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Conference Report: AWEA - US industry faces up to market uncertainty

UNITED STATES: Disneyland claims to be the happiest place on earth, but just across the street at the Anaheim Convention Center, where delegates gathered for the American Wind Energy Association (AWEA) May 22-25 annual conference, the atmosphere was not nearly so ebullient.

Unease over how policymakers will respond to the imminent expiry of federal incentives and uncertainty over how the market will unfold in the face of stiff competition from cheap natural gas left many in the industry wondering when the US will regain the momentum that saw installations soar to 10GW just two years ago.

The factors driving demand for wind in the market today add up to much less than the 2009 high point, delegates heard. State renewable-energy mandates require 3-4GW a year, with California and the mid-Atlantic region alone accounting for about half of that. AWEA estimates load growth could add 2.5GW to the total, while controversial Environmental Protection Agency regulations that will force the retirement of older coal plants - when and if they come into force - could create demand for another 450MW.

So-called merchant wind installations, built to compete in the open market without the benefit of a long-term power purchase agreement, virtually dried up when natural gas prices plummeted from $12-13/mmBTU to $4/mmBTU and took wholesale power prices down with them. That merchant market, which made up 40% of capacity additions in 2009, is unlikely to recover as long as gas prices remain below $6/mmBTU.

"Somewhere between $5 and $6 for natural gas is where I'm pretty comfortable in terms of wind being able to compete head-to-head with what's in the market," said Tracy Stoddard, director of business development for Gamesa Energy.

But Stoddard does not expect gas prices to rise to those levels until "well into the future". Tim Stephure, a senior analyst at IHS Emerging Energy Research, agreed. IHS has drawn up a market forecast to 2025 that anticipates gas remaining below $6/mmBTU the entire time. In that scenario, said Stephure, support mechanisms will be the catalyst driving the industry forward. "Policy over the near term, while gas prices remain low, really is the key driver to increasing growth," he said.

Policy woes

The overriding challenge for the US wind sector is getting clarity on what that policy will look like. Over the past two years, the industry tried and failed to get Congress, the US's legislative body, to enact a federal renewable-energy standard (RES), which would see a minimum percentage of the nation's electricity supply come from wind and other green sources.

Climate policy is a non-starter in the current Congress. A cash grant programme paying 30% of project costs - implemented as a stopgap in 2009 to help overcome investment roadblocks in the wake of the financial crisis - ends this year with little hope of renewal. That leaves the federal production tax credit (PTC), which provides a payment of $0.022/kWh for the first ten years of a project's life. With the PTC scheduled to expire at the end of 2012, AWEA is focusing its lobbying efforts on making sure the incentive continues. "Our number-one priority remains extending the production tax credit beyond 2012," Ned Hall, president of AES North America and AWEA's new board chair, told delegates.

New political reality

The PTC has been extended beyond its scheduled expiry date six times in the past decade, but whether it will happen again is not a given. Congress has a much different face than the last time the PTC was renewed in 2009. Republicans are in charge of the House of Representatives and the level of animosity between them and the Democrat-controlled Senate and White House is palpable. Andy Cukurs, CEO of Suzlon Energy, said the divide became very obvious when industry executives visited Capitol Hill in February to participate in AWEA's annual lobby day. "I've never seen Congress so dysfunctional before," he said. "I'm usually the optimist, the glass-is-half-full guy, but it's really going to be tough the next year and a half."

The situation is made even more challenging by the fact that last autumn's mid-term election sent more than 100 new faces to Congress, many of whom are unfamiliar with wind energy and the PTC. And a lot of those new policymakers came to Washington with a singular focus on cutting the federal budget deficit.

"We have to recognise this is an uphill battle. The number-one issue right now is the debt and so extending tax credits is going to be a big fight," said Exelon Power president Sonny Garg, whose company entered the wind sector last year with its purchase of John Deere Renewables. "The context in which we are operating is not favourable to that extension right now."

Still, many in the industry who have lived through the ups and down of PTC uncertainty in the past expressed confidence the incentive would live to see another day. In fact, argued Matt Kaplan of IHS Emerging Energy Research, politics could ultimately play out in favour of wind. "The industry has matured so quickly in the past several years and the investment in manufacturing and job creation is at a level now where we think it's probably too detrimental and will affect too many constituents of Congressmen to stop the PTC at this time," he said.

