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United States

PTC extension too late to avoid 2013 downturn

UNITED STATES: The full benefit of the continuation of the US wind industry's main tax subsidy will not be felt until 2014, according to experts.

Rule change means projects qualify for PTC when construction starts, but details are yet to be defined
Rule change means projects qualify for PTC when construction starts, but details are yet to be defined

In January the $0.022/kWh production tax credit (PTC) was extended until the end of 2013 as part of a broader tax bill signed into law by President Barack Obama on 3 January. This latest extension makes an important change to the PTC rules, allowing projects to qualify if construction starts this year, rather than when it starts to deliver power, as previously required.

"That is actually a huge deal," said Amy Grace, lead US wind analyst for Bloomberg New Energy Finance. "There are probably not very many projects that could get completed by year end. But there are definitely quite a few that can start construction. So we expect to see a huge spike in financing in the second half of this year and project completions probably next year, with maybe a few that run into 2015."

Analysts predict 2-3GW new wind build in the US this year, rising to 5-8GW next year. Even with the PTC in place, the market will fall well short of the 13GW built in 2012 as developers rushed to complete projects amid uncertainty over the future of the credit.

The sector is being buffeted by low power prices, competition from cheap natural gas and flat electricity demand. Utilities also advanced some of their wind purchase plans to take advantage of the PTC in case it disappeared. "That forward procurement naturally makes the next couple of years much smaller years," said Matt Kaplan, associate director at consultancy IHS Emerging Energy Research.

Developers are now actively touting wind projects to potential buyers, but they are still facing uncertainty over what "begin construction" means. How the government defines this will be critical, said David Burton, a partner at law firm Akin Gump.

Defining the beginning

The industry is hoping it will follow the rules laid out under the government's now-expired cash grant programme, he said, which required developers to spend at least 5% of the total cost of their project.

"If it is defined by reference to breaking ground and actual construction in the common sense of the word, it will mean the extension will be less valuable for the industry as there is little time between now and 31 December to obtain land, secure permits and negotiate construction contracts," said Burton.

The expectation is that the government will opt for the 5% model, added Burton, so he does not expect developers to hang back waiting for a ruling. "Right now if you're a developer, you're taking a gamble to go out, spend that 5% and place an order," he said.

"I think it's supported by some good reasoning, but it's still a gamble."

The slump in the market next year will hit many contractors, said Dan Shreve, Make Consulting's US-based partner. "I'm not anticipating any strong construction activity until the second half of the year at best," said Shreve. "And, given the small level of demand expected in 2013, it is going to be a difficult year for the construction crews."

On the turbine side, Shreve expects to see "a fairly substantial order blitz" in the second half of this year. Until then turbine makers will need to manage their US-based workforce through a first-half lull so it is available when needed, said Grace.

Siemens Wind Power Americas CEO Mark Albenze said that as projects move forward and orders come in, "we will adjust our operations accordingly".

However, the extension is still only a short-term solution, said Albenze. A six-year phase out as proposed by the American Wind Energy Association late last year would provide manufacturers with the policy certainty they need to continue to reduce costs, he added. "The wind industry needs longer-term stability so that wind power can move gradually towards a subsidy-free future," said Albenze.

Effect of PTC lapse on new installations 1992-2012

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