United States

United States

Analysis: US market at cross roads

UNITED STATES: Turbine OEMs enjoyed a short-lived seller's market in the US at the end of last year as developers scrambled to take advantage of the most recent extension of the $0.023/kWh production tax credit (PTC) by placing conditional equipment orders for an estimated 6GW of new wind projects.

Will US mega-projects such as the Alta Wind Energy Centre become a thing of the past?
Will US mega-projects such as the Alta Wind Energy Centre become a thing of the past?

"It's not by any means a firm order backlog, but it is still more than we anticipated," said Luke Lewandowski, research manager at Make Consulting.

The US Congress passed a retroactive one-year extension of the PTC in December, allowing projects that were able to start construction before the end of 2014 to qualify for the credit. Coming as late in the year as it did, it really only left a two-week window for developers to move new projects forward. One way was to spend 5% of total project costs by making a down payment on turbines. They could also begin physical work on the project. Make estimates developers started about 3GW of new construction at the end of 2014 in order to make projects eligible for the PTC. But Lewandowski suspects many of those had already spent the 5%, so it likely only represents an additional 1GW of new project potential.

"Developers who safe-harboured equipment could have started construction as well, just to be safe. Everyone is cautious to make sure they comply," Lewandowski said.

Vestas, GE, Siemens and Gamesa seemed to have been the most successful at winning new orders at the end of 2014. "They were able to capitalise on existing relationships with the developers that have the financial wherewithal to get projects done quickly and effectively," Lewandowski added.

Commissioning deadline

How many of the estimated 7GW of new projects incentivised by the PTC extension will go to completion remains to be seen. Much will depend on what the Internal Revenue Service (IRS) has to say about commissioning deadlines. Before December's PTC extension, the tax agency said that projects need to come online by the end of 2015 in order to avoid scrutiny and risk not qualifying for the credit. After the extension, many in the industry thought that deadline would also be moved, to the end of 2016.

But the IRS has not yet confirmed this, and without the additional time to get projects built, the 7GW of potential could easily drop to as little as 1GW. The situation is causing significant uncertainty in the market. Tax-equity investors want to see some firm commitment from the IRS on a new commissioning deadline before they will consider funding projects that are not expected online until 2016.

Jack Cargas, managing director at Bank of America Merrill Lynch, agrees. "One of the things that ought to be, in our view, a natural corollary to the one-year PTC extension would be a one-year extension of the construction completion period," he said at a a recent webinar examining the US project financing outlook for 2015. "We get the impression that some participants are assuming that is the case, that the IRS guidance will be forthcoming. But we would like to see it very clearly before we get comfortable."

It seems highly likely that the tax agency will change the deadline, said David Burton, a partner at law firm Akin Gump. "However, the IRS appears to be having a surprisingly difficult time reaching an institutional view on that issue and publishing guidance," he notes.

The wind industry is pushing hard in discussions with lawyers at the IRS, Burton said. "Some participants have reached out to their senators and members of Congress, many of whom are empathetic."

Another factor that will determine how many new projects go ahead will be the availability of power purchase agreements. Many utilities are holding off on procuring additional renewable energy until after the Environmental Protection Agency submits the final version of its plan to cut emissions from existing power plants in the third quarter.

If all the pieces come together, however, Make expects the US market to average more than 6GW of new installations a year in 2015 and 2016. "But if the PTC doesn't extend into 2017, or there isn't some kind of successor policy, everything could come to a halt after 2016." Lewandowski said.

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