Vic Abate, vice-president for renewables at GE Energy, is also convinced the PTC will be extended. His main concern is timing. On average, the PTC is renewed just seven days before it expires, which does not suit the planning schedules of either developers or manufacturers. Activity is expected to be brisk through 2011 and 2012 as companies work to make sure their projects qualify for available incentives, but Abate argued that, in some ways, the statistics on construction starts and project completions are deceptive.

"To somebody who doesn't know what's going on, it looks like the industry is doing well. But the fact is, if we don't have a production tax credit by the middle of next year, factories are going to be shutting down," Abate said. The industry, he explained, cannot take the risk of carrying inventory into a year that could see steep drops in demand for turbines. "(So) 2013 really needs an answer pretty quick."

The impact of policy uncertainty after 2012 is already becoming evident on the development side, said Jan Blittersdorf, CEO of NRG Systems, a US manufacturer of wind-measurement equipment. "Our product is going into the market 18-24 months before the wind turbines go into the ground. Over the years, we've been a little bit of an indicator of what's going to happen," she told delegates. "Frankly, our percentage of sales in the US right now is about as low as I've ever seen it. So if we are that indicator, that spells out a little bit of trouble in a couple of years."

Although panellists across the conference sessions were in near-unanimous agreement about the need to get the PTC question settled as soon as possible, they seemed equally resigned that it would probably not happen until the end of next year. Bob Gates, senior vice-president of commercial operations at Clipper Windpower, blamed the US tendency to manage by crisis. "We seem to career from one side of the road to the other. PTC extensions have been management by crisis," said Gates. "To think that it is going to change is an unrealistic expectation. Congress is marginally functional and it only deals with the current crisis or the current hot topic. It's not very forward looking."

The cyclical uncertainty and market instability that comes with the short-term extensions that have marked the PTC in the past has increasingly led industry players to question whether it is the best way to support growth. And although the credit helps keep wind competitive with $6/mmBTU natural gas, it does little to drive much-needed new demand. For many, however, it is an issue of what is politically practical. "We'd prefer some more sustainable long-term solution, but we'd still like to see a PTC if it's PTC or nothing," said Peter Toomey, manager of environmental markets for Iberdrola Renewables.

Wider approach

The long-term solution favoured by AWEA has been a federal RES, but the prospects of carving out a niche exclusively for renewable-energy technologies in the current Congress seem remote. Republicans prefer an "all-of-the-above" approach to energy development. This is changing the discussion in Washington to a broader clean-energy standard (CES) that would include technologies such as nuclear, coal plants equipped with carbon capture and storage, and even natural gas.

From the tone of the discussion at the conference, this idea is gaining traction within the wind industry as well, especially as new, larger energy companies get involved. Exelon, whose 735MW wind business is dwarfed by its 17GW of nuclear capacity, favours a portfolio approach in its transition to a cleaner energy environment. "You're going to need to have different technologies as part of the solution," said Garg. "That's how Exelon thinks about it, and I think as an industry we need to think about it that way."

GE, which manufactures electricity-generation equipment across all fuel sources, would also like to see a CES "A clean-energy standard that deploys wind in the near term is what we need to get this thing going," said Rich Reno, GE's general manager of wind products.

Given Republican aversion to mandates of any kind on the power sector, even a CES faces steep hurdles. But Rob Gramlich, AWEA's senior vice-president of public policy, believes there is an opportunity. President Barack Obama called for a CES of 80% by 2035 in his State of the Union address earlier this year and turned it over to the Senate to start working on a bill. So far, however, infighting over spending and the country's debt ceiling has dominated the Congressional agenda.

"They're a little distracted and really not able to focus on this or anything else at the moment," said Gramlich. "However, there is room for a deal and there have been a number of people suggesting how a compromise can come together." Public concern over things such as rising petrol prices and the Fukushima nuclear plant crisis in Japan could help push Congress to focus on long-term energy policy, he said, pointing out that energy legislation often moves "when there is a critical mass of energy issues that are in the public mindset". Next year's presidential election could also force the issue. "The president has laid out his clean-energy-standard policy and whoever his challenger turns out to be will have to respond with something," said Gramlich.

Tough contract terms

Meanwhile, the challenging market for wind in the US is having an impact on more than just growth rates. Competition for the power purchase agreements (PPA) that are available is fierce. Xcel Energy's 2010 request for 250MW of wind in Minnesota attracted more than 9GW of bids. In that kind of buyer's market, utilities are demanding tougher contract terms. A recent innovation is what Ed Zaelke, a partner at law firm Akin Gump Strauss Hauer & Feld, called the hedge PPA. Rather than sign a contract to buy wind power at $50/MWh, for example, utilities are increasingly asking developers to sell into day-ahead markets and offering to guarantee the price. "If you get $30, they pay the difference. If you get $70 you pay the utility," Zaelke explained.

