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On the Edge of the Subsidy Cliff: Will the US PTC Expire?

Colorado Senator Mark Udall is persistent by nature. He's a mountain climber who has scaled some of the world's most daunting peaks, from Mount McKinley in Alaska to Mount Aconcagua in the Andes. That dogged pursuit has served him well in his recent career spent navigating the perilous cliffs of Washington's Capitol Hill. And now he has at least one more mountain to climb — the seemingly intractable extension of the Production Tax Credit (PTC), the wind industry's defining subsidy and the financial tool that has helped his rugged home state become a leader in wind energy generation and wind manufacturing.

Udall’s approach is equal parts steady ascent and unflagging determination. His base camp is the Senate floor and from there he plans — to critics, annoyingly so — to make the extension of the PTC a daily topic of discussion. In a town notorious for the filibuster, the Democrat’s approach is slightly different in that he’s scheduled time each morning for when Congress is in session. And so it will be that every morning from now through the August recess, Udall will remind his colleagues why the PTC has gained widespread bipartisan support across much of the country, and why Congress should extend the soon-to-expire tax credit soon enough to keep the industry from contracting — and taking jobs with it.

This is the same refrain that has echoed through the halls of Congress and numerous statehouses since the end of last year. The industry’s growth, which is expected to surpass 10 GW of new installations through the end of this year, is closely aligned with the PTC, which pays out 2.2 US cents per kWh generated. That credit has helped to make wind energy a lucrative and worthwhile pursuit for developers and utilities alike, and its relative stability over recent years has allowed projects to move ahead with confidence. That strong pipeline has in turn ushered in a new era of US manufacturing, which has sprouted up across much of the country — all to support the growing industry.

Without promises of an extension, development plans have skidded to a halt, orders have dried up and large manufacturers are plotting their escape — or at least a scaled-back presence. At stake, according to a recent Navigant study, are as many as 37,000 jobs, a staggering number for an industry that currently employs about 75,000 workers. And extension, meanwhile, would add 17,000 jobs, according to the same study.

The industry has been down this path before, but the last time the PTC was allowed to expire the only real victim was project development. That was in 2004 and at that time about three quarters of the industry’s supply chain came from imports. Now, the US wind industry boasts about 500 manufacturing facilities, many of which are centered in places like the Southeast, where wind energy is a rare find, but where wind manufacturing is seen as one of the few bright spots for an economy that’s struggling to find traction.

Ideologically, the wind industry may find its broadest support among Democrats. But wind generation remains strongest in staunch conservative pockets like the Midwest, where turbines line farms across Texas and Iowa. And in states like Oklahoma and Kansas, the industry is ramping up to become a political force.

That’s why the PTC is a rarity. It’s a political hot potato, yet it’s one with wide support that has prominent Republicans and Democrats calling for its extension. Most agree that the tax credit is worth the $4 billion–$5 billion bill that comes with a one-year extension. According to PTC supporter Senator Charles Grassley, Republican of Iowa, members of his party are reluctant to move ahead with legislation until they can find budget savings to offset that expense. So far, the support has produced lots of nods and handshakes, but not enough legislators willing to jump into the hot seat and vote for its extension. The hot seat, of course, is boiling at the moment because of a perfect political storm. The general election is just months away and a centerpiece of the criticism is President Obama’s pursuit of a clean energy policy. And nipping at its heels is the growing reality that fundamental tax reform will follow the election. That has industry insiders and analysts trying to read Washington’s swaying tea leaves. How will tax reform come together? Will any type of tax policy receive a long-term extension in this political landscape? And how does wind differentiate itself amid the coming fray?

The Timetable

At Windpower 2012, the American Wind Energy Association (AWEA)’s annual conference in Atlanta in June, Republican strategist Karl Rove told those in attendance that the worst thing that happened for the wind industry was when Obama put the PTC extension on a Congressional ‘to-do list’ ahead of its August recess. Republicans say it won’t happen because Obama is failing to show leadership on the issue, and that the ultimatum proves their point. Democrats contend that there’s no way House Republicans especially will give Obama a political victory on the eve of the November election. Either way, few are giving a pre-election agreement much hope, even if Udall does succeed in giving the issue mainstream prominence each and every day.

That pushes the real political horse-trading into the tight window between the end of the election in early November and the new Congress in mid-January. By then, the PTC will be one of many cutthroat issues on the agenda, and it could get lost in the fray as the Bush tax cuts, the payroll tax holiday and the potential raising of the debt ceiling take precedence.

According to Tim Kemper of the Reznick Group, the PTC’s best bet is that it gets passed early in the lame-duck session (taking place after the election for the next Congress has been held, but before the current Congress has reached the end of its constitutional term). 

If that happens, the industry may have enough deals waiting on the sidelines to retain some of that 2012 momentum. The later a deal is struck, the more difficult it will be to salvage 2013, which according to Bloomberg New Energy Finance could see as little as 500 MW of new installations. IHS Emerging Energy Research, meanwhile, has projected the market could drop from 11 GW in 2012 to just over 2 GW in 2013.

This small window of opportunity comes as America debates the future size of its government, and ultimately what role taxpayers will play in energy investment. The recent economic downturn has paved the way for fundamental tax reform, and programmes like the PTC could get caught in the line of fire.

The last big tax reform came in 1986, and it was the type of divisive, laborious process that makes rewriting the tax code in 2013 a long shot. That realisation could, perhaps, bode well for a one-year extension, but that would really put pressure on the industry to secure something longer term.

