Can the American Wind Energy Industry Survive Without the PTC?

Quick Summary

• The wind production tax credit (PTC) is likely to expire at year’s end, although a revision to the law will keep the pipeline of wind projects moving in 2014.
• Industry analysts project 6,000-10,000 MW of new wind capacity in 2014 as projects begun in 2013 are completed.
• Without the PTC, the American wind market will contract but not collapse, falling to roughly 3,000-7,000 MW per year from a peak of about 13,000 MW in 2012.
• If the PTC expires, the U.S. wind power market will be concentrated in the Interior region (Texas and the Great Plains states), where recent PPA prices indicate wind power is broadly competitive without the tax credit.

Debate over PTC renewal heats up as expiration looms yet again

It’s December, and that means it’s time for yet another debate over the impending expiration of the federal renewable energy production tax credit (PTC) that has supported the growth of the American wind energy industry since 1992. 

Twenty-five Democratic Senators and six of their House colleagues issued a pair of letters Monday pressing Congress to renew the clean energy tax incentives before they expire at the end of the year.

“If a broader tax code overhaul cannot be achieved by year’s end, it is imperative that these key clean energy tax incentives are renewed as soon as possible,” Senator Ed Markey (D-Mass.) said in a statement.

The letter called out the PTC alongside nine other clean energy tax credits set to expire at year’s end. 

“These tax credits have helped scale up production and drive down the cost of clean energy technologies,” write Senator Markey and his colleagues. “They remain critical to addressing the market failures that prevent cost-effective, market-ready technologies from being deployed to their full potential.” 

Senators Joe Manchin (D-W.Va.), Lamar Alexander (R-Tenn.) and eight other Senate Republicans fired back with a letter of their own Tuesday, urging Finance Chairman Max Baucus (D-Mont.) to let the PTC die.

“Now it is time to let this technology stand on its own,” the senators wrote.

Congress is working furiously to finalize a bipartisan budget deal announced last week. The deal excluded any extension of the PTC or other clean energy tax credits.

“Using the wind production tax credit to pay for all or part of the budget agreement would do this country more good than extending this subsidy for expensive, low-quality wind electricity ever could,” said Senator Alexander in a statement. 

With work on the budget deal likely to consume nearly all of Congress’ attention in the dwindling days before the holiday recess, the odds that the PTC will lapse at year’s end are steadily rising.

Can the industry survive without the key tax credit? Let’s take a closer look…

Revision to PTC will keep industry moving in 2014

The PTC lapsed briefly at the end of 2012, causing the industry to come crashing to a halt. Just 70.6 megawatts (MW) were installed through the first three quarters of 2013, a 96 percent decline from the record-setting year in 2012.

This time, however, an expiration of the PTC wouldn’t have such devastating effects, thanks to an important revision Congress wrote into the law when it extended the tax credit in January.

While in previous years, wind farms had to be completed and placed in service before the end of the year to claim that year’s credit, the revised law states that any projects that begin construction before the end of the year remain eligible for the PTC.

As a result, thousands of megawatts of projects are getting underway before year’s end, as I reported in my last column (see “Wind Energy Projects Rush to Start Construction in Advance of Expiring Tax Credit (Again)”).

“Unlike previous years, there’s not a cliff coming,” Mark Albenze, CEO of Wind Americas at Siemens Energy said in an interview with TheEnergyCollective.com. “There’s a race to the start line as opposed to the finish line this time around.”

Albenze should know. Siemens just secured the largest-ever single order for onshore wind turbines in the world.

Siemens will produce 448 turbines destined for five projects in Iowa being developed by MidAmerican Energy Company. 

Construction began in November at all five sites, ensuring they will all be eligible for the PTC even if it expires at the end of the month.

According to MidAmerican, the projects will all be completed by the end of 2015, bringing online a total capacity of 1,050 MW.

Despite another impending expiration, the revision to the PTC is thus keeping the pipeline of wind energy projects alive into 2014 for both project developers and wind turbine manufacturers.

“This order and a number of others gives us a significant base volume over the next couple of years,” said Albenze. “Even if the PTC expires, we feel we have a solid base for the next 18 to 20 months.”

The MidAmerican order alone will keep Siemens’s U.S. manufacturing operations, including a blade factory in Fort Madison, Iowa and a nacelle and hub assembly facility in Hutchinson, Kansas, humming along with full shifts for at least 10 months, Albenze estimates. 

Industry-wide, analysts project between 6,000 and 10,000 MW of wind capacity additions will come online in 2014, as developers commission projects that began construction in 2013. 

Source: Wiser & Bolinger (2013). 2012 Wind Technologies Market Report. US Department of Energy.