The wind producer gets the same power price under either structure. The difference is that the hedge PPA leaves the developer shouldering a host of risks around things such as changes in market rules and new transmission congestion charges, that used to rest with the utility. The increased uncertainty makes the prospects of financing projects difficult, said Zaelke. "Although we've seen a number of these PPAs signed we haven't seen any of them, to my knowledge, actually financed," he told delegates. "What this has done is allow those developers who don't need financing to have a competitive advantage over those that do."

The business is changing in other ways as well, delegates heard. The traditional model of finding a windy site, developing a project and finding a buyer is "somewhat disconnected from the current market reality", said Gamesa's Stoddard. Today, he said, developers need to start with what the customer wants and then find a way to meet that need. "It sounds pretty simple, but I think we need to get back to that sort of thinking as far as our development goes," he said. "It's not necessarily the project on the windiest piece of dirt that gets built. It's the one the customer wants."

That ability to be flexible favours larger, well-capitalised players, as does the need to rapidly shift development focus to areas where there is still demand for new wind, such as California and the Atlantic region. "A lot of the smaller players in the industry have really had trouble keeping pace," said Stephure.

The need to keep wind competitive has driven capital-cost declines of about $500/kW over the past two years, said Ryan Wiser, staff scientist at US Department of Energy's Lawrence Berkeley National Laboratory, while technological innovations such as taller towers and larger rotors have also helped lower the cost of energy. "The one positive piece about the industry being in a slump right now is that everyone is getting a kick in the butt to really reduce costs," said Kaplan. "Over the long term, that's where this industry needs to go."

One of the things keeping natural gas prices low is the prospect of a glut in supply as the industry unlocks previously inaccessible reserves from shale formations. But growing concern over the impacts on water quality and fugitive methane emissions from the extraction process could lead to new environmental regulations. The resulting cost increase could change the equation for wind. "Just as the industry fell very, very quickly in 2010, the prospects that would make the industry turn again in a positive direction could happen just as quickly," said Stephure.

Natural gas's share of the US electricity market has risen by seven percentage points since 2003, compared with two percentage points for renewable-energy sources. The challenge for the wind sector is to keep regulators and policymakers focused on the fact that relying too heavily on cheap gas as a generation source carries risks, said Gramlich. Throughou the conference, it became clear that some utilities are already reaching that conclusion. Xcel Energy, for example, is willing to consider buying wind beyond what the renewable-energy mandates require in the seven states where it operates, said Tom Imbler, the company's vice-president of commercial operations. Not only have prices for wind come down, he explained, but they are also fixed over time. "Having a little bit of fixed price as we convert more and more of our generation mix to gas, for which it is much harder in our jurisdictions to actually fix a price over the long term, is attractive to us."

KEEP FIGHTING - TED TURNER URGED WIND SECTOR TO LOBBY POLICYMAKERS AND PUBLIC OPINION

Media-mogul-turned-energy-entrepreneur Ted Turner brought his straight-talking style to the stage at the opening of this year's American Wind Energy Association (AWEA) conference, rousing the crowd to repeated bouts of applause with his no-nonsense plea for the US to get on with transition away from "antiquated fossil fuels" to cleaner energy sources.

"We all know, it's just overwhelming, that it's time to move away from fossil fuels. We're already late. It's like hanging on to telephone booths," he said. "I've never seen anything so clear and overwhelming as the case for wind, solar and geothermal."

In a wide-ranging and often feisty conversation with AWEA chief executive Denise Bode, Turner argued that if President Barack Obama had made the strategic decision to tackle energy before wading into the contentious health care debate, there would be a long-term policy in place and the wind sector would be dealing with "a five-year backlog" instead of a 50% drop in installations.

Turner urged the industry to keep up the pressure on policymakers, and even offered to do some lobbying on its behalf. "We've got to keep fighting because we're right and they're wrong. The coal proponents are wrong. The oil proponents are wrong," he insisted.

The government, the CNN founder said, should be phasing out the fossil-fuel industry by shifting the incentives it receives to renewables and putting them in place for the long term "so we can plan intelligently".

Natural gas should be seen strictly as a transitional fuel, he said. "People say we've got 100 years of supply like that's a lot. It's not. We're on too short a time horizon. We should be thinking 1,000 years, not a hundred."

