Given a market challenged by scarce and costly capital, unanswered questions about how and when measures to stimulate the American economy will be enacted, falling electricity prices, layoffs along the fledgling US supply chain and a potential 30-40% drop in new installed capacity this year over last, it might have been expected that the American Wind Energy Association's 2009 conference would be preoccupied with the task of just getting through the next few months. But starting with CEO Denise Bode's energetic rallying of the troops during the event's flashy opening session -- and running right through the gold rush atmosphere of the massive exhibition hall, where a record 1280 exhibitors hawked everything from wiring to work boots -- it was clear that the sights of the US wind industry are set very much on the future.
The unbridled optimism that brought an unprecedented 23,200 delegates to Chicago's McCormick Place Convention Center, in what more than one delegate described as a very tough year, can be traced to the new administration in Washington, DC. "We have never seen a political climate so favourable. We really have the wind behind our backs with the Obama regime," said James Walker, vice-chairman of the board at Enxco, a wind project development and construction company based in California.
President Barack Obama had barely moved into the Oval Office when he signed into law a $787 billion economic stimulus package containing the longest term yet for an extension of wind power's federal production tax credit (PTC), a temporary wind project grant program to help overcome investment roadblocks over the short term, targeted incentives for grid upgrades, loan guarantees for renewable energy and transmission projects, and manufacturing inducements. As delegates gathered for Windpower 2009, more was on the way, with both the House and Senate energy committees moving on new legislation that will restructure US energy policy in a major way.
For the wind industry, this year's conference was an opportunity to communicate exactly what it wants to see in a new energy bill. The PTC, long the poster child of US policy discussions, was barely mentioned, giving way to calls for a new national renewable energy standard (RES) for a minimum percentage of the nation's electricity to come from wind and other green sources. "To fulfil our dream of a new manufacturing base and a more balanced portfolio with wind and other renewables meeting 25% of our needs, it will take a long term commitment by the US," said Bode. A national RES, she added, would signal that commitment "once and for all."
The message was a well-orchestrated one, repeated over and over again by a panel of state governors from the Midwest and by company executives representing the breadth of the US industry. At one point, Bode even paused in her speech to urge delegates to follow her lead and use their cell phones to call their representatives on Capitol Hill, right then and there, to push the RES agenda. As GE Energy's Vic Abate put it, the time for action is now.
"I think the next 12 to 24 months will set the odds for this industry for the next ten years. So I think it is critical we are all united in the message," he told delegates. "If you look at the activity that is going on today, it is really out of the backlog of the industry. These were commitments and projects that were really built up in 2006, 2007 and 2008 and are now being executed. The next set of deals will be for 2011 and for that to happen you really need a renewable energy standard. The production tax credit worked for its time, but the next phase of this industry needs to be built around an RES and utilities investing in alternative energy over the long haul," Abate demanded.
AWEA has tried for an RES in the past and failed. With the priority both Obama and Congress have placed on clean energy, however, the odds this time around have improved considerably. "I'd like to say we are coming into a perfect storm of action," Lisa Jacobson of the Business Council for Sustainable Energy told delegates. But at the same time, she cautioned, the legislative steps to get there are "just as challenging and messy as they've ever been."
The Senate Energy Committee's proposal for a 20% by 2021 standard, with 15% coming from renewable energy and 5% from efficiency measures, is running into opposition from Republicans and a handful of sceptical Democrats. The House Energy and Commerce committee started out with a more ambitious 25% by 2025 plan, matching the target favoured by both Obama and AWEA, but faced pushback from moderate and conservative Democrats pressing for a lower standard. Last month, the committee passed a compromise standard of 20% by 2020, with the original proportion of renewables and from energy efficiency measures intact. If a state cannot meet the requirement, its governor may cut the renewable target to 12% and boost the energy efficiency goal to 8%.
Tough fight ahead
States in the US Southeast have long been opposed to a national RES, arguing it will be too costly for consumers because they do not have the indigenous resources needed to comply. It is a claim that many, including the new head of the Federal Energy Regulatory Commission (FERC), Jon Wellinghoff, do not accept. "Southeast states have a lot more renewable energy than they realise or understand. I think there are a lot of people who don't know that," said Wellinghoff. "There's a tremendous amount of biomass, a tremendous amount of hydrokinetic energy and a tremendous amount of solar, so I don't buy the argument that Southeast states don't have enough renewable energy. In fact, I think if you put an RES in place, they will find their own energy rather than import it from another state."
Such counterarguments have so far not held much sway with the Southeast political block in Washington, said Greg Wetstone, vice-president of government relations with Terra-Gen Power, a renewable energy company based in New York. "We have, I think, reached a point where we are going to have to outvote the South. We're not going to bring the South along. And I think the prospects are there to do that. Certainly the political stars are in much better shape in this Congress than they were in the last. But this is a tougher fight than our past fights to, for example, extend the production tax credit because if we win on the RES it costs the coal industry serious money. There are some utilities that are not wild about the change either," he told delegates.
