The short-term nature of the PTC has created a boom and bust cycle in the US wind power market. The market is reaching new heights, but that’s not necessarily good news.
This year is set to be a record breaking year for the US wind power market. Following a slow year in 2004, when just 400 MW of new capacity was added, there are now contracts in place for the construction of 2700 MW of new capacity – more than has ever been added before.
The sudden growth in the US wind market should be a positive sign for the wind power industry around the world in general, but it is resulting in pressures that could ultimately have a negative impact on the competitiveness and viability of wind power. In the US this year, wind project developers have pointed to a shortage of wind turbines in the market, while equipment vendors are having to cope with the sudden rise in demand, the high costs of steel and rising transport costs.
These pressures combined have led to a rise in the price of wind turbines, with major manufacturers such as GE and Vestas announcing price rises for 2006 that are thought to be in the 10-20 per cent range. The key concern is that such price rises will affect the viability of wind as a competitive energy source, and the development of the wind turbine market in general.
The vendors’ price rises mean that the cost of wind farm development will rise from approximately $1.1m/MW to $1.3-1.5m/MW, according to Godfrey Chua of Emerging Energy Research. When these additional costs are amortized over the life of a wind project, the resulting rise in the cost in energy is marginal, says Chua, but could still make all the difference to a project’s feasibility. Ultimately the industry wants the per-kWh costs to go down, not up, said Chua.
At the root of the problem in the USA is the Production Tax Credit (PTC), a fiscal mechanism designed to encourage the development of wind power. Enacted in 1992, the PTC currently provides a à‚¢1.9/kWh credit for electricity produced from a wind energy facility during the first ten years of its operation. For a facility to qualify, it must be completed and operational while the credit is in place.
Annual capacity additions in the US market. Source: AWEA
The PTC expired in December 2003. It was then renewed in October 2004 and will remain in place until the end of 2005. It is not certain whether it will once again be renewed for 2006. The impact of the short term, cyclical nature of the PTC is clear – when the PTC is in place, investment in wind power booms as developers rush to get projects on line; when it expires, the whole industry winds down and waits for the next extension. The PTC is important to wind farm developers, says Chua, accounting for 20-40 per cent of cashflow. “It is a significant part of project economics,” said Chua.
The boom and bust nature of the market has been a headache for the wind industry in the US. Developers, vendors and sub-suppliers alike are unable to plan ahead and are unwilling to invest in manufacturing capacity and other key growth areas. This means that times of sudden growth in the market – such as in 2005 – are hard to manage. “Suddenly winding up production levels is hard to manage,” said Robert Gates of GE Wind Energy. “We are putting in place more demand on our sub-suppliers in terms of quality and capacity to make parts, but the PTC means that there is a reluctance to invest and that brings supply chain limitations.”
Such logistical constraints – ranging from purchasing steel to transport of blades and employee management to manufacturing – result in cost increases which could be mitigated in a more long term, stable market.
One way for manufacturers to manage the sudden rise in demand from the US market is to use their European operations and manufacturing capacity. The addition of 2700 MW in the US represents 30 per cent of the global market for wind turbines in 2005, says Chua, so there is a risk that the pressures experienced in the US could have a wider impact.
Gates does not see this as an issue for GE, however. “GE is the only manufacturer that assembles wind turbines in the US,” says Gates. “Most wind turbines go to the USA in a PTC year and we’re working hard to take care of our customers globally. Some may be affected but the effect will not be dramatic.”
Both Gates and Chua also play down the level of turbine shortages in the market. “People talk about projects being ready to go but they cannot get the turbines, but in reality these projects are not quite ready for the turbines anyway,” notes Gates. “If there were an unlimited supply of turbines, then maybe 20 per cent more could be installed in 2005.”
Gates also points out that the industry is finally getting used to the uncertain nature of the PTC. “It’s becoming predictable – it’s extended late for a shorter period of time. The PTC has been around since 1992 and it always gets extended,” says Gates. It also has sufficient political support, notes Gates, so actually developers and other industry players are confident that it will be extended at the end of 2005.
This change in attitude is helping to smooth out the boom and bust nature of the market, says Gates. “Developers are beginning to order wind turbines now for 2006 to avoid shortages. GE is working with customers to smooth over the cycles. If we keep the supply chain working we can mitigate the ups and downs of the market and reduce costs.”