As of October, U.S. utilities had signed power purchase agreements (PPA) totaling more than 5,670 MW and received approval to build about 1,870 MW of utility-owned wind generation, lending credence to those estimates. 

While estimated capacity additions in 2014 will fall well below the record 13,131 MW of wind projects commissioned in 2012, the project pipeline remains fairly strong heading into the new year despite the impending expiration of the PTC. 

Projections for 2015 and beyond are far more uncertain.

Without PTC, U.S. wind industry will contract but not collapse

The PTC could still be extended some time in 2014, particularly if Congress takes up a more comprehensive tax reform discussion in the new year.

However, what form that extension will take is unclear and renewal is far from assured. Some members of Congress have called for the wind tax credit to be extended for several years, but phased out progressively over that time, while Senator Alexander and others are saying it is time for the industry to “stand on it’s own.”

So let’s take a look at a possible world without the PTC. What will the U.S. wind energy industry look like if the PTC expires for good at the end of 2013?

“Without the tax credit, we’d see a stable market of about 3,000 MW in the U.S.,” Albenze of Siemens estimated in our interview. “Those projects would mainly be concentrated in the interior of the country,” Albenze added.

That market would constitute a sizable contraction from the peak of about 13,000 MW seen in 2012, Albenze pointed out.

Absent the PTC, industry analysts also see the U.S. wind energy market contracting to between 3,200 and 7,300 MW in 2015. 

In the longer-term, Bloomberg New Energy Finance projects that the U.S. wind market may be able to sustain approximately 6,200 MW per year of new wind capacity from 2017 on.

The fact that the American wind industry could survive at all without the PTC is testament to the cost reductions the industry has achieved in recent years.

“Wind turbine prices have dropped substantially in recent years, despite continued technological advancements that have yielded increases in hub heights and especially rotor diameters,” write Lawrence Berkeley National Laboratory’s Ryan Wiser and Mark Bolinger in DOE’s 2012 wind trends report.

Average wind turbine costs have declined 20 to 35 percent since late 2008, according to the DOE report.

Source: Wiser & Bolinger (2013). 2012 Wind Technologies Market Report. U.S. Department of Energy.

The levelized cost of electricity produced at U.S. wind farms has also declined, as manufacturers ship lower cost, higher-performing turbines.

After topping out at nearly $70 per megawatt-hour (MWh) in 2009, the average levelized price of wind PPAs signed in 2011 and 2012 fell to around $40 per MWh nationwide, according to Wiser and Bolinger. That rivals all-time lows seen from 2000 to 2005. Those prices include the value of the PTC and other tax incentives.

That national average figure hides important regional disparities in wind energy costs, however.

Source: Wiser & Bolinger (2013). 2012 Wind Technologies Market Report. US Department of Energy.

As the DOE figure above indicates, the Interior region, including the Great Plains states and Texas, consistently sees the lowest wind energy costs in the nation. PPAs signed in the Interior in 2011 and 2012 generally ranged from $20 to $40 per MWh, and anecdotal reports indicate costs continued to fall in this range in 2013.

If these cost trends hold, levelized wind energy costs in the U.S. Interior would likely fall in the $47 to $75 per MWh range without the PTC. While the PTC is worth $23 per MWh, its pre-tax value is much higher, with the precise amount depending on the marginal tax rate of the business claiming the credit (here I estimate a 15 to 35 percent corporate tax rate).

Those prices would make wind energy broadly competitive with the levelized cost of new natural gas-fired power plants and one of the cheapest new sources of energy available to utilities.

Source: Trembath and Jenkins (2012). “Gas Boom Poses Challenges for Renewables and Nuclear.” Breakthrough Institute.

With no fuel costs, wind power prices are also guaranteed for the life of the PPA (generally 20 years), giving wind a significant hedge value as part of a utility power generation portfolio.

While wind energy costs in the U.S. Interior states are increasingly competitive even without the PTC, wind project costs are much higher across the rest of the nation. Recent project costs inclusive of the PTC range from an average of $55 per MWh in the Great Lakes region to nearly $80 per MWh on average in the West Coast states, according to DOE data.

Absent the PTC, average wind energy costs would range from $82 to $115 per MWh in these regions.

Outside of the Interior states then, only compliance with state renewable portfolio standards would keep the wind industry moving without the federal tax credit.

In short, while the wind industry will survive without the PTC, it won’t necessarily thrive.

What do you think the future of the U.S. wind industry has in store? Should Congress renew, reform or terminate the PTC? Can the wind industry thrive without federal support? Join the discussion in the comments below.