The wind sector also needs to focus on raising money to take the fight to the airwaves, where it is being seriously outspent on advertising by the conventional fuel sector, Turner urged.

"It changes people's perceptions. I've seen so many commercials for clean coal that I wake up in the middle of the night having nightmares about clean coal," he said. "It makes me sick."

CONFERENCE DIGEST - FEWER VISITORS IN BIRTHPLACE OF US WIND BUT ONLINE COMMUNITY IS THRIVING

Sign of the times

Attendance at this year's American Wind Energy Association (AWEA) annual conference was down from last year. Preliminary attendance figure show nearly 16,000 delegates registered for the event, which is 20% less than the 20,000 people who gathered in Dallas last year and far below the record attendance of 23,200 in Chicago in 2009. This year's trade show was also smaller, with 1,165 exhibitors compared with 1,393 last year. The numbers are in line with what was expected "given the circumstances of a downed economy and continued uncertain federal policies", said AWEA.

Wind comes home

This year's conference headed back to the place where it all began, and where today's industry is looking to tap into one of the bright spots in a sluggish market.

The country's first commercial wind farms were installed in California in 1981. The three projects, consisting of hundreds of turbines with a combined generating capacity of just 10MW, were commissioned in the midst of an energy crisis marked by shortages of petroleum supply and spiralling prices. Governor Jerry Brown was in office at the time, and just six weeks ago, after being re-elected to the post last November, he signed a renewable energy standard of 33% by 2020 into law, launching something of a renaissance for California wind. "Today, 30 years after those wind farms first appeared, the Golden State is once again challenging the nation, leading the charge," AWEA chief executive Denise Bode said in her opening remarks.

Global forum

With operations and maintenance issues gaining attention in the wind sector, the founders of a new website designed to give wind farm operators around the world a forum to share ideas used the AWEA conference to introduce their idea. It started with a problem Windsmith president Paula McGarrigle was having with some computer software. "I went online, found a forum and I posted something. Twenty minutes later I had an answer that fixed all my problems." McGarrigle and partner Evelyn Carpenter are hoping www.windsmithforum.com can provide the wind industry with the same kind of access to expert knowledge and experience. The forum has eight main discussion categories, ranging from health and safety to wind farm operations and performance.

Online support

Wind energy may still only supply a fraction of US electricity, but it is well ahead when it comes to connecting with supporters through social media. AWEA has 25,496 Facebook friends, compared with 516 for the American Petroleum Institute and 126 for the American Natural Gas Association. "We may only have 2% of their advertising budgets, but they've only got 2% of our real, committed followers online," said Rob Gramlich, AWEA's senior vice-president of public policy. "In this digital democracy, those genuine voices really make a difference."

VIVA WIND POWER - ROS DAVIDSON TAKES A WRY LOOK AT PROCEEDINGS

Too much?

At the glitzy opening session of this year's American Wind Energy Association (AWEA) conference, Denise Bode rolled on to the stage on a mammoth motorbike "inspired by wind power". AWEA's chief executive was grinning from ear to ear. But quite what was inspired by the wind was unclear, especially amid the cacophony and spotlights of a session as stage-managed as a Las Vegas show. Later that morning the conference's star guest, Ted Turner, nailed it: surely it would be better if the motorbike were powered by wind or solar, said the famously outspoken creator of 24/7 news coverage and supporter of wind.

You can't win them all

"American Wind Power. Clean. Affordable. Homegrown." That was the wording on the free T-shirt given to everyone attending Windpower 2011. In fact, investment in America and American jobs was a core theme throughout the conference.

But wait, what about those T-shirts? Made in Honduras and distributed by a Mexican company. Homegrown? Well, let's just call them global - just like the wind industry's ever-growing supply chain.

Identity crisis

Are you global or are you Chinese? That proved a delicate question for one Chinese turbine maker trying to crack the US market. In the vast exhibition hall, exhibitors headquartered outside America could have stands in their national grouping - such as in the Danish and Scottish pavilions. Many companies accepted this. But not Goldwind. A senior US executive for the number-two Chinese turbine maker, which is headquartered in Beijing with a US wing, confessed they had politely declined to be in the Chinese pavilion. Goldwind wanted a global image and maximum foot traffic. It also staged a "beer of the world" party. In contrast, rival Chinese turbine maker Sinovel - although not in the Chinese pavilion - was giving out free decorative paper fans.

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