Tax credit falls victim to budget gridlock

The US wind market has taken a serious blow with news of the final death of this year's attempts to extend the federal Production Tax Credit (PTC). The set-back, which became clear in mid-October, means that the existing federal wind subsidy -- $0.017/kWh for the first ten years of a wind project's life -- will only be applicable to new wind projects completed by June 30, 1999. Although the credit may be reintroduced next year, with or without a gap in coverage for projects built in the intervening period, the uncertainty is sure to depress a huge potential market that had recently been showing healthy signs of life.

The current rush of wind installation in the US is all specifically planned so turbines are up and running by the June deadline. Totalling some 800 MW (Windpower Monthly, June 1996), this development is not likely to be affected. Nor is wind capacity that is mandated by state legislation. But aside from that, the US outlook has become decidedly murky. The American Wind Energy Association (AWEA), which had made a five-year PTC extension its top priority for 1998, says it will try to ensure the subsidy -- $0.015/kWh adjusted for inflation and in place since 1990 -- is reintroduced in legislation for the next fiscal year.

Last month AWEA's frustration was clear as the news spread through the industry. "Yes, we're disappointed," said the association's legislative man, Jaime Steve. Although it had been clear for a few weeks that wind would not get the hoped for five year extension, it was only in the last days of federal budget negotiations that a stop gap extension -- of just eight months -- died. It took AWEA several days after budget details had been hammered out to issue an official response to the bad news. It promised a renewed fight in 1999. AWEA attributes the failure, in part, to the broad US "budget gridlock" and the acrimony of election year politics, when many members of Congress face tough re-election battles. AWEA estimates the PTC would cost only $45 million over the next five years, while the US Congress says the cost would be more than three times as high, at $144 million.

Disappointment was palpable in the wind industry, with many unwilling to comment on the highly sensitive issue. Others were more forthcoming. "It's quite clear that it will slow down the implementation of projects," says Niels Rydder of M&N Wind Power in San Diego. Utilities, he adds, will have to come to terms with the new pricing of wind without the tax incentive. That may take a year or two.

Johannes Poulsen of Danish turbine maker Vestas A/S agrees. The PTC's expiration will put a "major damper on the US market," he says. At Central and Southwest Corp in Dallas, owner of CSW Services, Larry Jones adds: "It makes a tremendous difference in how you figure the price of the project and in how competitive renewables are with fossil fuels." CSW is one of the members of AWEA who have been active in trying to prolong the life of the PTC.

A vacuum

There is no other US policy that will make up for the loss. Only a handful of states have passed any sort of Renewables Portfolio Standard (RPS) setting a minimum standard for the amount of renewables in the state's electricity supply. It does not seem likely that a national RPS will be passed anytime soon, especially now that the PTC has become a tougher fight than apparently anticipated by AWEA.

The only market right now remaining in the US is the "green pricing" market, which will result in little more than small projects, according Poulsen. He doubts -- as do many others in the industry -- that green pricing demand will spark development of major wind farms. "Without the PTC or something similar we face a situation where we can generate electricity for the same price as from coal, but we cannot guarantee capacity," he says. "Within the next four to five years we believe we can reduce the price of wind to a point where it can compete with the variable costs."

But until then, he says, wind needs a helping hand from the policy-makers. The company will not consider setting up manufacturing facilities in the US until there is enough stability for what he describes as a "sensible market."

Price cap compromise

In an effort to make the fight for the PTC more winnable, next year's legislation will be attached to a bill giving a five-year tax credit to electricity generated from chicken shit, or poultry manure as it is known on Capitol Hill. It will also include a significant compromise on California repowering. The side deal, to allow utilities to cap the price they pay for electricity from repowered wind farms, is backed by the wind industry and the state's major utilities, Southern California Edison and Pacific Gas & Electric. It effectively wipes out the PTC.

"We will take less money in the short term in California so we can grow more outside California," concedes AWEA's Steve. The compromise had been quietly included in this year's PTC extension proposal since June, although AWEA was still being tight-lipped about its existence even after the set-back last month. Simply put, repowering in California that is not well under way could die a not-so slow death. Or projects such as the large-scale repowering of Kenetech's Altamont Pass wind farms, which have yet to be permitted, could end up being scaled back significantly so they are on-line in time to be eligible for the PTC.

The only mandated wind -- those projects least likely to be affected by the PTC's death -- is in the Upper Midwest. In Minnesota, Northern States Power must build 425 MW in total, as well as the next phase of its Buffalo Ridge development, some 103.5 MW by Enron Wind Power, it has another 130 MW still outstanding. About 50 MW is also mandated in neighbouring Wisconsin.

Other proposed projects face a decidedly uncertain future. These include two large Enron projects in Iowa, totalling about 188 MW. In addition, it is not clear what effect there will be on the approximately 300 MW of new wind projects in California chosen by the California Energy Commission six months ago for state incentives of an average of $0.012/kWh.