"I think we're seeing the reality that it is a lot easier to stop legislation from moving forward in Washington than it is to get it done. I'm hopeful that we have enough of an edge this time that we can get through. But these are tough opponents and I really don't see a silver bullet out there that maintains the integrity of the program and works as we want it to work to deploy renewables, but at the same time would be more appealing to the Southeast," said Wetstone.
Some states that have already enacted their own renewable energy standards are also positioning themselves to ensure their interests are protected should a federal RES be enacted. "We believe that we need a national standard, but we also believe the national standard should acknowledge what has already happened in so many of our states and should not pre-empt state standards if, in fact, the state standards are stronger," Ohio governor Ted Strickland said. Ohio's 25% by 2025 RES allows 12.5% to come from sources such as nuclear and clean coal. The rest must come from new renewable sources, at least half of which must be generated within the state. "The part of our portfolio standard that I want to protect is the requirement that a certain percentage of it be generated in Ohio. It's maybe sort of a selfish concern, but we don't want simply renewable energy to be purchased outside of Ohio and brought in," he added.
Acting in concert
Balancing concerns like those of Strickland is only part of the complexity involved in drafting a national RES. A federal standard would most likely act as a floor, with states free to pursue tougher targets if they choose. But how separate state and national programs might act in concert is not clear. The House RES proposal envisions that a federal renewable energy certificate (REC) will be overlaid on top of existing state certificates, meaning in some jurisdictions there will be two RECs issued for every MWh produced. The RECs will be bought and sold to meet the requirements of whatever program they are attached to and the price premium, said Peter Toomey of Iberdrola Renewables, will likely end up split between the two.
"It should, from a pricing perceptive, get us to the same place in markets that currently have a renewable energy standard," he said. Practically speaking, though, it might not be so straightforward. "What makes me nervous is that if they try and overlay new and different approaches, we could get to the point where nobody understands them well enough to know what they are buying. And that ultimately drives down the value. It really does," said Jeff Bladen of Gamesa Energy USA.
The intricacies of program design aside, the real value of a national RES is that it will help push the deployment of wind and other renewables in the 22 states that have not enacted their own targets, as well as other jurisdictions where the requirements may not be as stringent. The market that is created, said Declan Flanagan of E.ON Climate & Renewables NA, is going to force action on many of the other challenges facing the US industry.
One of the most pressing of those challenges is the need for new electricity transmission capacity and the average five to seven year timeline for new lines to be permitted. The Senate energy bill proposes to slash that by giving FERC the authority to site "high priority" lines if the states fail to act. But T. Boone Pickens, the iconic American oilman who has spent $60 million of his own money over the past year promoting wind power, is not convinced the plan goes far enough. He wants to build 200 GW of wind capacity in a wide swathe running from Texas through the Great Plains to the Canadian border and transport the output via high-voltage transmission lines to load centres on the east and west coasts.
"I heard somebody say give the states a year to work it out. If that's the case, they'll just waste a year. Give FERC the power to site the power grid, just like they do natural gas pipelines," he said.
Not surprisingly, it was a point at least one state governor was not prepared to concede. "This is a very, very difficult issue when you get down on the ground and decide where the power line is going to go. People don't want the federal government to come in and say this is going though your backyard. That will incur, I believe in the long run, great hostility to the wind industry," warned Wisconsin governor Jim Doyle. "We need to make sure that the states have the role in determining what the route of the lines will be."
Delegates were also cautioned not to let the ideal of a national renewable energy transmission backbone overshadow upgrades that could help the industry today. "It is very important we don't let the perfect be the enemy of the good here. We need momentum in this industry and there is lots of incremental, less complicated investment that is needed in order to keep the industry moving," said E.ON's Flanagan.
Break in momentum
Exactly when the US will regain the red-hot momentum that led it to a record-shattering and world-leading 8358 MW of new installed capacity in 2008 remains to be seen. The stimulus provisions will help, conference speakers agreed, but not until there is clarity on the rules and the financial market have a chance to absorb them.k"Without that I think the industry is going to sit on the sidelines," said Michael Revak of Siemens Energy.
The Treasury Department is expected to issue guidelines on one of the package's most important elements by July, possibly even sometime this month. Developers starting construction of projects in 2009 and 2010 will be able to opt for a cash grant covering 30% of eligible capital costs, a provision designed to tackle one of the biggest issues facing the US industry in recent months. Until now, US incentives for wind energy development centred on the $0.021/kWh PTC, paid out on the energy produced in the first ten years of a project's life. But most project developers do not have the appetite for tax breaks to use it, forcing them to go out and find equity investors who can. But the bottom fell out of the so-called tax equity market in the fall as the global financial crisis took hold, trimming the number of tax credit motivated investors in US wind from as many as 18 to only four or five.
