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Wind Power In Trouble on Two Fronts

Wind power is being squeezed on two fronts. Natural gas prices remain low, limiting the financial incentive to install wind capacity. Meanwhile, the Chinese government continues limit the supply of rare earth elements (REE), and the magnets required for wind turbines use sizable quantities of two of them, neodymium and dysprosium. Any interruption in supply, accompanied with price shocks, could debilitate the wind industry, whose struggle to become competitive is already being harmed by the success of its competitors like natural gas. 

At the end of 2010, China controlled over 97 percent of the world’s REE production and around one-third of reserves. However, China’s geopolitical posturing has caused it to significantly reduce export quotas for REE by 37 percent in 2010, as well as 35 percent in 2011. This has caused a massive price shock for REE; while the price of neodymium has fallen from its highs of mid-2011, at about $200/kg, it is still vastly more expensive than it was in 2006 when it was only $10/kg.

This comes just as wind turbines were falling in price after nearly a decade of price increases in the U.S. The Wind Turbine Price Index reported that prices worldwide in 2010 were at their lowest level per MW since 2005, at $1.33 million dollars. Data from the Department of Energy show that prices for wind turbines per kW actually bottomed out around 2001 and until recently had been steadily increasing. Despite improved technology since the early 2000s, larger turbines, a falling dollar, more expensive labor and higher steel costs were the top four reasons for price increases from 2002-2008.

The increase in the cost of REEs is significant to the cost of wind turbines. A calculation made in 2009 found that a 400% rise in the cost of a turbine’s generator, the component that requires substantial amounts of neodymium, would increase the installed cost of a turbine by roughly 10%.  Further price shocks could further hinder the wind industry.

Luckily, these problems aren’t going entirely unnoticed. Molycorp Incorporated announced in June 2011 that it will reopen the REE facility in Mountain Pass, California which, when opened, will be the first REE production plan in the United States in more than a decade. With a potential capacity of 40,000 metric tons a year, the Mountain Pass site is certainly capable of reducing the impact that Chinese export quotas have on the price of REE. The DOE also recently funded projects that hopefully will eliminate the need for rare earths in turbines.

The future of competitive wind power is further exacerbated by the increased interest in and decreased price of shale gas. Cheap natural gas reduces or eliminates any financial incentive to install wind power. According to Travis Miller, a Chicago- based utility analyst at Morningstar Inc, “Wind on its own without incentives is far from economic unless gas is north of $6.50.” Currently natural gas prices in the U.S. are below $3/MMBtu. With the ever-increasing efficiency of hydraulic fracturing, Baker Institute Energy Forum models show the United States’ shale gas production is “expected to more than quadruple by 2040.

While an important component of wind energy is getting more expensive, wind’s competitors are getting cheaper. It seems quite likely that in the foreseeable future, wind energy’s chance of real market competitiveness could hit the doldrums.

This post was written by Lavanya Sunder, who interned at the Baker Institute Energy Forum and is a student at Lamar High School.

Amy Myers Jaffe's picture

Thank Amy for the Post!

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CelloMom on Cars's picture
CelloMom on Cars on Mar 2, 2012 10:26 pm GMT

Thanks for a well-written post that includes a quantitative analysis of how REE prices affect turbine pricing.

I would like to make an analogy with organic food:  if you are of the opinion that organic is better for you / your children / the planet than conventionally produced food, then you are on the whole willing to pay more for it.  Similarly, if you are convinced that wind is part of our planet’s (long-term) energy solution, then you are willing to pay a premium on that.  Some utilities around the country are now offering electricity sourced from wind and/or solar.  Apparently people do buy, despite the slightly higher price.  I find that heartening.

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