As the rest of the world prepares to toast the new year, the wind industry is hard at work on its own year-end tradition, rushing to make sure projects qualify for an important subsidy before it is set to vanish at the stroke of midnight Tuesday.
Developers are signing deals, ordering equipment and lurching ahead with construction starts to qualify for a tax credit that is worth 2.3 cents a kilowatt-hour for the first 10 years of production. This month, giant turbine-makers like Vestas and Siemens have announced major new orders, including a deal worth more than $1 billion with MidAmerican Energy, an Iowa-based utility majority-owned by Warren Buffett’s Berkshire Hathaway, and another with the Cape Wind project in Nantucket Sound.
In previous years, the projects had to be in commercial operation by New Year’s Eve. This year, they need only to have begun.
“What we see right now is a race to the finish line, where we’re trying to get projects signed,” said Mark Albenze, chief executive of the Wind Power Americas unit of Siemens Energy. “It’s a little bit of a different dynamic, whereas in ’12 our projects teams were the ones stressing out in December and now it’s our acquisition team.”
But, he added, getting those deals signed means plenty of work for the next 18 months or so, “so it’s not as dire of an expiration as it has been in the past.”
Although the wind industry has grown enormously since the tax credit began in the 1990s, it has followed a boom-and-bust cycle driven by the fate of the subsidy. Over the years, Congress has allowed it to expire several times before renewing it, according to the American Wind Energy Association, a trade group. With each expiration, new installations dropped sharply.
That happened in late 2012, when manufacturing and new project starts nearly came to a standstill, only to pick up again after Congress revived the credit, called the Production Tax Credit, in January for a year. The renewal was intended as a temporary fix to keep business going as lawmakers overhauled the tax code.
Under the current rules, a lapse in the credit will not have much immediate effect, since many projects are in the early stages of development.
However, executives said, developers are unlikely to start any projects without a credit in place, because they cannot compete with power generation from other sources like cheap natural gas. And with prospects for a redesign of the whole tax code looking dim at the moment, clean-energy advocates are calling for yet another extension of the subsidy.
Referring to the credit, Kevin Lynch, managing director of external affairs at Iberdrola Renewables, which develops and operates green energy projects, said: “In the near term, projects that do not have the PTC attached to them are probably difficult to justify economically for buyers to purchase, and therefore for us to build.”
He added that with the credit, “Wind has clearly become a very competitive generation source, and I do have to say we’re pretty confident that the president and the Congress will see their way to extending the credit.”
Still, how that process will go is anybody’s guess, especially given that President Barack Obama nominated one of the chief architects of the larger tax effort, Sen. Max Baucus, to become ambassador to China.
Sen. Ron Wyden, D-Ore., who is in line to succeed Baucus as chairman of the Senate Finance Committee, said tax reform was a priority.
“My first choice is comprehensive tax reform where in effect you start moving toward a more level playing field,” Wyden said. “But I’m not going to support just letting renewables just fall off a cliff.”
Under a recent agreement, among the largest in land-based wind power, MidAmerican will buy 448 turbines from Siemens. The turbines, which Siemens will maintain for the first 15 years of operations, are to be installed in five projects in Iowa.
The company has also agreed to make turbines for Cape Wind, which could become the country’s first offshore wind farm. More than a decade in the making, it has faced lawsuits and stiff opposition from Cape Cod residents who say the spinning machines will spoil pristine views and raise the price of electricity.
Other companies are benefiting from the new orders, too: Vestas said Tuesday that it would reach its second-highest peak in sales in the United States and Canada this year since it entered the market in 1981, with recently announced equipment orders for projects in Texas and Oklahoma.
Opponents of the credit campaigned against a renewal all fall. They include some fiscal watchdogs worried about the cost. But the bulk of the opponents are mostly generators of other forms of energy, who say that, by subsidizing wind, the government is adding supply to the market in a way that depresses prices for electricity, cutting the revenues of other generators and, in some cases, driving them out of business.
The subsidy “is grossly distorting the marketplace,” said Don Nickles, a Republican who represented Oklahoma in the Senate from 1981 to 2005 and is now a consultant on energy policy. The problem, he said, was that the credit was very large relative to the wholesale price of electricity. It is occasionally infinitely larger. During the late-night hours when overall electric demand is low and wind production is high, the value of a kilowatt-hour on the open market is sometimes zero or below. Wind generators collect the credit regardless.
Nickles, who was a senator when the first production tax credit was passed, said that it was meant to be an incubator for a fledgling industry. Now, he said, “This child is ready to go to college.”