So it was encouraging to see that the industry mood at the annual gathering of the US wind industry in June was one of determination. While the industry's near-term focus is resolutely on making the case for a quick extension of the soon-to-expire federal production tax credit (PTC), long an important driver for new project installations, it is also working to position itself to respond - however the market unfolds in the future. The sector has no intention of remaining stuck for long.
"While immediate extension of the PTC is paramount to our industry's future, as any CFO or financial adviser will tell you, diversification and self-reliance is the only way to determine your own destiny," said Thomas Carnahan, president of New York-based developer Wind Rose Partners and new board chair of the American Wind Energy Association (AWEA), told delegates at the Windpower 2012 conference in Atlanta, Georgia. "As we look ahead, it's incumbent on us to search for new methods to achieve our goals to ensure we do not become over-reliant on public policies that create a dependency we cannot escape."
The big dip
The heavy reliance of the US industry on the PTC, which provides a tax credit of $0.022/kWh for the first ten years of a project's life, is obvious from the level of projected new build this year and next. The US will likely bring anywhere from 9GW to 12GW of new capacity online this year as developers rush to qualify for the credit, which expires at the end of December. But installations are expected to plunge to the 1-5GW range in 2013, with the exact number dependent on whether and when the PTC is extended. During a panel discussion among eight of the top turbine suppliers, not one reported an order for US delivery in the first half of next year.
"Right now, utilities are not contracting for long-term power beyond 2012 because they don't know what is going on in 2013 or in 2014," Gabriel Alonso, CEO of EDP Renewables said at the conference.
While most conference speakers expressed confidence that the tax credit will be renewed, few expected it to happen until the so-called lame-duck session, when the current Congress wraps up its legislative work following the November elections and before the newly elected lawmakers take over in January. Even then it could face hurdles. Congress will be trying to figure out what to do with about half a trillion dollars worth of expiring individual and business tax breaks and, given the limited time frame and partisan rancour that has divided Democrats and Republicans to date, there is much that might not get done.
"That is what I see as a very big risk, and I can't rule out for you or my investors the possibility that the PTC could expire altogether," said Christine Tezak, a senior energy and environmental policy analyst at private-equity firm Robert W Baird. Muddying the waters even further is the prospect of corporate tax reform. Momentum is building for Congress to overhaul the US tax system, essentially by lowering the tax rate and at the same time closing some of the loopholes companies use to avoid paying taxes.
All of this is colouring how potential investors view the sector, Tezak said, particularly given the broader economic climate. "Global economic conditions, the unrest in Europe, (this) is really driving US investors, as well as foreign investors who have been big supporters of clean energy, on to the sidelines and into more defensive investments. That would include things like utilities and conventional energy stocks where they feel they have a bit better visibility," she explained. "Policy-contingent investments are a tough, tough sell to Wall Street right now. Too much has to go right."
As a result, many in the industry are concluding that the status quo is no longer working. "We need to figure out a better approach because the political system is not going to change that much. We are going to continue to have these boom and bust cycles," said Richard Glick, vice-president of governmental affairs for Iberdrola Renewables.
One option that is gaining traction, particularly among policy makers, is the idea of providing a longer-term planning horizon by phasing out the PTC over several years. At a hearing in Washington on expiring tax breaks held just two days after the AWEA conference, Congressman Patrick Tiberi, an Ohio Republican, pointed to "a lot of consensus" for a phase out. That consensus also extends across the political divide, said Keith Martin, a Washington-based partner at law firm Chadbourne & Parke. "Some key Democrats have been telling the wind industry that even to get Democratic votes for this, the industry has to come in with a plan to phase out the credit in the long term. I'm not sure any plan has actually been presented by the industry. It's been resisting so far," he said.
Discussions during the conference in June showed signs that this resistance may be breaking down. The cyclical uncertainty that comes with short-term PTC extensions wreaks havoc on manufacturers' efforts to build a US-based supply chain and drive costs down. "We all believe that we need a longer-term extension and then some deadline where we are competitive with other industries. I think that is achievable," said Michael Revak, vice-president of technical sales and proposals at Siemens Energy Wind Power Americas. Tim Rosenzweig, CEO of Goldwind USA, agreed: "If you had two or four years and phase it out, we could all live with that."
