Dead Air: End to Tax Credit Takes Big Bite Out of Wind Power

July 18, 2014 by  
Filed under Green Energy News

It’s in the doldrums.

If there was any question about whether and how the wind industry would be affected by the absence of a federal tax credit, the evidence is here.

Wind power is closely tied to a federal subsidy, an analysis by the Union of Concerned Scientists and the American Wind Energy Association shows.

While more than 12,000 megawatts’ worth of new wind power was installed in 2012, fewer than 2,000 new megawatts were just a year later. The reason: Investors rightly predicted the production tax credit would not be renewed by Congress before it expired after last year, according to data from the Union of Concerned Scientists and the American Wind Energy Association.

“What you’re seeing … is the uncertainty over this production tax credit. It’s night and day, an on-off switch,” says Dan Kammen, a professor of energy at the University of California–Berkeley. “In terms of the projects getting the go-ahead, it totally changes the financing needs, the revenue of the project.”

C. Arden Pope, an economist at Brigham Young University, agrees. “This is a stunner,” he says. “On the margin, it suggests that these production tax credits play a very, very big role in the viability of these turbines.”

[DATA MINE: 5 Graphs About Wind Energy]

The tax credit, originally enacted in 1992, in its most recent form gave turbine owners 2.3 cents for every kilowatt-hour of power their windmills produced and applied also to wind power construction. It sounds small, but the credit added up. It not only eased the intense upfront costs of constructing high-tech turbines, but also often made the difference when wind was compared to competitors in the solar, coal, and oil and gas sectors – all of which still receive tax breaks and other incentives. Oil, gas and coal, for example, received more than $21 billion in state and federal subsidies last year, according to a new report by Oil Change International, an environmental advocacy group.

“Utilities are looking for a good deal, and often they’re looking at a knife-edge situation between one resource and another,” says Rob Gramlich, senior vice president for public policy at the American Wind Energy Association. “So they very much do tend to buy power when one is effectively at a discount.”

That trend shows: Each time the credit has been extended, wind production has risen. Each time it’s been at risk of expiring, production has bottomed out.

Mike Bergey, president of Bergey WindPower: It’s extremely difficult. The projects may have stopped, but the overhead costs and salaries and business expenses continue.

“It’s a boom-bust cycle,” says Steve Lockard, president and CEO of Arizona-based TPI Composites, which builds blades for wind turbines.

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This time around, it was a coalition of Republicans and conservative Democrats, many backed by the fossil fuel industry, that killed the incentive. Arguing that wind’s precipitous rise and fall demonstrates the industry is wholly reliant on government handouts, they asserted that wind producers simply cannot turn a profit without help, and therefore are not worthy of further government support.

“It should go,” Sen. Joe Manchin, D-W.Va., himself a leading defender of coal subsidies, said of the credit last month at a policy dinner hosted by The Hill, a Capitol Hill newspaper. “Hell, your mother only carried you nine months.”

Sen. Jeff Flake, R-Ariz., who counts oil and gas among his top campaign donors, offered a similar argument.

“Wind power generation is no longer an infant industry. It’s no longer in need of federal support,” Flake said during debate in the Senate in May.

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Others inside and outside the industry, though, sharply disagree. The “roller coaster” illustrated by the American Wind Energy Association figures, Kammen says, isn’t a symptom of an industry that’s wholly reliant on federal tax credits. Instead, it’s an outgrowth of uncertainty about the wind market – in short, how much money new turbines will cost.

“The fact that credits have been reinstated in the past alters behavior,” Doug Koplow, founder of the group Earth Track, which researches what it calls “environmentally harmful subsidies,” tells U.S. News in an email. “Specifically, you may see a particularly sharp drop in new wind projects following expiration of an incentive … as investors wait to see if the old incentives are reinstated again.”

Turbines can be costly to build and install – as much as $4 million each – and they need to be built wherever the wind blows strongest, in places like the Midwest, the Great Plains, Texas and the Pacific Northwest. Construction often means not merely building the turbines themselves, but also the transmission lines, utility poles and transformers needed to bring the power to market. 

Natural gas plants, by comparison, can be built right alongside an existing pipeline, often with little regard to other factors. In fact, over the 20- to 25-year life span of a gas plant, experts say, much of the cost stems not from building the plant, but from buying the gas.

Most wind power in the U.S. is concentrated in Texas and California, as well as in the Midwest, Great Plains and Pacific Northwest.

“When you build a wind turbine, all of the cost is upfront,” Kammen argues. “So when the banks look at the price tag for a turbine, if that production tax credit isn’t available, it looks like a much bigger cost, even if there’s no cost down the road after construction.”

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Wind power proponents say they are optimistic the credit will be revived next year.

“The last few extensions have been in lame-duck extender cycles, where a number of tax policies are being extended all at the same time and it gets lumped in with other tax credits,” says Lockard, the CEO of TPI Composites.

In the meantime, turbine manufacturers and others in the industry face a steep challenge.

“It’s extremely difficult,” says Mike Bergey, president of Oklahoma-based Bergey WindPower. “The projects may have stopped, but the overhead costs and salaries and business expenses continue. Just keeping the doors open is a challenge. There’s a market demand, but the instability of the federal policy has really been hurtful.”

Lockard’s company – which makes turbines for a single large client at a manufacturing plant in Newton, Iowa – declined to say whether it’s had to lay off any of its 800 factory workers, citing confidentiality concerns. 

Yet, Lockard says, “To go from thousands of jobs to no
business, from plants [that] are full to no business – I’m talking about the U.S. manufacturing sector – when you have thousands of manufacturing employees,
that’s a very big challenge. You hire and train employees to hit the peaks, and
then suffer through what can be a lot of industry layoffs in the lows.

“I would say what we really need most is

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