WEST MICHIGAN — The extension of the wind production tax credit at the eleventh hour may please industry organizations, but the alternative energy party may still be over.
Originally established in 1992, the wind production tax credit gives tax incentives for wind energy projects that use turbines with over a 100-kilowatt capacity. Since 1992, the tax credit was extended multiple times to continue supporting manufacturing and research in the area of wind energy production.
The credit was set to expire again at the end of 2012, meaning that any installation not in service by Jan. 1, 2013 would be ineligible for the credit. Congress renewed the tax credit at the last moment as part of the solution to the so-called fiscal cliff.
However, some of the damage had already been done, said Elizabeth Salerno, director of industry data and statistics at the American Wind Energy Association (AWEA).
“(Losing the credit) wreaks havoc on the industry, cutting off investment 70 to 90 percent. So it was critical that this got extended before it expired,” Salerno told MiBiz. “Unfortunately, there was some impact already, particularly on the manufacturing side. We started to see layoffs and manufacturing closures.”
Suppliers to the wind turbine industry began to feel the squeeze in March 2012 as installations started construction and demand for parts dropped off. Many manufacturers were forced to look beyond alternative energy projects and to produce other parts and equipment or be faced with laying off workers.
With the PTC extended, Salerno thinks the industry will be able to bounce back.
“There is some impact on the industry just because of the timing of the legislation, but the way it’s designed, hopefully it will allow us to ramp back up over the next few years to a more stable size,” Salerno said.
With the PTC in place for at least the short term, the hope among groups such as AWEA is that the extension will help the industry rebound in 2013 and 2014. However, other analysts see the situation for wind energy in a much more negative light.
According to an October 2012 Congressional Research Service (CRS) report, the current wind turbine manufacturing capacity of the United States was approximately 13 gigawatts per year, slightly over the record-setting capacity installed in 2012: 12 gigawatts. Unfortunately, projections for 2013 are bleak compared to that record-setting year.
“... Market estimates for new installations in 2013 range from 1 to 2 gigawatts if the PTC expires and 2 to 4 if the PTC is extended,” the report stated. “All projections reviewed for this report expect annual U.S. wind turbine demand to be less than the existing U.S. turbine manufacturing capacity.”
As with any energy question, there are multiple reasons for this projected drop off in production. The market contraction can be partially explained by a glut of wind-related projects that pushed 2012 into record production territory. This surge in production was largely caused by the pending expiration of the PTC and a desire to get in under the wire as many projects as possible.
Other factors that are depressing the industry include the slowing domestic growth in demand for electricity and the historically low price of natural gas. According to the U.S. Energy Information Administration’s annual energy outlook report, total demand growth in the United States is not projected to exceed 0.8 percent.
While developing countries like China are expected to have robust growth in demand for electricity — and there is potential for renewable resources to expand into those markets — the logistical difficulties posed by transporting wind turbine components may prohibit Michigan’s wind manufacturers from tapping into those markets.
Additionally, state renewable portfolio standards (RPS), which have generated most of the demand for wind energy, are projected to provide only a mild demand for the next 20 years.
“Market analysis indicates that the incremental RPS-driven demand for all sources of renewable power is estimated to be 4 to 5 gigawatts annually until 2025,” the CRS report stated.
While AWEA acknowledges the potential difficulty for the wind industry, especially in the face of low growth in electricity demand and cheap natural gas, Salerno sees these obstacles as affecting all power generation, not just wind and solar.
For AWEA, wind energy has room to grow as utilities broaden their generation portfolios.
“I think those elements of lower load growth and natural gas prices impact all the power assets on the market,” AWEA’s Salerno said. “Wind offers a sort of unique product to the market. It’s not exposed to fuel price risk, and we can offer a long-term contract at a stable price.”
For AWEA, the future will largely be defined by the coordination of state and federal wind policy to provide a stable environment for the elements of the wind industry, like research and development, that require long lead times and large investments. While AWEA is looking for a more permanent solution to the PTC renewal problem, Salerno said that question will have to wait until the government can focus on tax reform.
“We’re focused right now on getting the PTC that was just passed and getting our businesses back up and running,” Salerno said. “They were halted, effectively. The focus now is more on getting our businesses and companies reignited and developing projects. … I don’t think it’s clear at this point what moves forward and what other ideas come to the table, but I think that’s all going to play out once that tax reform discussion starts.”
The question remains as to what will happen with the additional turbine manufacturing capacity. Sources say that without a market-driven demand for wind power, the PTC alone will be unable to sustain the industry.