have found

using a silica layer on the solar panels can help cool

them and make them more efficient. Other

researchers at the University of Arkansas are

working to develop the technology with NASA for

their devices. Elon Musk’s company SpaceX has

spent significant amount of energy and resources

working to develop reusable rockets that could

greatly reduce the cost of sending the necessary

machinery to space.

Earlier this year, Chinese authorities even made

long-term plans to create a functional solar power

station in space by 2050. In fact, the science

behind SBSP may be close to coming to fruition.

Machines in space are already using solar power.

NASA’s Juno, planned to make measurements

above Jupiter, just became the farthest spacecraft

from the sun to be successfully powered using

solar energy. The technical difficulty increases

when trying to send that power back to Earth on a

larger scale. The largest hurdle will be making

SBSP affordable compared to other energy

alternatives. With all the challenges of launching

heavy materials into space and sending the energy

back to Earth, large-scale use of space-based solar

power will probably be relegated to the

undetermined future—but not, perhaps as distant

as one might initially think.

Sources: US Department of Energy, Forbes,

Scientific American, National Space Society,

Discover Magazine

Renewables

German Energy Operations Divide to Focus on Renewables

Emma Dong – Member, Academics Committee

Germany is one of the forerunners in transitioning

to alternative energy, and two of its energy giants

have decided to split operations of energy into two

companies to allow for a greater focus on

renewables. E. ON has decided it will now focus on

renewables, energy networks and energy

efficiency services, and a new company, Uniper,

will control fossil fuel and hydro assets, so each

company can focus on developing in its sector. In

addition, E. ON’s competitor, RWE, has also

announced that they will split operations between

green energy and conventional energy. Germany

believes that the division into these two

companies would allow for each of them to

become leaders in their spheres without being

limited by the risks associated with the other

company.

whartonenergygroup.com 9


January 2016

Germany plans on having renewable energy

supplying 45% of power by 2025, and 80% by

2050. However, as Germany is transitioning to

green energy, they are also eradicating all nuclear

power plants. After the Fukushima disaster in

2011, they moved to dissolve all nuclear energy by

2022. The German government is focusing on the

“…investors and analysts are

skeptical that Germany will be able

to develop their renewable energy

networks to compensate for fossil

fuels and nuclear.”

social impact of renewables, but there are major

economic and logistical costs associated with

eradicating nuclear and concentrating on

renewables.

Currently, Germany doesn’t have the technology

or infrastructure to fully depend on renewables, so

during the transition away from nuclear, fossil

fuels such as oil and coal would have to be used to

fill the quota that was produced from nuclear

power plants. In the short run, Germany would be

releasing more greenhouse gases, and investors

and analysts are skeptical that Germany will be

able to develop their renewable energy networks

to compensate for fossil fuels and nuclear.

Consumers already pay more for renewable energy

in the grid, and the costs associated with the

eradication of nuclear would also come from the

pockets of the taxpayers.

Although E. ON and RWE had the right intentions

in transitioning to renewable energy, it did not

consider all the externalities. The energy giants are

now each other’s main competitors, and they have

to cater their business operations around the new

policies that the government is creating. In 2015,

RWE’s shares dropped about 55% and E. ON’s

dropped 39%. The companies did not plan for the

repercussions associated with two companies

competing for margins that are not large enough

to cover the costs of nuclear energy and coal.

As the two companies develop their infrastructure

and improve the efficiency of the national grid,

Germany may be able to meet its goals for

renewable energy quotas, but they would need the

financial support from investors who are willing to

take large risks.

Sources: The Guardian, The Wall Street Journal

Extension of Tax Credits for Wind and Solar Projects Will Boost

Investment

Sheetal Akole – VP, Academic Committee

In an unexpected move, U.S. lawmakers voted to

extend tax credits for solar and wind projects for

the next five years in mid-December as part of the

$1.15 trillion federal spending bill that lifted the

ban on exporting American crude oil.

These tax credits for commercial and residential

renewable energy projects have spurred increased

investment in this field since 2005, when the 30%

tax credits were first introduced. Since then, they

have been extended several times. The wind

subsidies technically expired in 2014, although

many wind farm developers that had already

begun construction were able to continue

receiving it for the last year as well; the solar

subsidy was set to expire for residential projects

(and reduce to 10% for commercial projects) in

December 2016.

whartonenergygroup.com 10


January 2016

The renewable energy industry was expected to

take a great hit as a result of the expiration of the

tax credits – Bloomberg New Energy Finance

(BNEF) created an independent report analyzing

the possible effects if the ITCs were not extended.

