Regulatory uncertainty threatens US wind sector growth, S&P says

Washington (Platts)--21Sep2004

Prospects for future growth in the US wind power sector are unclear given
growing uncertainty over federal regulations, Standard & Poor's said in a
report released Tuesday. "The upbeat investor mood in the sector during 2003
has evaporated, owing to a lack of transparent and consistent policy direction
from the US government," S&P said. The absence of a policy has "effectively
compromised" the US wind industry's hopes of providing 6% of the nation's
power by 2020, it added. The federal production tax credit, which provides a
per-kilowatt-hour benefit for the first 10 years of a facility's operation,
has expired three times over the past five years, most recently in December
2003, S&P noted. The average payback on a project generally extends beyond ten
years and therefore the existence of a supportive mechanism is important in
attracting investment, S&P said. The PTC's repeated lapses mean that
developers may be unwilling to start on a new project because of uncertainty
over whether the credit will be available when the project is completed.

Globally, the obstacles to attracting interest to financially viable
investor-funded wind power project remain daunting and one of the biggest
challenges for wind developers will be increasing funding diversity, S&P said.
Rising political support and soaring prices for hydrocarbons have helped wind
generation, but wind power is generally still not fully competitive with
traditional energy sources and it could be another five to ten years before it
is, the rating agency said. Increasing turbine size at wind farms is closing
this gap, but technology developments have been more evolutionary than
revolutionary, S&P said. The investor community will therefore require
assurance that the political environment will continue to provide the backdrop
for a stable return on their investment and that assurance is not always
forthcoming, S&P said.

Another major obstacle in the way of projects achieving investment-grade
ratings, despite supportive regulatory regimes, is likely to be the
variability of, and the projects' lack of control over, the main energy
source--wind, S&P said. The ratings agency has only two wind power issuers on
its books and only one has been in action long enough to provide any
consistent data, S&P's Jan Willem Plantagie said. Projects by FPL Energy, one
of the largest US wind developers, performed well throughout the second half
of 2003, and over the first quarter of 2004, S&P said. The company's seven
wind projects in California, New Mexico, Texas, and the Midwest saw
electricity production at 99% of FPL's forecast in the second half of 2003,
while revenues and availability beat the operator's forecasts by 4% and 2%
respectively. Similarly, in the first quarter of 2004, production was 97% of
forecast, revenues 100%, and availability 101%.

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