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Many in the industry don’t think a one-year extension will do much to secure the confidence of international companies and investors. That thinking extends to statehouses across the country — those places where jobs are the driving issue of the day. One such place is Arkansas, home to major manufacturing operations for everything from blades (LM Wind Power) to turbines (Nordex to Mitsubishi). The notion that a one-year extension, especially with looming tax reform, will give companies the confidence to stay or invest in his state is a nonstarter for Democratic Governor Mike Beebe.

‘We don’t need it renewed for a year,’ he told the industry at Windpower. ‘How in the world do multimillion dollar investments get made ... how in the world can business or industry chart a course ... how in the world can the transmission system be expanded as it needs to be ... how in the world can all these capital decisions be made when you’re making public policy for something as important as this tax credit on a year-to-year basis and you don’t know whether it’s going to be renewed? That’s insane.

‘I can’t imagine with the sort of [bipartisan] support that there would be any hesitancy at all not only to renew, but to put in a cycle that people can be assured that they can make decisions two years, three years and five years down the road,’ he added.

Companies React

For legislators like Beebe as well as Governor Sam Brownback of Kansas and Senator Charles Grassley of Iowa, both Republicans, there’s little secret why they are among those leading the crusade. Wind has become big business in their states, and the success and impact of the industry easily cuts along party lines. And that’s certainly why Udall is heading up the charge from the Senate floor.

Earlier this year, when Danish wind giant Vestas announced it was cutting more than 2300 jobs in Europe, it took the opportunity to warn that it could slash its presence in the US in half if the PTC failed to be extended. Many of those 1600 potential job losses could come in Colorado, where Vestas has spent about $1 billion building three manufacturing plants and one engineering facility. Those operations employ about 1700 people.

And it’s not just Vestas. Vermont-based NRG Systems, which manufactures wind measurement technology, had to cut jobs in May for the first time in its 30 years. President and CEO Jan Blittersdorf said, ‘Anything we can do to get past this and back to steady growth is fine by me.’

Mitsubishi Heavy Motors scrapped plans for a manufacturing plant in Beebe’s home state of Arkansas, which certainly didn’t diminish his passion for strong policy. And in rural Virginia, an area with few inroads in wind generation, a 45-MW wind farm targeted for completion by the end of this year was pushed back to 2015.

From developers to turbine manufacturers, the wind industry has already seen a stark downshift in its production plans. And while many are busy moving ahead to close out a strong 2012, they’re looking at the stark realities of 2013.

Where the Market is Going

As industry giants react to the lack of orders for 2013, they’re turning to other markets to fill the void. During a visit by Grassley to the Acciona plant in Iowa, company officials said they’re turning to Canada to fill their own pipeline. That’s a similar approach to that reportedly considered by Siemens and Gamesa, who see the smaller Canadian market as a way to weather the short-term downturn.

Canada in 2011 installed more than 1200 MW of new wind energy capacity and has plans to install 1500 MW in 2012. The country, which boasts stable policies in Ontario and Quebec, has surpassed 5000 MW of cumulative capacity, and it has plans to top 10,000 by 2015. Partnerships with companies rooted in the US market may soften the jobs impact there. But those companies are also sure to explore their options in Latin America, where wind has been gaining serious momentum.

Whether such a strategy would work for long depends on transportation costs — the main reason that domestic wind projects have drawn manufacturing to the US. For a company like TPI Composites in Newton, Iowa, the blades they make are not necessarily less expensive to produce than those coming in from places like China. But transporting 50-metre blades to construction sites can push transportation costs to $15 to $20 per mile, said TPI CEO Steve Lockard. The US wind industry has evolved out of a need for transportation efficiency in a way that’s unnecessary for relatively lightweight industries like solar. So from the US wind industry’s point of view, feeding long distance markets may keep the jobs intact, but it won’t create the long-term stable economics it’s working to achieve.

Absent consistent federal policy, domestic developers and manufacturers may look for other ways to regain their post-PTC footing. According to Kemper, as they view the prospects of a zero-build year, they’ll be forced to reconsider what constitutes an acceptable deal. And they’ll also be driven by existing state policies. Ultimately, we may see some states increase their wind incentives as a way to drive production and manufacturing within their own borders. While this likely won’t make up for the potential loss of the PTC, it could lessen the blow from its demise.

Dan Shreve of MAKE Consulting recently released a report that looks at the US wind industry from 2013 to 2016 under a series of scenarios, ranging from no extension to the adoption of a Clean Energy Standard. While MAKE expects the PTC to get a one-year extension, there are other factors at play that could weigh down the industry over the next few years regardless of an extension.

According to the report, none of the policy scenarios it looked at supported more than 7 GW of new installations per year, and the more likely scenario was peaks of about 5 GW through 2016, with significantly lower figures in the short term.

The reasons for the lower wind installations have much to do with the expectation of continued low natural gas prices and a lessening commitment from utilities in states with a Renewable Portfolio Standard (RPS). Those states, says the report, have made great strides in meeting the RPS and they’ll need to invest less in wind to maintain their pace.

‘Strong year-on-year build cycles, plus effective “banking” of renewable energy credits (RECs) ensure that many utilities are already in compliance and can use cheap REC purchases from existing capacity,’ the report says. MAKE’s baseline scenario estimates RPS policies will drive little more than 15 GW of new capacity through 2016.

While this changing policy landscape paints a murky portrait, it will force the industry to in many ways stand on its own ahead of schedule. This, says the report, will drive innovation and cost savings in ways that may not lead to massive installment numbers, but will position it better for future success.

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