The production tax credit for renewable power has sent the American wind market into overdrive. Although positive news it does have wider ramifications, with equipment supplies struggling to keep up with demand and other countries held back from developing wind as fast as they would like.
In October, the American Wind Energy Association (AWEA) announced that the United States was on track to install a record 2750 MW of wind capacity in 2006.
This quarter brought total installed wind energy capacity in the country to 10,492 MW, and next year the rate of installation is unlikely to slow down. In fact, AWEA currently estimates that in 2007 new installations will exceed those of 2006 and range from 3000 MW to 3500 MW.
Wind represented around 20 per cent of the new generating capacity built in the USA in 2006. In comparison, the United States Energy Information Administration estimates that slightly less than 10,000 MW of new natural gas plants will be brought online in 2006, and that less than 400 MW of new coal fired and oil fired generating plants will be added. This is the second year that natural gas and wind have led capacity additions.
This boom in wind energy is reflected in the United States’ placing in a regular “Renewable Energy Country Attractiveness Index”, produced each quarter by Ernst & Young. October’s report saw the USA take the number one spot for the first time in the “all renewables” index, reflecting the company said “unprecedented awareness and support for climate-friendly policies in the USA”. The index rated America as the most attractive destination for wind power financing in its short term index, maintaining its position, but also for the first time it overtook Spain to take the number one position in the long term wind index. The latter indicating that developers believe that there will continue to be a favourable market for wind in the USA, even after existing subsidy regimes are due to expire.
Subsidies help growth
The USA is extremely attractive to wind developers because of its favourable subsidy regime. The so-called production tax credit (PTC) generates an index-linked subsidy of 1.6 cents for every kWh produced by a wind farm, and the AWEA says it is a “critical factor in financing new wind farms”. The tax credit remains in place for ten years for each wind farm.
The PTC has been the country’s favoured method of subsidising wind generation for a couple of decades, but it has not always been available. It has been agreed for periods of two or three years and then allowed to lapse, sometimes for several years, requiring the wind energy industry to lobby furiously for a new PTC period. The result has been that the United States’ industry has followed a “boom and bust” pattern: a fast expansion of new projects while the PTC is available has been effectively constrained by turbine manufacturers, who have no guarantee that the PTC will be renewed at the end of the existing term and are wary about investing in new manufacturing capacity that could lie idle in future.
There are signs, however, that this “boom and bust” may be over. The wide-ranging energy bill of July 2005 included an extension to the PTC that pre-dated expiration of the existing subsidy. The existing PTC was scheduled to expire on 31 December 2005, but the new bill extended that to 31 December 2007 – not an open ended extension, but one that suggested the job of renewing the subsidy in future could be somewhat easier. What was more, the extension left in place the PTC’s current 1.9 cent per kilowatt-hour value, the annual inflation adjustment provision, and the 10-year term to generate credits following the installation of a wind turbine. Nor did it introduce restrictions on the availability of the PTC or place limits on offshore wind projects, as some anti-wind lawmakers had proposed.
“This is the first time that an extension of the production tax credit for wind energy has been approved before the credit expires, and, following the past six years of boom-and-bust cycles caused by successive expirations, that is very good news for the industry,” said AWEA executive director Randall Swisher. “Thanks to Congress extending the wind energy production credit before it expired for the first time in the credit’s history, the wind industry is looking forward to several record-breaking years in a row.”
Ernst & Young’s assessment was similar. It noted, “investors continue to take a positive outlook for the future of the PTC and are investing in the long-term with the assumption that the PTC will continue. For example, Airtricity announced that it has signed a deal to purchase 500 MW of turbines from GE. The turbines will be used in four projects one of which is not due to come on-line until after the PTC expires.”
Along with the PTC, Ernst & Young also identified significant long-term shifts that would see more renewables of all types installed in the USA, driven by so-called renewable portfolio standards (RPS). Set by individual states RPS require electricity providers to source a proportion of their power from renewable sources. They are in place in many states, but Ernst & Young noted that a new tough RPS in the country’s most populous state, California, which requires carbon dioxide emissions to be cut by 25 per cent, “provides a long term incentive to investors and shows a deep level of commitment from one of the largest economies of the world”. Other states are expected to follow where California has led.
