PA Consulting Group says yes - but players across the supply chain will need to adapt

New York, March 14, 2012 - To address the challenge of expiring federal

incentives for renewables, players across the supply chain will need to
adapt, says Barbara Sands, renewable energy expert at PA Consulting Group.
Equipment manufacturers, renewable developers and utilities will each need
to face this issue, and Sands points out the ways in which each is likely to
adapt to remain competitive.

Federal incentives have been the major driver in reducing the direct cost of
renewable energy generation to customers. Between 2009 and 2011, the federal
cash grant program provided almost $10 billion to renewable facilities
(according to US Dept. of Treasury), reducing the direct cost to customers
by approximately 30%. However, the popular cash grant program expired at the
end of 2011, and wind grants will expire at the end of 2012, with others to
follow soon after. Yet at the same time, the target level for renewable
generation under state renewable portfolio standards (RPS) is starting to
increase, with most programs ramping up to achieve their maximum targets
around 2020.

Sands explains that with the elimination of federal incentives for renewable
generation, more than $20 billion(Based on approximate capital costs of
$2,000/KW in 2012 dollars for installed wind capacity) may be shifted from
the federal level (i.e. all taxpayers) to the customers in states with RPS
targets. The resulting rise in energy costs will test state, and by
extension, regulator support for renewables, and participants across the
sector will face a number of complex challenges from this evolving scenario.

With the federal grant incentives program for renewable energy expiring,
players across the supply chain will need to adapt, and are likely to do so
in the following ways, says Sands:

1. Equipment manufacturers will come under pressure to improve
performance.
Equipment manufacturers will come under pressure from renewable developers
and operators to continue to reduce the cost of their equipment. But
assuming the current projected level of natural gas prices of about
$4.50/MMBtu, the capital cost of wind projects would need to be at least 35%
lower for wind generation to be competitive with new natural-gas-fired
generation. The capital cost of solar projects would need to decrease by an
even greater amount. Given the equipment cost decreases already seen, this
seems challenging. Manufacturers would need to decrease fixed capital costs
and improve efficiency to become cost competitive.

2. Renewable developers will need to focus on sites and projects that
provide the best economics
Renewable generators are already grappling with the impact on power prices
of the current and projected low cost of natural gas. Natural gas prices
would need to almost triple from the current levels of less than $3.00/MMBtu
for renewables to begin to be competitive on a total cost per MWh basis. The
elimination of federal incentives will compound the economic challenge that
renewable developers face in acquiring financing for future projects and
selling renewable power.

3. Utilities will need to find a way to recover the high cost of
renewables.
If utilities' renewable energy purchases end up costing more than double the
available price of energy, many will fear prudence challenges in the coming
years. And as a result, this places pressure on regulators to allow them to
recover the higher cost of renewables in future rates, thereby passing these
costs to customers.

Says Sands, "the US renewable market is becoming increasingly challenging,
and players across the supply chain will need to adapt to survive."

About PA Consulting Group
PA Consulting Group is a firm of more than 2,000 people, specializing in
management and IT consulting, technology and innovation. Independent and
employee-owned, we operate globally from offices across Europe and the
Nordics, the United States, the Gulf and Asia Pacific. We work with
businesses and governments to anticipate, understand and meet the challenges
they face. We have outstanding technology-development capability and a
unique breadth of skills, from strategy to performance improvement, from HR
to IT. Our expertise covers energy, financial services, life sciences and
healthcare, government and public services, defense and security, transport
and logistics, telecommunications, consumer goods and automotive. PA
Consulting Group has partnered with energy clients for over 25 years to help
them understand the challenges they face and define and implement an
effective strategic response. For more information about PA Consulting
Group, visit www.paconsulting.com.