Beyond inexpensive supply in North American power markets

The next decade is expected to be another one defined by inexpensive power supply in North American power markets. Competition among renewable power developers with be fierce. Cheap capital will be plentiful. 

Renewable energy developers, project financiers, utilities and commercial & industrial offtakers need to be wary of several key dynamics in North American power markets over the next ten years.

Power delivery risks and uncertain returns 

The margin of error for meeting project returns has narrowed substantially in recent years. Competition for offtake contracts in wind and solar that secure the bottom for investors has become intense, and projects’ internal rates of return are dependent on the post-contract market environment 20 to 30 years in the future.  

This means that developers are increasingly taking more power delivery risks in the near-term to win contracts, while backloading their own returns into the distant future.  

Infrastructure is also becoming a more salient risk. In many areas where wind and solar development was concentrated in the 2010s, limited or weak grid infrastructure is approaching saturation. That infrastructure will require costly network upgrades to incorporate new projects.   

Transmission grid access and secure pathways to market have become critical factors determining project viability. These dynamics will play a significant role in shaping project risk profiles in the 2020s.    

Policy change will make the value of power key  

High-penetration renewable energy and zero-carbon targets will strengthen project economics this decade, but these policies will also shift the market need from the lowest cost of energy to the highest value of power.  

As a result, generation will need to match market and offtaker demand profiles.  

The rapid emergence of battery storage paired wind and solar projects is the clearest manifestation of this market evolution.  

Companies that can consolidate multiple technologies and revenue streams will be best positioned in an increasingly complex market.  

Demand will become critically important  

In an environment in which power generation costs are most likely to range from cheap to very cheap, demand growth becomes a critically important variable.  

Demand growth is already tenuous at best, with the U.S. expected to average net load growth of 1% annually as of Wood Mackenzie’s assessment in early 2020. Of course, recent developments in both the global oil industry and global coronavirus response are having an immediate and direct impact on power demand.    

Wood Mackenzie is currently working on further analysis on this impact and how the short-term impact translates to long-term fundamentals.  

The grid edge sector will pose a threat 

The growth of the grid edge sector represents a unique threat to the wholesale market environment.    

In the 2020s grid edge players will increasingly compete directly for wholesale market opportunities, and competition to wholesale generators from the grid edge is likely to be focused on critical periods often make up generators’ most lucrative profit windows.