During the first six months of 2010, the installation rate for wind turbines in the US has dropped by 71% compared to the same period in 2009. Though there are 5,000 MW (peak capacity) still under construction, there are few projects in the planning phases with expected start dates after December 31, 2010.
The problem that the wind industry is facing is that its current favorite subsidy program of a 30% cash grant from the federal government is about to expire. That program was a hasty response put in place as part of the American Recovery and Reinvestment Act (ARRA) of 2009 when tax equity financing dried up during the financial crisis that started in 2008 and still has not yet fully ended.
(Aside: Tax equity financing is a project structure where the wind developer sells off the rights to the production tax credits that his project will generate – currently set at 2.1 cents (which is adjusted for inflation) per kilowatt hour for the first ten years of project operation. This mode of financing dried up since most purchasers had other losses that already off-set their federal tax burdens. End Aside.)
The ARRA appropriated $40 billion for selected “clean energy” projects and included an additional $20 billion in tax credits and other incentives associated with “clean energy”. (I put the words into quotes, because the official federal government definition of clean energy does not yet include emission free nuclear energy.) That rather large spigot of funding is coming to an end, and surprise, surprise, the number of investors interested in providing financing for wind energy projects is disappearing just as rapidly.
Denise Bode, currently serving as the CEO of the American Wind Energy Association (before taking that job, Ms. Bode served for seven years as president of the Independent Petroleum Association of America (IPAA)), is predicting the end of the world if Congress does not do something. Of course, I am exaggerating a bit, but here are recent quotes from Ms. Bode in which she uses some catastrophic language describing the prospects for her industry without congressional action to either extend current credits or pass a federal renewable energy standard (RPS) that mandates wind energy development.
“In the first half of this year, we are down 70 percent in terms of wind installation,” Bode said in introducing the report. In addition, she said, “we continue to see a drop in new manufacturing activity.” Speaking with rising passion, Bode said the U.S. had dropped to third place, behind both the European Union and China, in new wind installations. Describing the U.S. wind industry’s circumstances as “dire,” she went on to say, “We need action.”
. . .
“We are going to see jobs lost,” Bode said. The wind industry needs an RES to provide a long-term market signal to manufacturers and developers. Without it, Bode foresees “the loss of the most exciting, most explosive new sector in the economy.” Bode termed Reid’s announcement that an RES will not come from Congress this year, “unbelievable” and “incomprehensible.”
As long as Congress can be counted on to do what it does best, which is to continue talking without taking any action, the upfront credit incentives will disappear and the federal RPS will not be enacted. There will still be production tax credits available for projects that get completed and actually produce electricity, but there are some growing risks associated with that particular credit.
In places like the Columbia River Valley where the Bonneville Power Authority (BPA) current provides load balancing services, wind developers have been warned that they may be forced to feather their turbines during certain wind conditions. There have been so many wind farms put into the grid in that location that they sometimes overload the transmission capacity. With a certain amount of wind, it is possible for BPA to reduce output from either thermal or hydroelectric plants, but if the power from the wind turbines goes above a certain level, there are no more thermal plants to shut down.
BPA’s hydroelectric dams have to be operated with considerations other than electric power production in mind; there may be a need to maintain a certain amount of flow for fish or irrigation concerns. In that case, even though wind turbine operators cannot earn their PTC when they are not producing electricity, BPA is going to tell them to stop producing. (See, for example, POST-WORKSHOP REPLY COMMENTS OF THE BONNEVILLE POWER ADMINISTRATION.)
BPA has suggested to wind developers and responsible agencies in California that this situation could be alleviated with more investment to develop the transmission pathways from the Columbia River Valley into California. California’s Renewable Portfolio Standard (RPS) is driving a major portion of the wind development in BPA’s service territory, but developing transmission is difficult and expensive enough to significantly reduce the profitability of developing wind in Oregon to supply California.
My hope and prediction is that the artificially high incentives for wind development are going to disappear. When that happens, Wall Street will lose all interest in providing the remainder of the required financing because the project risk of losing money will be far too high.
I have no desire to see people lose their jobs, but an industry that requires such large cash grants from taxpayers is simply not sustainable. The US needs clean energy, but it also needs cheap energy. Cheap energy enables hundreds of thousands of jobs that are not in the energy production business. We know how to produce vast quantities of cheap, clean, reliable energy; we produce about 800 billion kilowatt hours of nuclear electricity every year in the United States for a marginal cost that is about 2 cents per kilowatt hour. That is a lower total cost than the amount that taxpayers give to companies producing electricity with wind turbines.
Christian Science Monitor – Wind energy industry looks to copenhagen for a mandate. (That strategy did not work out so well for the industry.)