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Investors fear 'Trump effect' on global wind energy costs

UNITED STATES: As the US wind industry races to complete projects before the PTC expires, concerns are growing over looming tax reforms and the threat of border tariffs.

Ready and waiting… Industry has stockpiled enough components to build out 30-70GW of wind farmsin the next four years before the PTC is phased out
Ready and waiting… Industry has stockpiled enough components to build out 30-70GW of wind farmsin the next four years before the PTC is phased out

The US wind industry should keep a low profile in its dealings with president Donald Trump and focus on working with allies in Congress as questions swirl about the possible impact of tax reforms and border tariffs on the sector's cost structure.

"We need to be smart in this environment, and strategic about who we partner with to advance our agenda," Gabriel Alonso, CEO of EDP Renewables North America, said at February's Infocast Wind Power Finance & Investment Summit in San Diego.

"As an industry, we need to lay low with this type of president," Alonso added.

Trump, whose animosity towards wind energy has put the industry on edge, was a major topic of discussion at the summit, the first large gathering of industry leaders since he took office. Some of his policy priorities, they agreed, have generated significant uncertainty for the industry.

At the top of the list is tax reform. The Republicans, who control both the House of Representatives and the Senate, are expected to start overhauling the US tax code this year. The new treasury secretary, Steven Mnuchin, has voiced his support for the current five-year phase-out of the production tax credit (PTC), easing fears that it might be scrapped to help pay for big cuts to corporate tax rates.

But some of the changes being proposed could curb the availability of tax equity and the amount of tax benefits for projects, increase the cost of debt, and ultimately drag down internal rates of return for developers.

Threat of delays

What one banker called "the Trump effect" is already prompting deals to be structured to try to anticipate the changes, while investors wrangle over who will bear the risk.

"The transition to tax reform and the uncertainty about what that might look like could slow down projects," said Declan Flanagan, CEO of Lincoln Clean Energy.

Delay is a problem. The industry moved in a big way at the end of last year to qualify turbines for the full $0.023/kWh PTC, stockpiling enough components to build 30-70GW of new capacity. They now have four years to get the projects operating.

Maintaining that four-year window in the face of tax reform "should be the primary objective" of the industry, said Alonso, even if it means agreeing to give up the final year of the phase-out, when the PTC is worth 40% of its current value. Alonso doubts many are relying even on the 60% PTC prior to that.

"If industry has to give up something so Republicans can declare victory, I would be more than happy to trade," he said.

The four-year window also gives utilities a chance to get used to the implications of tax reform, said Don Ford, director of renewable business solutions at Westar Energy. "I think you will see few utilities make big moves into wind for the next couple of years, until the tax issue is ironed out."

In merger-and-acquisition deals, buyers are looking to mitigate the tax reform risk with insurance that allows a one-time reset of the purchase price to take into account the impacts of a tax overhaul, said Keith Martin, a partner at law firm Chadbourne & Parke.

The spectre of border taxes is also finding its way into turbine purchase agreements, said Martin, with developers pressuring vendors to supply equipment from US factories.

Last spring, the House tax committee released a blueprint calling for a "border adjustment" that would prevent firms from writing-off imported equipment. This would raise $1.2 trillion over ten years to defray the cost of tax reform. Trump is reported to prefer imposing direct tariffs, said Martin.

Wind economics

Either way, the strong domestic manufacturing base in the US should help insulate the industry. But stifling trade will hurt ongoing efforts to improve wind economics, several speakers warned.

"Cost-of-energy programmes are highly dependent on international supply chains. It's not only about US tariffs, but what that could do in other countries, and the ripple effect this could have," said Ilya Hartmann, CEO of Acciona Energy North America.

Border taxes to protect domestic jobs and manufacturing will push up costs for US consumers, warned Michael Storch, executive vice-president of Enel Green Power North America.

"I assume at some point folks will wake up to the fact that we can't just look at one side of the equation," he said. "Right now things are being looked at in a very simplistic way."

At least one turbine maker is responding. "My colleagues on the manufacturing side are looking carefully at new opportunities to source components from the US," said Kevin Walsh, head of renewables at GE Energy Financial Services. "It is being actively considered. It's important, so we can maintain our competitiveness."

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