Posted by Big Gav in wind power
Jerome a Paris at The Oil Drum has a post noting the likely impact of the late renewal of tax credits on the US wind power industry this year - Wind power set to decline under Obama?.
As the above graph shows, the lack of consistency in the regulatory framework in the US has already killed the industry 3 times over the past decade: the PTC (production tax credit), the main federal scheme to support wind, has been mishandled to a criminal extent - by being renewed much too late each time it was due to lapse.
This happened once again this year, with the PTC for projects built in 2009 becoming law only in November (as part of the Paulson TARP). Given that you need a number of months to build a windfarm, all projects that could not be completed before the end of 2008 - ie basically all projects for which construction could not start before last summer, were stopped until investors were sure that the PTC would be in place at the time of completion (because the PTC drives the level of revenues for the first 10 years of production of a windfarm). Construction decisions taken after the November resinstatement will only lead to projects being put in line much later in 2009.
But, in addition to this instability, the credit crisis is creating additional difficulties, in two ways.
* The first one is that the PTC was turned into money to build the wind farm thanks to investors willing to provide future tax payments from which the PTC could be deducted; the most active investors in that market were the big invesmtent banks like Lehman or Morgan Stanley, who have either disappeared or have seen their profits (and thus their ability to cash in PTCs) disappear. This has been solved to some extent by allowing utilities to get the PTCs, something they were prevented to do until now, but it requires tweaking to investment structures that had been put in place.
* The second issue is, of course, that the credit crisis has made lending a lot scarcer. Wind, where most of the costs are upfront, in the initial construction investment, relies to a large extent on debt financing to make it possible to spread that investment cost over very long term power production volumes. Such debt is a lot harder to find, and when available, is more expensive than it used to be. There is no easy solution to that, although the proposal in the current stimulus plan to authorise projects to convert the PTC into an "ITC" (ie a direct investment subsidy paid upfront) will be a major help.
So the situation now is that we have an industrial activity which provides a lot of good things, but is handicapped in the short term by the consequences of past bad government and the credit crunch. 2009 will be a mediocre year, that much is pretty much certain by now, given that minimal lag time for projects, but it would be rather incomprehensible if 2010 did not show a massive turnaround.
This does not require massive subsidies, but a few small things:
* an acknowledgement that wind is a large-scale solution (not a silver bullet, not the only solution, but a good part of the solution to a number of problems) that needs to be taken seriously and not just as a bone given to green groups to appease them;
* in turn, all that wind needs is a stable regulatory framework. The PTC works, but it needs to remain in place for more than a year or two at a time. State RPS (renewable portfolio standards, ie obligations for utilities to produce a given % of their power from renewables within agreed timeframes) work, but they create a patchwork of different rules across the country. There is a need to provide a simple, consistent and permanent set of federal rules. Personally, I think that a feed-in tariff (ie a fixed price guaranteed to reneable energy producers) would be best: it works, as demonstrated in Europe, and it actually reduces electricity costs for consumers when wind penetration gets high enough (in the 5-10% range);
* the main flank of federal action will be a long term plan to reinforce the power grid in a coherent and systematic way, in order for wind to be better absorbed into the system: this fits perfectly well with Obama's discourse to invest in infrastructure. But it needs to be done on a scale that makes sense - not just a few billion sprinkled here or there.