Two Minutes to Midnight for US Wind

What a difference a vote can make. The U.S. wind industry appeared ready to tumble off a cliff in late 2012 as the production tax credit, its chief federal subsidy, readied for expiration. Some manufacturers had already begun cutting jobs and developers started focusing their attention on other countries. But in a last minute vote, Congress extended the credit for another year on January 1, 2013 and thus activity is set to potentially pick up again for the U.S. What will this possible resurgence mean to the international market? How long will it last? And what’s being planned to sustain wind industry investment if Congress fails to extend the tax credit next year?

The new one-year tax credit extension has advantages over its previous incarnations. Developers can now use the US2.2 cents/kWh credit as long as they begin construction in 2013, whereas in the past the law required wind farms to be in service to receive the credit.

Deal-making began quickly after Congress extended the credit. “There is a lot of contract negotiation going on,” said Rob Gramlich, interim chief operating officer for the American Wind Energy Association (AWEA) at a news conference in late January. “There are a lot of utilities calling developers and discussing power purchase agreement (PPA) contracts, and developers calling manufacturers and talking about turbine contracts for the year. We know there is a lot of activity, so we are optimistic.”

It is certainly too soon to say if the U.S. wind industry will perform anything like as well as it did in 2012, which saw a record-breaking 13,124 MW installed. Wind not only beat its previous records that year but more new wind was installed than gas-fired generation. By the end of 2012, the U.S. had 60 GW of wind, according to AWEA. The credit extension heartened developers who had risked losing the subsidy because they couldn’t make the end-of-year deadline to get their projects in operation. Now, several are pushing forward with renewed vigour this year. For example, Boston-based First Wind, an independent developer that operates 980 MW of wind in six states, says it will increase its operating portfolio by at least 50 percent this year. And Spain’s Iberdrola Group, the second largest wind operator in the U.S., with 5700 MW, says it continues to see the U.S. as strategic to its international business. It plans plans to channel 16 percent of its total corporate investment into the US from 2012–2014, about €1700 million (US$2311 million), mostly for wires and renewable energy projects. Its US affiliate, Iberdrola Renewables, finished three wind farms, totaling 265 MW, just before the 2012 credit expired.

Wind industry advocates had been predicting that international developers would largely abandon the U.S. in 2013 if the tax credit expired and instead focus on Canada, Latin America, India, China and other growing markets. But now developers appear to be intent on taking advantage of the U.S. incentive as long as possible while also getting footholds in the newer markets.

“In my opinion, the extension of the PTC has saved some planned or early stage U.S. projects that may have otherwise been abandoned without the assistance of the credit,” said Erika Benson, partner in the Austin law office of Gardere Wynne Sewell. “However,” she continued, “I don’t believe that project developers will take their eyes off emerging markets.”

Much depends on the scope of the company and its ability to find local partners abroad. “The companies that are going international tend to be more the multinational European and international utilities that have gotten into wind,” said Mike Lorusso, managing director and group head for advisory company CIT Energy.

What Happens After 2013?

Unfortunately the U.S. wind industry’s near-cliff dive was nothing new. Congress has balked – but eventually acquiesced – in the past about renewing the credit, each time severely slowing development. The PTC has lapsed three times: in 1999, 2001 and 2003, after which years installations dropped by between 73 percent and 93 percent, only to revive again once the credit was restored, according to AWEA.

Now, a federal budget crisis means lawmakers are warning that they will take a hard look at any programmes that reduce revenue, such as tax credits. So over the next year, the wind industry may find it difficult to convince Congress to extend the tax credit again. The wind credit has spurred $15.5 billion in private investment annually over the past five years, AWEA figures state.

But developers have other reasons for concern about the future of U.S. wind. Some states, like California, have used up most of the sites that have strong winds, transmission and proximity to load.

Wind also faces competition from historically low natural gas prices. “I won’t sugar coat it,” Lorusso said. “I would say that wind is somewhat of a dying industry here in the U.S. You’re seeing the international developers who came over here to the U.S. market… beginning to pull back and looking to sell some of their business in the U.S. You may see consolidation among wind developers.” However, others remain optimistic about a post-PTC wind industry. They point to state programmes for renewable portfolio standards or job development to drive U.S. wind development.

A New Way to Attract Capital

Potential also exists to draw new kinds of capital to the industry and to create unexpected partnerships with fossil fuel companies, say wind advocates.