Finding a way to drive more renewable energy into utility supply portfolios is another way to move the industry forward. State mandates, known as renewable portfolio standards (RPS), have been the main drivers of demand for wind energy in the US to date, but many of their near-term targets have been met. Over the long term, they are likely to generate a market for new wind installations of only about 1.5GW a year, said Amy Grace, lead North American wind analyst for Bloomberg New Energy Finance (BNEF).
While a federal clean energy standard (CES) could help bolster that demand, the one proposal now on the table - requiring large retail utilities to obtain 84% of the electricity they sell from clean energy sources by 2035 - would do little to encourage new wind build until after 2020. Before then, said Iberdrola's Glick, gas would dominate. For wind to benefit, the law would have to strike a better balance. "We need to focus much more on the fuel diversity benefits of such a programme. Otherwise we are just going to lose out to gas in the short term."
There is not a lot of political agreement on the idea of a CES, said Glick, but there may be room for a trade off that taps into Republican concerns about Environmental Protection Agency (EPA) rules expected to force significant coal plant retirements. "There's been a lot of whispering about this in Washington, both at committee hearings on Capitol Hill and also within the White House and some of the Senate and House offices, that maybe there is some sort of grand bargain where you exempt utilities from certain EPA regulations in exchange for getting a clean energy standard enacted," he said. "It is certainly a possible compromise."
With so much of US wind project financing driven by tax-motivated investors able to use the PTC and other write-offs, the industry has also been pushing to expand the pool of financiers and keep capital flowing into the sector. The European debt crisis has forced a retreat of key lenders to the US sector, said Thomas Emmons, head of renewable energy for Rabobank International, with seven of the top 20 banks in 2010 no longer on the list. While Japanese, American and Canadian banks are stepping in to fill the void, few are willing to lend money for more than ten years. The result has been the emergence of a hybrid deal structure where banks team up with institutional investors, such as pension funds and insurance firms, to provide financing for as long as 25 years.
On the equity side, the industry is backing new legislation, introduced in the Senate in June, to allow access to master limited partnerships (MLP), an investment vehicle used widely by other energy-related companies. MLPs are traded on stock exchanges like corporations, but pay no corporate taxes. Instead, income passes through the partnership to individual investors who pay on their personal tax returns. Today, about 80% of the roughly 75 publicly traded MLPs earn their income from natural resources. A study by the Maguire Energy Institute at Southern Methodist University in Texas, recently found that the use of MLPs could unlock as much as $5.6 billion in new wind investment between now and 2021.
Ultimately, the consensus among conference participants was that the best way to ensure a growing market for wind and continuing investor interest is to compete head-on with other generation sources. With spot prices for natural gas hovering in the range of $2 per million British thermal units (MMBtu), the industry's competitive benchmark has changed, said Steve Lockard, CEO of component supplier TPI Composites. While advancements in turbine technology, driven mainly by larger rotors and taller towers, have helped lower the cost of energy by what Siemens' Revak estimates to be 40-50% over the past few years, it needs to fall further. "We need to set a goal and drive really hard towards that," said Lockard. "We need to be more independent as an industry, less concerned about things like the production tax credit over time. Our work is not done."
Gamesa has set its own target of reducing the cost of energy another 30% by 2015 through technological innovation, more efficient logistics and optimising the performance of existing wind farm, said Borja Negro, the Spanish company's new North American CEO. Other opportunities, his competitors agreed, range from the industrialisation of manufacturing through standardisation and modularisation to better turbine controls and more aerodynamic blades.
Continued innovation is expected to increase average capacity factors - the overall achieved output in relation to the project's plated capacity - in the US from 33% in 2011 to the high-30s by 2020, said Matt Kaplan, associate director at IHS Emerging Energy Research. In some major markets with good wind resources, capacity factors will hit the 40-50% range. Already, the improvements are unlocking new markets in areas such as Michigan, Ohio, the north-east and the south-east, where the economics of wind have historically been poor to marginal. "There are some opportunities that weren't there just a couple of years ago," said Kaplan.
