Wind Credit Blown Off Course

Wind Credit Blown Off Course

Location: New York
Author: Ken Silverstein, EnergyBiz Insider, Editor-in-Chief
Date: Tuesday, July 15, 2008

Congress is playing games. But in doing so it has dropped the ball. The U.S. Senate has failed to advance the production tax credit given to wind power -- all at a time when the nation is trying to wean itself from fossil fuels.

The renewable sector is still in its infancy. But its growth and reduction in costs over the last two decades have shown that it can gain a foothold in the marketplace. To become more firmly rooted, however, government has to stay involved. And in the mid-term, that means promoting policies to give green energy a leg up such as the 2-cent per kilowatt hour (kWh) tax credit provided to wind developers.

"Thanks in part to the production tax credit, U.S. wind power capacity is now over 16,800 megawatts -- or enough to serve the equivalent of 4.5 million average households -- and wind has been the second largest source of new electrical capacity in the nation, behind natural gas, for the past three years," says Julius Steiner, CEO of Gamesa USA, noting that his company has added 1,000 new manufacturing jobs in the United States during that time period.

The tax credit is set to expire at year-end unless Congress votes to extend it. No one doubts that the subsidy will get renewed. But the political tumult created by using the issue as a lever to extract favors does generate uncertainty. That gives developers pause and all at a time when the wind industry has a head of steam behind it.

Last year, the sector grew by more than 45 percent and attracted $9 billion in capital -- the third year in a row of such record-breaking growth. That, in turn, created about 17,000 construction-related jobs and another 1,600 full-time operational positions. A study released by GE Energy, which has a big chunk of the wind turbine market, says that the production tax credit is the impetus behind that expansion. It says the credit generates $250 million in value not just from projects but from wages, vendors and land leases.

While wind power now provide about one percent of the country's electricity mix, a study performed by the U.S. Department of Energy in conjunction with private industry says that wind alone could top 20 percent of the nation's generation portfolio by 2030. That would have the effect of creating 500,000 jobs and more than $400 billion in economic benefits. It would also reduce greenhouse emissions and other pollution by 25 percent than otherwise.

"Congress is debating how to pay for the wind tax credits perhaps without realizing that, over time, wind farms pump more money into the U.S. Treasury and state and local coffers than they take out," says Kevin Walsh, managing director of renewable energy at GE Energy Financial Services.

Political Football

The production tax credit has expired three times in nine years. Each time it has lapsed the industry suffers. And, when it has been subsequently put back in place, development has taken off. But this "boom-and-bust" cycle could level off if the tax break were extended over a longer time frame. Still, the industry says that production costs have dropped 80 percent over the last 20 years while the sector grows by leaps and bounds -- something that could be expedited by a proactive government.

The last time the credit became a political football was in 2003. The following year more than half the employees at West Fargo-based DMI Industries, a North Dakota manufacturer of wind turbine towers, were said to have been laid off. In Texas, the year after the credit lapsed, Lone State Transportation of Fort Worth lost millions in revenue because of wind project delays.

On the other hand, extension of the credit might give momentum to existing cost-cutting efforts and production innovations. That would attract an increasing number of durable players. As a result, the wind market would become more vibrant.

"The 20 percent wind scenario would only cost 2 percent more than the cost of the baseline scenario without wind," says FERC Commissioner Suedeen Kelly, referring to the Energy Department's wind projections by 2030. "At 50 cents per month for the average ratepayer, that is a small price to pay for the climate, water, natural gas, and energy security benefits it would buy -- and it does not even count the stability provided to consumers by eliminating fuel price risk."

A recent study by the Lawrence Berkeley National Laboratory gives credence to that optimism. The lab found that a 50-megawatt wind farm delivering power at less than 5 cents a kWh would -- using typical natural gas project financing terms and current tax subsidies -- generate electricity for 3.69 cents a kWh. With tax subsidies, wind energy is now able to compete head on with coal, natural gas and nuclear energy.

To be sure, the production credits are not without controversy. Critics say that developers go forth not because economics dictate it but because of the tax breaks. It's particularly true in the early years of operations. Besides the credit, they say that wind developers get accelerated depreciation and sharply reduced sales and property taxes.

"Tax breaks and subsidies are now so large that their value to wind farm owners -- not the alleged environmental benefits -- is the primary motivation for building a wind farm," says Glenn Schleede, a utility analyst living in Virginia.

That thinking has sway in some circles. But public policy is less about nuances and more about overall aims. Public opinion polls continue to show strong support for greener resources and policymakers generally are responding to that sentiment. While the production tax credit is getting bounced around now, Congress will eventually rally behind it and development will spike as a result.