On Oct. 4, 2004, the members of the wind energy industry breathed a collective sigh of relief that could have fueled an entire farm of turbines for a day. After more than nine months of waiting, they got their wish when President Bush signed a 15-month extension of the energy production tax credit (PTC). The PTC expired for the third time in five years on Dec. 31, 2003, and as in previous years its absence had virtually shut down wind farm construction for the first three quarters of 2004. Its renewal, however, assured contractors, design firms, manufacturers, and industry activists that a turnaround would follow this year.
Arguably the single-most important factor promoting the growth of the wind energy market, the PTC provides a 1.8-cent/kWh credit for developers and owners of large-capacity wind farms. However, there's a catch: construction must be completed before the PTC expires for a project to be eligible.
Although significant technological advances throughout the last decade have brought down the capital costs of wind energy, it has trouble competing with fossil fuels, making the tax incentive a must-have to get most large projects off the ground. And the wind energy market's movements over the last five years bear out that fact. When the PTC lapsed in 2000, 2002, and 2004, 43MW, 410MW, and 480MW of capacity were installed, respectively (Table). Installed capacity reached about 1,700MW in 2001 and 2003 when it was in effect, and predictions for 2005 range anywhere from 1,400MW to 2,500MW.
The statistics show the PTC's intermittency is almost single-handedly responsible for that boom-bust cycle, and many believe wind would account for a much larger portion of the nation's energy supply had a consistent policy been in place. By the end of 2004, U.S. wind capacity had reached almost 6,800MW — about 1% of the nation's total. Given the flurry of activity that has followed previous extensions and the fact that the credit will expire again at the end of 2005, the wind market is poised for a busy year, but experts worry that the market will struggle to gain a good footing without a stable PTC.
Room to grow. It's ironic that the fate of wind energy's future is decided in an area of the country that has neither the weather nor the land to support any measurable capacity, but it's no coincidence that the headquarters of the industry's loudest supporter are just a few blocks from Capitol Hill. From her office at the American Wind Energy Association (AWEA) in downtown Washington, D.C., Christine Real de Azua keeps a close eye on legislation that affects the wind industry, and she anxiously followed the PTC extension last year as it started and stalled in Congress before finally being passed as part of a larger package of tax incentives. Those first nine months were especially painful for her as she watched what she estimates could have been 2,000MW of capacity drift away. “People really thought that there was going to be a timely extension of the PTC, and everyone was geared up to make for a strong 2004,” she says. “But it didn't happen and the market suffered.”
That backlog of work has raised AWEA's expectations for 2005 considerably, though, and they expect it to be a record-breaking year with as much as 2,500MW installed. “There is a lot of interest in wind energy in the U.S. market because it's thirsty for new electricity,” Real de Azua says. “And not only that, utilities are beginning to see that it provides an insurance or hedge value against volatility in the cost of natural gas.”
GE Wind Energy, one of the country's largest manufacturers and installers of wind farms, is also looking forward to a big year, thanks in large part to the PTC. The company expects to ship and install 1,500MW of capacity. “You had all that pent-up demand from 2004 that spilled into 2005, and now everyone else wants to make sure their projects are completed before the PTC expires at the end of the year because there's no guarantee it will be renewed in a timely fashion,” says Pete Duprey, general manager of marketing for GE Energy. “So you kind of have a double effect driving this demand.”
And with less than 7,000MW installed, the market for wind energy is wide open in virtually all areas of the country. “The wind potential is vast because you have lots of windy areas that would welcome development,” Real de Azua says. “And many of those areas have gone largely untapped.”
Northwestern states like Montana and Idaho and Great Plains states like the Dakotas and Kansas have considerable wind resources but account for less than 5% of the United States' installed capacity, while California, which has only sporadic concentrations of wind potential, accounts for nearly one-third. In many cases, though, states with high wind resources lack sufficient transmission lines to carry all of the energy that could be created. “The windiest states are vastly underutilized,” Real de Azua says. “People are looking at building pipelines from Alaska and shipping natural gas from all parts of the world to the United States, but for some reason putting up some additional lines to become more dependent on our own Midwest isn't feasible.”
As a result, in the short term AWEA expects the industry to continue to make the most headway in areas where it has already established a presence, in places like California, Texas, and Minnesota. The fact that wind energy is still comparatively younger than coal- and gas-based generation, though, means that almost every state has at least some potential for growth. Christ Nomawicz, operations research analyst for the Department of Energy's Energy Information Administration, which predicts a much more conservative estimate of 1,400MW installed in 2005, says even the most unlikely areas have pockets that could be developed. “Wind energy can be built in places that don't have a lot of wind resources, like the Northeast and even the southeast Appalachian region,” he says. “But those areas will quickly run out of resources, and the majority of the country's capacity will come from the Northwest, Great Plains, and Rocky Mountain region.”
A windfall year. News of the PTC's extension gave Phillip O'Connor reason to be especially excited about 2005. The construction and commissioning of high-voltage substations and underground collection systems associated with wind farms is one of several contracting services his Syracuse, N.Y.-based Kay-R Electric provides, and after watching the PTC's expiration put several projects on hold in 2004, the vice president and part-owner predicts this division of his company will make a significant comeback this year to account for 25% to 35% of total sales. The company is already in the budgetary phase on six projects, and at least two — totaling about 65MW — should be completed this year.
In fact, depending on what happens with the PTC this December, the market looks bullish in New York for the next few years. To start, the state's wind levels will allow it to support a sizeable amount of capacity. Studies from the National Renewable Energy Laboratory have shown that New York has a greater wind resource potential than California, which has the United States' highest installed capacity of nearly 2,100MW. Only three wind farms with a total of 48MW have been installed in New York to date — Kay-R employees were involved in all of them — meaning there's plenty of work to go around.