New technologies could also play a role in another emerging market opportunity in the US. There are currently 8,000 turbines in California that are 20 years old or more, said Kaplan, making the state ripe for repowering. And older turbines may not be the only ones in line for replacement. "There is also a point which the capacity factor improvement of the newest turbines make repowering machines that aren't at the end of their life cycle worth the additional investment," said BNEF's Grace.
Over the long term, expects IHS EER, the US market will see about 6GW of wind installed annually - if the PTC is in place until 2015. There will be peaks and troughs through 2016 that level off to 2025. BNEF has similar estimates, expecting an average of 5.5GW installed annually through 2030. Continued low gas prices would drop the average build estimate to 3GW a year, and technological improvements increasing the average US project capacity factor up to 40% would push estimates up to 8GW a year.
Clearly, there will be change in the US market, regardless of the outcome of the PTC. There is currently 14GW of turbine nacelle assembly capacity in the US. "There is a tremendous amount of overcapacity in the marketplace today," said Dan Shreve, a director at Make Consulting. "There are some structural issues at play with respect to profitability throughout the value chain. You are going to see contraction at some point in time in the next year or two. What will need to happen is a small number of better financed players."
Kaplan believes there will also be a broader focus for companies in the market. "We've seen a lot of companies look for other areas of business opportunity, whether that's going to Canada or Mexico or Brazil, or whether that's moving into the service market. We've seen a huge focus on operations and maintenance over the past several months."
Shreve agrees. Where the US accounted for 90% of new installations in the Americas in 2009 and Canada for 9%, the outlook for 2016 tells a different story. The US will account for just 41% of the market, Canada for 27%, Brazil for 19%, and Mexico for 13%. "It is imperative people start looking at an Americas strategy," he said.
But it appears that the major players are in the US for the long haul. Despite later cancelling a 60MW project in Pennsylvania, Gamesa's Negro said the US market had always had strong foundations. "It is a strong economy, there's a lot of land available, there have been adequate policies in the past and there is a high demand for energy," he said. "We think it will keep having strong fundamentals and, coming from a European country, at this point it seems more obvious than ever."
NO BLOOD, NO MOTORBIKE, JUST CIVIL AND SOMBRE DETERMINATION BY ROS DAVIDSON
From the outset, you could sense that AWEA's 2012 conference differed profoundly from last year's. Fewer people were in attendance - around 11,000 compared with 16,000 at Windpower 2011 and 20,000 the year before that. That's despite the 920 exhibitors this year. Journalists from major news organisations were less evident. And as the show got under way, there was less glitz on stage.
This year, American Wind Energy Association (AWEA) CEO Denise Bode did not ride on to the stage on a motorbike, a scene that led to CNN media mogul Ted Turner asking why her wheels were not powered by renewable energy. Instead, AWEA's 2012 opening session - in the shadow of thousands of likely lay-offs in a US wind market that is about to contract rapidly - was sober and realistic. Guest speaker Turner, back again, not surprisingly given that Atlanta is his home town, was serious in his usual call to arms. And this from the man who can be so outspoken that he has been dubbed the Mouth of the South and Captain Outrageous.
Even the highlight, for those looking for a face-off at the world's largest wind conference, proved to be quite amiable, but still fascinating.
Right versus left
"Bush's brain" as Karl Rove, long-time adviser to former president George W Bush, has been known, appeared versus Robert Gibbs, adviser to the current president, Barack Obama. Partisan Republican versus partisan Democrat - but it was not the one-two punch one might have expected.
Yes, the stage management was there. After all, the duo of Rove and Gibbs is marketed as an item for the talk-show circuit in the US. Rove ramped it up, suggesting that the two men must try to be bi-partisan because the white couch he was seated on would show blood. Gibbs, for his part, noted that Rove was sitting on the right.
But they agreed on the usefulness of the production tax credit, although not on who was to blame for it hanging in the balance. "It is a market mechanism, you don't get paid unless you produce the power, and we're not picking winners and losers," said Rove, drawing applause. Just like a talk show, but maybe a little lower key.