Much talk centres on master limited partnerships, or MLPs, which attract investors and are much used by the fossil fuel industry. These business structures have attracted $350 billion in capital, spurring development of a large amount of fossil fuel infrastructure in the U.S., but are available only to ‘depletable’ resources. However, this situation may change in the future.

The MLP creates a fairly predictable dividend stream, which would help wind companies gain access to capital markets, according to Lorusso. If renewables are allowed to use the MLP, the result is likely to be growth of US wind companies through acquisition, with the greatest beneficiaries being medium-sized companies that can acquire smaller ones, he said.

Given the fiscal worries in Washington, however, it is unclear how easily any bill will pass that decreases revenue for the U.S. Treasury.

Odd Bedfellows

However, some see the MLP issue bringing together the fossil fuel and renewables industries for a mutual cause.

A push has been underway in the U.S. to remove oil and gas subsidies. This puts the MLP under threat. However, if renewable energy companies become eligible to form MLPs their inclusion in the tax code language might “immunise” the MLP structure for oil and gas, said Marc Spitzer, a former Federal Energy Regulatory commissioner and now a partner at law firm Steptoe & Johnson.

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“If the renewable people would stop Congress from repealing it for oil and gas, they might like it,” Spitzer said. “It may immunise a provision of the tax code that has been very beneficial in expanding oil and gas infrastructure in the US.”

Added Jim Tynion, co-chair of Foley & Lardner’s energy industry, “If an energy policy debate is going to happen in 2014 or even begin in Congress in 2013, this would be one of the 10 items on the list.”

Fossil fuel and renewable energy industries may also find technological sources of mutual benefit, according to John Pierce, a partner in the corporate and finance group at law firm DLA Piper. In California talk is underway of co-locating wind and natural gas generation installations. The gas would provide low-cost firming for wind’s variability, while the contribution from wind power generation would help fulfill state renewable portfolio standards.

A push is also underway to expand the bond market for renewables. Some states already use bonds for renewables. The Clean Energy + Bond Finance Initiative (CE+BFI) is a new effort by the national Council of Development Finance Agencies and the Clean Energy Group, a long-time renewables advocacy organisation. Together they hope to expand bond financing for renewables from $5 billion to $20 billion over five years. CE+BFI is working with institutional investors, public finance agencies, and public clean energy fund managers.

Others see the future of US wind in specialised markets, such as repowering older wind farms like those in California that are near the end of useful life.

The Offshore Frontier

Offshore wind also appears to be an industry poised for growth in the US. Democrat senator Tom Carper has been pushing for a federal tax investment credit tailored specifically for the first 3000 MW of US offshore wind.

The U.S. has no offshore wind farms installed yet but there appears, at last, to be some solid enthusiasm for it. The most advanced project, the 130 turbine Cape Wind, hopes to begin construction off the coast of Massachusetts later this year. It has now received all necessary government approvals and has long-term power purchase agreements with utilities for 75 percent of its output. It is now negotiating with potential investors.

In Rhode Island, New Jersey-based Deepwater Wind plans to build a project comprising of five 6 MW Siemens turbines off of Block Island for operation in 2015. National Grid has signed a contract to buy the output.

Deepwater Wind also plans to build a 900 MW to 1200 MW wind farm further offshore, some 40 km off New England, with commercial projected operations in 2017–2018. It includes an extensive underwater HVDC transmission project, called the New England-Long Island Interconnector (NELI).

In nearby New York, a group that includes NYPA, the Long Island Power Authority and Consolidated Edison wants to build up to 700 MW of wind power off Long Island.

And in the mid-Atlantic a group led by independent transmission company Trans-Elect is moving ahead with plans for a transmission backbone, the Atlantic Wind Connection, for 6 GW of offshore wind. The first phase of the 10-year project would be off New Jersey, developers said they were attracted to the state because of its support for offshore. AWC hopes to begin construction of its New Jersey phase in 2016 and operations in 2019.

Other offshore projects are also in various stages of planning, and the Obama administration is apparently pressing ahead to accommodate those located in federal government-controlled waters. The U.S. recently announced it will offer the first ever competitive lease sales on the Outer Continental Shelf for wind energy. The government will make available 1123 km2 off the coasts of Virginia, Massachusetts and Rhode Island, areas which offer the potential for 4000 MW.

So with the U.S. tax credit in place for another 12 months, this looks like it may be another fair year for wind, but what happens beyond? Wind companies and their advocates are strategising to develop new investment structures and alliances while capturing underdeveloped markets and untapped niches. So far, the U.S. has spurred tremendous growth in wind energy – and it seems determined to find a way to keep it going.

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