Rethinking Wind Power

Issue 1 and Volume 118.

russel ray   By Russell Ray, Managing Editor

Once again, the federal subsidy that has driven the construction of new wind power projects in the U.S. has expired. But don’t expect a quick extension like last year.

Congress isn’t expected to consider an extension of the 2.3 cent per kilowatt-hour production tax credit until it concludes discussions on tax reform. That could take months.

Although the credit expired Jan. 1, there is still plenty of work for wind power developers in 2014.

New orders for wind turbines and new power purchase agreements for wind energy will continue in 2014 because the credit applies to projects under preliminary construction by Dec. 31, 2013. Previously, qualifying projects were required to be in operation by the end of the year. The change, which acknowledges the 18- to- 24-month construction timeline for wind power projects, allows developers to build new projects beyond 2013. As long as a developer incurs just 5 percent of the project’s total capital cost before the credit expires, they will have until 2015 to put the project into service and claim the credit.

But without an extension or an alternative solution, wind power development will eventually grind to a halt, as it did this time last year after Congress waited until the eleventh hour to extend the credit another year. Months of uncertainty in 2012 killed the market for new projects as wind turbine manufacturers shut down factories and cut jobs.

“Our industry still faces uncertainty in the medium and long term and needs Congress to address that,” said Rob Gramlich, senior vice president of public policy for the American Wind Energy Association. “The legislative vehicle could be tax reform, an extenders package or something else, but, ultimately, our industry will begin to feel the impacts of uncertainty in 2014.”

Historically, lawmakers have renewed the credit for wind and other forms of renewable power shortly after they expire in a legislative measure known as an “extenders package.” This year, however, an extension has been placed on hold as lawmakers take on a major overhaul of the nation’s tax system.

The overhaul may include long-term incentives for wind power. But an extension of the credit is not a given. Some say the long-standing credit for wind power should not be revived, arguing that wind power is a mature technology that no longer needs government support. What’s more, critics maintain the growth of wind power undermines the reliability of the U.S. grid because of its intermittent nature and limited transmission capacity.

The uncertainty in the U.S. may encourage some developers to take their projects abroad. Walt Hornaday, president of Cielo Wind Energy in Austin, told the Fort Worth Star-Telegram last month that he is hopeful the tax credit will be renewed but added his company is making plans for the credit’s demise.

“Canada, Mexico and South America are pretty busy right now,” Hornaday said. “Pretty much everything except for Europe is open to more wind energy right now.”

As Congress considers and debates ideas for tax reform, the industry should use this time to rethink its strategy for financing wind power projects in the U.S.

Without the credit, many projects would not be profitable because the price to produce the power often exceeds the price it can be sold for under long-term power purchase agreements. The 10-year credit creates a predictable return for investors and reduces the risk. What’s more, wind power generally can’t compete with gas-fired power at today’s prices. Wind power becomes competitive when gas prices exceed $6 per thousand cubic feet. By most accounts, gas prices will remain well below $6 for several years.

While a long-term extension may be the most effective way to promote the development of new wind power projects, developers must face reality and begin preparing for life without the production tax credit for wind. Without new financing strategies or a sharp spike in gas prices, the industry will experience a long stint where virtually no new wind power projects will be financed or built.

New projects can be financed with well-structured deals, even in the absence of production tax credits. They will be more difficult to finance and build, but there are a number of approaches that can be used to turn a marginal project into a fruitful venture.

Spread the risk out among multiple projects. This will reduce the risk for investors by providing a safeguard against an underperforming project or technology. The use of risk management tools such as insurance, hedges or contracts in combination with a reputable power purchaser will lower the perception of a project’s risk. These and other strategies were featured at POWER-GEN International’s Financial Forum, Nov. 13-14, in Orlando, Fla.

If you have a question or a comment, contact me at [email protected]. Follow me on Twitter @RussellRay1

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