One of the major impacts of the grant will be on the cost of capital, said Edward Zaelke, a partner at law firm Chadbourne and Park specialising in wind power financing. The scarcity of tax equity drove up the returns demanded by investors from about 7% after-tax to about 10.5%, while returns for standard equity players went from 10.5% to 14%, pushing the break-even price for wind from $70-80/MWh to $90-100/MWh. Getting 30% of project capital for free will help knock the breakeven price down to $75-85/MWh. "We're back down in the range of where we were last summer," he told delegates.
The challenge, even with the stimulus, is that wind's major competitor in the power generation market has seen its costs decline since last summer. "Choosing between wind and gas-fired plant will become more difficult during the current recession as gas prices have virtually bottomed out, falling around 70% in the last six months to just over $3/BTU," said Keith Hayes of Emerging Energy Research, a renewable energy consulting firm. The cost of gas generation, he said, is expected to remain in the $50-65/MWh range in the near term.
Declining wind turbine prices will help close the gap, said Hayes. He estimated that wind power equipment has dropped $200-400/kW over the past two to three months, driven by falling demand and declining materials costs. But the full impact of cheaper turbines is unlikely to be felt in the market for a while as developers work through inventories bought at the peak of the market as part of large multi-year framework agreements.
"These sustained high project costs, coupled with the higher cost of equity, could push the price of power from new wind projects built in 2009 even higher. But over the longer term we would expect to see somewhat lower prices as the backlog of turbines is eventually cleared and as the cost of equity hopefully peaks out and begins to return to more normal levels over time," said Mark Bolinger of the US Department of Energy's Lawrence Berkeley National Laboratory.
Some of that backlog is making its way onto a so-called "grey market" for turbines as developers who secured machines ahead of when they were needed find the projects they were slated for are no longer economic to build, said Mark Goodwin of Horizon Wind Energy, a project developer based in Houston. Goodwin told delegates there are about 1000 MW of turbines available on the resale market.
The availability of grey market turbines, combined with fewer new orders, delayed projects, a major manufacturing ramp-up in recent years and more vendors active in the US market, has led to a radical shift in the tight supply situation of just a year ago. "The market has changed, it has literally turned on a dime. Unfortunately, turbine manufactures are not able to turn quite as quickly," said Goodwin. "We are going into a little bit of a buyer's market."
Goodwin estimates that the US has about 9000 MW of turbine supply capacity in 2009. But the senior executives participating in the conference's large wind turbine manufacturers forum only expect installations to hit 5000 or 6000 MW this year. The dip, however, does not seem to have taken the sheen off their view of the US market's potential. Most expect it to become a 10 GW a year market within a couple of years.
"It wasn't that long ago when we were dreaming about a 2000 MW a year market. We've had fantastic run up these last four years. There's been a tremendous amount of investment in manufacturing capacity as well as the creation of jobs in the United States. If we have a 5000 or 6000 MW market in 2009, I don't think it is anything to be ashamed of. We will still likely be the single largest market in the world for wind power," Suzlon Wind Energy's Andris Cukurs told delegates. "To me this is a temporary, and frankly a very healthy, slowdown in growth here in the US."
The jobs driver
If the political input at the conference was any indication, it may be the jobs Cukurs referred to, as much as energy security, climate change or the need for new electricity supply, that will ultimately drive the new long term policy the industry is seeking. The US wind sector created 35,000 new jobs last year. In an economy now battered by recession, politicians have taken notice. Nine states had a physical presence on the exhibition floor at this year's AWEA event, all looking, as Jennifer Granholm, the governor of Michigan, put it, "to put people back to work."
Michigan has identified 700 suppliers to the ailing auto industry that are in a position to retool for the wind sector. "We see this opportunity to diversify in manufacturing as a way to transform Michigan and the Midwest, to be able to go from a rust belt to a green belt," she said.
At the federal level, US Secretary of the Interior Ken Salazar told delegates that the Obama administration is looking to wind and other renewables to help remake the country's economy. "With millions of jobs at stake, this time, this year, 2009, is an opportunity that America cannot afford to miss. We must lead the world with a clean energy revolution." AWEA president Don Furman pointed out that the wind industry holds nearly all the answers. "No other industry can provide hundreds of thousands of jobs at this point in time," he said.
For plainspoken Pickens, it's a simple matter of getting it done. "We can do it if our leadership will deliver, because it is teed up for them to do. It's teed up for President Obama to knock it out of the park," he said. "I think we're ready to go. I think it's all going to happen."