The state government is also getting involved. The New York State Public Service Commission and New York State Energy Research and Development Agency are currently encouraging new development by providing grant money to developers. In addition, the state passed a renewable portfolio standard (RPS) last September that will require 24% of energy retailed in New York to come from renewable sources, including wind, by 2013. “This state should be a great spot in the future,” says Dave Maine, vice president of Kay-R's commercial wind projects division. “I'm not sure how quickly all of these incentives will kick in, but I hope it will be concurrently.”
RPSs operate at the state level and use a credit system to ensure minimum levels of renewable energy are included in the state's energy portfolio. They require electricity generators and retailers to prove, through ownership of credits, that they've supported an amount of renewable energy generation equivalent to a percentage of their total annual kilwatthour sales. Thirteen states have some form of RPS on the books, and percentages and deadlines vary from one state to the next (Map).
Some question the effectiveness of RPSs, however, and believe they work best as a supplement to the PTC. Namowicz says RPSs have a reputation for being lax and aren't capable of spurring major wind energy growth on their own. “There are basically a lot of outs for the utilities if they don't think they can meet the RPS targets,” he says. “But with the PTC in place, it becomes a lot easier to meet the RPS.”
Duprey agrees and has trouble drawing a distinct correlation between the implementation of an RPS and significant wind energy development. “It's an enhancer,” he says. “I don't think anybody is going to build a wind project just because a state adopted an RPS. I think it makes marginal projects more likely to attract investment, but it's not going to replace the PTC.”
Wind in doubt. Expectations for 2005 are high and there's every reason to believe it will be a productive year, but some in the industry are already looking ahead to 2006 and beyond. As evidenced in previous years, the PTC has the power to stimulate massive growth, but even when in effect, the uncertainty of its extension can cause developers to be skittish about investing in new projects down the road.
Once conceived, a typical central station wind farm installation can take several years to complete. The initial stages of a project — identifying a site, securing the land, and gathering wind-potential data — carry little risk, but once it comes time to secure permits and begin construction on infrastructure, the money invested begins to add up. “Once you get those permits, then you're putting some cash out there,” Duprey says. “That's when most developers say, ‘If I can't clearly see the PTC being in effect, I'm not going to spend any more money.’”
That phenomenon can also put a strain on the installers. With the short warm season in upstate New York, Kay-R has only a few months per year in which it can reasonably finish a project. From a technical standpoint, wind installations don't differ much from the typical industrial projects the company works on, but the tight schedules they often encounter can complicate things. “If we're not awarded a project until the middle of the summer, it's going to be difficult to finish by the start of the cold weather,” says Bruce Emerson, vice president and chief electrical engineer of Kay-R.
The fact that projects in New York continue to get larger will present new challenges as well. The largest project in the state is 30MW, but O'Connor expects the demand for sites in excess of 100MW to increase in the near future. “The magnitude of the projects is becoming larger and larger, but the construction season will stay the same,” O'Connor says. “So the larger the project, the higher the need for labor resources.”
Kay-R is diversified enough that a slow wind year won't hit the company too hard, but Real de Azua worries that may not be the case for all contractors and installers in the industry. She's concerned that smaller firms that focus more heavily on wind projects could have trouble establishing themselves or even surviving with the uncertainty of the PTC. “Some companies can cope with that aspect of the industry,” she says. “But for others, if the contract doesn't come in, that can translate into layoffs,”
AWEA claims the problems caused by the PTC's stop-start nature could be solved with a long-term extension. First passed in 1992, the PTC was only meant to last for seven years, but when it was clear it had helped wind energy gain traction in 1999, the industry pushed for an extension. Two years was the most Congress could ever justify, bringing about the on-again/off-again cycle. Real de Azua says at least a five- or 10-year extension is in order. “We've been trying to argue for that and make members of Congress understand the cost and difficulty these short-term extensions create,” she says. “If there were a longer term extension, you would minimize the cost of those cycles or take them away altogether.”
Duprey, who lives in Amsterdam, has seen firsthand the benefits of long-term tax incentives on wind energy. European countries like Germany, Spain, and Denmark all have stable incentive programs, and they lead the United States in either wind capacity or percentage of total capacity. “They have systems in place that really help create the build-out of wind,” he says. “They're just different in how they've approached it.”
Despite the uncertainty surrounding the future of the PTC, AWEA is confident wind can make substantial strides in the next two decades. So confident, in fact, that it predicts it will account for 6% of the nation's energy capacity — or 100,000MW — by 2020. Such a feat would require an 18% annual increase and several years in which more than 10,000MW would be added.
Nomawicz has run his own numbers and come up with a figure considerably smaller, but still impressive: 65,000MW, or 4%, by 2025. But that forecast comes with a qualifier: it includes a hypothetical extension of the PTC through 2012. Absent the PTC, the prediction drops to 11,000MW. “I don't want to say that we require an extension of the PTC because there are any number of different programs or policies that you could put in place to get you [to 6%],” he says. “But I think it's going to require something more than just a one- or two-year extension of the PTC.”
Discussions of long-term extensions and 20-year forecasts aside, O'Connor is focusing on 2005. Like the rest of the industry, he's happy to have the one-year reprieve and he's looking forward to the projects Kay-R has in the works, but he's not above making a few predictions of his own. “The industry in general will have a very good indication of what's going to happen by the end of the first quarter,” he says. “It won't be long before developers, manufacturers, and contractors will know what 2005 will bring.”