While high-level action is driving the industry’s development, detailed work is going on to accommodate the swathes of new wind capacity on the United States’ grid system. The wind industry has had some notable successes over the last couple of years in convincing grid managers that large-scale wind can be incorporated into the system without causing management or capacity problems.
In December last year, the Federal Energy Regulatory Commission (FERC) issued an order on connecting wind farms to the grid. The order put in place interconnection standards proposed by the AWEA and negotiated by AWEA with the North American Electric Reliability Council (NERC).
The order set clear standards for wind turbines to keep producing and supporting the grid during voltage disturbances elsewhere on the system. The order provides:
- Low voltage ride-through (LVRT) requirements that take into account the needs at different locations on the grid, and the minimal ability for regional variations. LVRT is the ability for a plant to remain on line during a local momentary fault.
- A case-by-case determination of power factor (reactive power) requirements. The costs of adding more of this capability would be imposed on wind developers only when system impact studies show them to be necessary.
- A transition period so that wind turbines need not be re-engineered to comply with new requirements.
More recently, AWEA policy director Rob Gramlich said “Anyone who supports renewable energy should stand up and applaud” proposals by FERC in August 2006 to make it easier for new generation, including wind, to connect to the grid. FERC said that the so-called Open Access Transmission Tariff (OATT) reform marks the first major reform of the legislation that was enacted ten years ago.
The AWEA explained that variable-output, renewable energy sources like wind fit far better into the system in areas of the country where wholesale, pool-type Regional Transmission Organization (RTO) markets exist, where it says “non-discriminatory access are already adopted”. But the association goes on to say that in much of the wind-rich West, however, wind power has great difficulty accessing transmission services. The lack of specificity in the original OATT creates opportunities for discrimination and makes discrimination more difficult to detect when it does occur, FREC said. Now it proposes:
- To make calculations of available transfer capability (ATC) more consistent and transparent.
- To require transmission providers to participate in an open and transparent regional transmission planning. Vertically integrated utilities lack the incentive to relieve transmission constraints in a non-discriminatory manner, and existing planning processes lack transparence. This contributes to potential undue discrimination and creates barriers to infrastructure development.
- To reform transmission pricing policies related to imbalances, credits for customer-owned transmission facilities and capacity reassignment.
- To revise the rules under which a transmission provider must provide rollover rights, and proposes to require the provision of hourly firm point-to-point service.
- To increase transparency by requiring transmission providers to publicise all business rules, practices and standards.
The reform also reaffirms the comparability requirement, in which third-party users of the transmission system must be dealt with in a manner comparable to the transmission owner’s use of the system.
If adopted, FERC’s proposals would improve grid access for many new generating projects, not just wind. But for wind it greatly reduces grid owners’ ability to discriminate because of the variable nature of the resource. Coupled with portfolio standards and the extension of the PTC, it places the USA at the top of the list for wind investment.
The effect of the United States’ huge investment in wind is being felt around the global industry as suppliers worldwide are pulled in to supply the boom. In 2005 GE Energy turbines accounted for nearly 60 per cent of the new capacity. Vestas turbines accounted for nearly 30 per cent. Mitsubishi was the third largest wind turbine supplier to the USA market, supplying about eight per cent of the new capacity. Suzlon and Gamesa round out the top five.
What that means for other countries is that projects can be delayed for months of years due to a simple lack of capacity at fabrication facilities, along with higher costs as the USA’s requirements for steel, cabling and other components drive up the price of raw materials. The tight turbine supply market has certainly given the UK pause for thought: reform of its main subsidy mechanism is under way, but recently the government has been quick to say that it has taken on board changes in the market, and there is no longer a strong case for reducing wind subsidies.
USA, king of wind
The USA looks set to stay as most favoured nation for wind power investors at least for the existing PTC period. Its long-term prospects are also favourable when compared against fairly consistent markets such as those of Europe, where developers have a good idea of what to expect from policymakers. The big unknown is the effect of emerging markets on the industry, with any big investments in wind in Asia, and especially in China, easily upsetting investors’ calculations.