The report found that in such a case, installed solar

capacity would fall by nearly 8GW from 2016-2017,

plummeting from 11.2 GW in 2016 to 3.2 GW in

2017. However, were the 30% tax credits to

continue, solar power build-up across America

between 2016 and 2022 was expected to be 22

GW.

from those presented in the hypothetical scenario

in BNEF’s report. The current 30% tax credit for

solar projects will be maintained through 2019,

when it will drop to 26%. It will then be further

reduced to 20% after 2020, after which the tax

credit will expire entirely for residential projects

and be reduced to 10% for commercial projects in

2022. The current wind tax credit have been

extended through the end of 2016, then fall each

year until it expires in 2020.

So how are these extensions likely to affect wind

and solar project build up in America over the next

few years? While the costs of installing solar and

wind power have fallen significantly over the last

few years, conventional fossil fuel sources of

energy such as coal and natural gas still remain

cheaper than unsubsidized renewables. As the cost

of solar and wind power falls over the next few

years, these subsidies will continue to drive

investment in renewable projects – the solar credit

is expected to contribute at least another 20 GW

over the next five years, while the wind credit is

expected to contribute 19 GW. In the meanwhile,

solar and wind costs are expected to continue

falling; the theory is that solar panel costs drop 20

percent for every doubling of capacity.

According to BNEF and Bloomberg, these

combined extensions are expected to spur over $73

billion of investment and supply enough electricity

to power 8 million U.S. homes. These combined

tax credits are expected to cost tax payers $23.8

billion.

The extensions of solar and wind tax credits, in

reality, will have a different effect on the industry,

although still driving renewables increase across

the nation. The actual terms of the extension vary

Looking forward to the expiration of these

renewed tax credits however, most analysts in the

industry agree that another extension after the

current one phases out is unlikely, especially for

the wind tax credits.

Sources: BloombergBusiness, The Wall Street

Journal, Forbes, Bloomberg New Energy Finance

whartonenergygroup.com 11


United Wind and the Potential for Residential Wind Power

Arnab Sarker – Member, Academic Committee

January 2016

Less than ten years ago, the term “wind power”

referred almost exclusively to wind farms, and

brought the image of dozens of giant, loud, white

wind turbines to mind. Now, wind farms are only

one of three major sources of wind energy, with

offshore wind and residential wind becoming more

popular each year. In fact, despite low oil prices,

wind power has grown to surpass the milestone of

producing 70 GW of generating capacity per year,

which is the equivalent of being able to power

about 19 million homes.

The growth in the wind industry has primarily been

due to both technological and financial innovation.

Technologically, wind turbines have become

smaller, quieter, and more efficient than ever

before. Several years ago, it was popular belief

that wind turbines were death traps for birds, but

now that these turbines have become smaller,

they are more marketable, and kill fewer birds

than powerlines. Additionally, one of the public’s

major concerns with wind power is that the

turbines are too loud and will lead to noise

pollution. However, technological advances have

resulted in wind turbines that are quieter than a

refrigerator.

The efficiency of wind turbines has also risen

significantly in the past decade, and a compact

wind turbine can easily power a home in a windy

area, typically reducing energy costs by 50-90% for

homeowners that install residential wind turbines.

This seems like a great alternative to traditional

energy sources such as natural gas, but a

residential wind turbine can cost between $48,000

and $65,000 for the turbine itself, an additional

$40,000 for other equipment, not including

shipping and installation costs.

That’s where United Wind comes in. Following

SolarCity’s economic model, United Wind leases

wind turbines at little cost to the homeowner, and

then receives payments based on the savings of

the homeowner. In a political environment that

supports the growth of low-carbon alternatives for

energy through rebates and low taxes, companies

like United Wind are in a great place to thrive. In

fact, especially after the Paris Climate Summit,

investors are incredibly optimistic about United

Wind’s future: United Wind just received $200

million in funding from Forum Equity Partners.

With this funding, United Wind is poised to drive

down its costs and scale up its operation.

Financially, residential wind power and residential

solar are in very similar places, but technologically,

they seem to occupy two different niches.

Residential wind power is mainly viable in the

Midwest, where homes have over an acre of land,

and there is enough wind for the wind turbine to

whartonenergygroup.com 12


January 2016

create a worthwhile amount of savings. Residential

solar power is already fairly popular, can power

suburban homes, and is ideal in the South.

Residential wind power certainly isn’t the sole

solution to get America to meet the carbon

emission target of zero emissions in the second

half of the 21 st century, as agreed upon at the Paris

Climate Talks, but it does have the potential to

play a large role in a low-carbon future.

Sources: United Wind, New York Times, New York

Business Journal, Green Tech Media

whartonenergygroup.com 13

More magazines by this user
Similar magazines