Having provided 35 per cent of all new electric generation capacity in recent years, wind has proven it’s mainstream, and it is here to stay
American wind has grown rapidly to reach over 40,000 MW of installed capacity and provided 2.3 per cent of total US electricity generation in 2010. As of this year, wind generation exceeds 20 per cent in Iowa, the first state to break that mark. The industry smashed records in 2009 with over 10,000 MW of new installations, and 2011 and 2012 are poised to deliver strong industry growth adding more clean energy to the power grid. During the last four years, wind power comprised 35 per cent of all new electric generating capacity in the US.
As a result, America’s wind industry has been a leader in job creation over the past decade, establishing a much-needed manufacturing supply chain while delivering clean, affordable energy to US power consumers. This economic track record is particularly notable during a period when America experienced fierce international competition in the manufacturing sector. American wind managed to insource jobs over this time frame due to the unique characteristics of the wind sector, including a heavy product that is difficult to transport over large distances and the need for highly trained workers with skills that are difficult to procure in developing countries. In 2011, NREL announced that domestic content had reached 60 per cent for wind equipment, up from 25 per cent in 2005, illustrating the capability of wind power to insource jobs. This growth in domestic content occurred while capacity grew at an annual rate of 35 per cent, so American workers gained a share in a growing market.
This performance comes as no surprise. Thanks to a continually maturing and improving technology, the cost of wind energy is lower than ever. In fact, independent cost analyses show that new wind installations can be cost competitive with those of any other new generation source.
Wind’s cost improvements tell the classic tale of business ingenuity mastering new technology, as cost reductions are the direct result of product innovation. Turbine manufacturers have improved performance in lower wind speed conditions, developed taller towers to tap better wind resources, and continued to perfect blade technology – and those are just some of the innovations that have come out of the industry.
Wind power has other attractive attributes beyond cost competitiveness that continue to drive its growth. Whether by signing 15- and 20-year power purchase agreements with independent wind project owners or building wind projects themselves, American utilities continue to sign up for the long-term price security of a power source with no exposure to volatile fuel costs. In addition, competing generation sources face the prospect of expensive new regulations on sulphur, nitrogen or mercury emissions; on a potential future carbon pricing regime or on increased pricing over water use during power generation. All such prospects add a high degree of risk to the utility bottom line. With no emissions footprint, wind energy’s competitive position is favourable in this respect against any of the more traditional electricity sources.
Growth despite economic and policy hurdles
Meanwhile, the industry finds itself at somewhat of a crossroads, and this crossroads comes against the backdrop of a relatively weak economy and a noisy political debate in Washington, D.C. As has been the case throughout the history of American wind power, federal renewable energy policy remains centred on the short-term, with key policies typically extended in only one-, two-, or three-year increments. For the American market, energy policy focuses heavily on attracting capital and therefore has a major impact on the use of and preference for various project financing mechanisms.
Recent market dynamics, in fact, illustrate the central role policy can have for project finance in wind. The modern wind industry has relied upon the federal Production Tax Credit (PTC) to support project growth. The PTC, an effective mechanism in spite of it being the poster-child of US short-term policy (more on that later), delivers an income tax credit to projects based on electricity generated. By rewarding generation, the PTC has encouraged innovations that produce higher performance and foster the development of lower-cost renewable energy projects. The PTC encourages financial institutions to invest in wind projects because the PTC needs investors with large tax bills who can use the credit, and Wall Street already has the investment expertise to put the deals together.
An example of how market dynamics come into play came in late 2008, when PTC investors were dealt a setback during the financial crisis, resulting in the industry facing a crisis of its own. The financial sector had seized up and activity ground to a halt. With investors going to the sidelines, projects faced a lack of crucial funds for construction.
Enter an important new policy, one taking the form of a federal tax credit reimbursement programme. Known as the “1603 Program” for its position in the 2009 economic stimulus bill, the provision allowed the wind industry to be a true bright spot in an otherwise flagging economy – and within the generally anaemic manufacturing sector, at that. This programme allows wind project developers to replace their Wall Street investors with a reimbursement in place of the tax credit, administered by the US Treasury. 1603 sparked new approaches to project finance when it launched in 2009 and allowed for the continued growth of wind energy throughout the economic downturn. This successful programme laid the foundation for continued growth in projects and American jobs. However, with no tax policy in place less than 15 months from now, with the PTC expiring on 31st December 2012, a PTC extension remains the industry’s policy priority.
The return of the PTC
This year, in fact, US markets are already shifting back to choosing the PTC to support projects, which will pave the way for a smooth transition after 1603 expires. The 1603 programme was dominant in 2009 and 2010, supporting 70 per cent of new projects. This preference for 1603 resulted partly because of issues on Wall Street. Notably, not only financial recovery but technological innovations have sparked the resurgence of the PTC in 2011.
Why are projects choosing the PTC? Because wind projects are generating more power at lower costs and projects are getting more value from the PTC than ever before; in short, more green electricity equals more tax credits. Simultaneously, financial institutions are recovering, reporting taxable income again, and so can support wind project investments again. Structured project finance markets (i.e., projects which attracted bank investment) chose the 1603 grant at nearly a 3 to 1 ratio in 2010, but the PTC is prevailing in 2011. This recovery for the PTC is occurring in a market with much stronger total deal flow than in 2010, reflecting increased project development overall. The resurgence has shown that the American wind industry runs not only on innovation, but the sound policy that is the PTC. All energy sources receive their own forms of policy support and, for wind power, the policy driver is the PTC.
One hurdle remains for US wind – the PTC is set to expire after 2012. This development is nothing new for the sector, as the PTC has faced expiration repeatedly since 2000. AWEA activities in the current legislative session have shown that lawmakers appreciate the need to offer business stability in order to keep the industry and its job numbers growing. Allowing the PTC to expire would remove the only support mechanism wind projects have, while competitors utilize dozens of tax and other policy incentives; policymakers understand this dynamic more than ever.
Wind finance will be dynamic in 2012, as it has been for the past five years. Project development pipelines are at record levels, offering lots of opportunity to invest in American infrastructure. The 1603 Program will impact the beginning of the year as approved projects finish construction, and a return to the PTC will be completed by year’s end. It is imperative that Congress extend the PTC in order to continue momentum in the clean energy revolution that is well on its way. The sooner the extension comes, therefore, the better.
Thus, extending the PTC is a good investment in America’s future. Wind investments not only create manufacturing jobs, they provide revenue to rural, often underdeveloped communities through lease payments to land owners and tax revenue to communities that often need it most. Furthermore, wind’s ability to reduce its cost profile shows that the PTC is reaping dividends in pursuit of a clean and affordable energy future. Just like those utilities today in the market for good energy sources, America needs a power source that is not subject to domestic or global commodity price swings. With such a strong economic case, wind energy is a technology that will pay long-term dividends for taxpayers, ratepayers, and investors alike.
American British Trade & Investment
This article was originally published in American British Trade & Investment 2012, the annual investment guidebook produced by BritishAmerican Business, the leading transatlantic organization dedicated to helping its member companies build their business on both sides of the Atlantic.
Countries: United States
Topics: Insights & Statistics and Market Research