Does Obama’s Re-Election Save the Wind Power Industry?
Blowing in the Wind
Much time was spent in energy circles discussion leading up to the election on how the outcome would affect the future of wind power in the U.S. The general consensus was that an Obama reelection would lead to an extension of the Production Tax Credit (PTC), and with his election the rescue of the wind industry in the U.S.
Current turbine orders for U.S. delivery in 2013 sit near (if not at) zero, as the lack of support from the PTC makes it extremely difficult to produce wind power at a cost low enough to compete with natural gas derived electricity due to continued weakness in natural gas pricing. (Read More: Perfect Storm Brewing for Troubled U.S. Solar Manufacturers)
But it’s premature to proclaim the industry saved — and here’s why.
PTC Extension Not a Given
It’s not clear when or even if, an extension of the PTC might occur. A push during the November session of Congress is likely, and a PTC extension could easily slot in as part of a broad set of tax extenders (research and development credits, new market tax credits and several other broadly supported tax incentives are all expired or expiring as well). While this is a reasonably good possibility, as action on tax extenders is likely and there is some bi-partisan support for the wind credit, action on the PTC this year is far from certain.
Additionally, the impending cliff will cloud discussions of all fiscal legislation, and passage of any clean energy support by the House will be a significant challenge.
I would start the handicapping today at a slightly better than even chance (call it 60% likelihood) for an extension this calendar year.
Just a Band-Aid
The current extension being pushed by the American Wind Energy Association would act as little more than a band aid. It is a one-year extension (and this would allow the credit to apply to any projects for which construction started in 2013). Certainly if passed this would lead to a big push of projects getting underway by late next year – I am aware of more than a dozen (and expect the total number is several dozen) good projects that are ready to go forward in 2013 if the PTC is renewed. (Read More: 5 Ways that Wind Power Can Survive Without a PTC Extension)
The challenge the industry faces is that at current pricing wind power generally doesn’t compete with natural gas generated power until gas prices rise to roughly $6/mmbtu. That’s significantly higher than current prices and most forecasts don’t have gas prices breaking the $6 threshold for several years.
So a one-year extension would provide a little quick relief, and then the industry would be right back in the same position (a key point that typically gets lost is that the PTC supports not just wind, but also biomass, hydroelectric upgrades, geothermal power, municipal solid waste and some other discreet energy types, so this isn’t all about wind either).
Developers Must Face Reality and Plan Accordingly
The question of whether a project can be financed typically turns first on whether a long term contract to sell the power is available at a price that is higher than the per unit cost to produce the electricity.
The second hurdle is that the returns must be enough higher that the return earned by an investor is more than the return that the investor could earn in another project with equal or less perceived risk. The role of the PTC has been to add enough additional return to projects to overcome the perceived risk for investors by allowing projects to pay higher returns to investors. (Read More: 5 Reasons Why Good Energy Projects Don’t Get Financed)
Many projects simply won’t meet the fundamental hurdle of profitability without the PTC (especially in a market where natural gas fired electricity is very inexpensive on a historical basis, making it extremely difficult to keep the per-unit cost to produce lower than the per-unit price to sell).
While an extension of the tax credits is vital to a robust wind industry in the U.S., developers must start to consider strategic options for financing projects in a world without the PTC. Even with financing innovations, successfully putting together wind deals will be very difficult, and without these financing strategies there will be a period of time where virtually no wind projects will be financed or built in the U.S.
In Part II of this segment, I discuss the various strategic options the industry can use in the event that the PTC expires.