IN DEPTH: US wind special

The US wind industry is back from the brink, emerging from its latest and most extreme boom-bust cycle claiming to be more competitive, efficient, positive and stronger than it has ever been.

As 2014 began, about 12.5GW in new generating capacity was under construction. Utilities are buying unprecedented amounts of wind energy as costs continue to decline. Wind now produces 4.1% of electricity in the world’s largest economy and is delivering impressive environmental benefits.

But while the wind sector continues to be over-reliant on the production tax credit (PTC), industry players are optimistic that it will be renewed and are seeing other signs that bode well for the sector’s long-term health.

Thirty-three states (plus the District of Columbia) have renewable portfolio standards (RPSs) in place, creating demand for 2-3GW of wind a year across the Northeast, Midwest and West by 2020. Recent efforts by wind opponents to rein in mandates in Kansas and Maine failed — a sign of continued strong public support for cleaner energy.

In California, the second-largest wind market after Texas, Governor Jerry Brown has come out in favour of raising the state’s 33% renewables mandate, which was set in 2011. “With the amount of renewable resources coming on line, and prices dropping, I think 40%, at reasonable cost, is well within our grasp,” he says, although he has not indicated when legislation to raise the RPS would be introduced.

Much of the 12.5GW pipeline is in Texas, where a booming economy has created a seemingly insatiable demand for wind energy that is cheaper than any other power source. Build-out is also strong in Iowa, Kansas, Maryland, Michigan, Nebraska and North Dakota.

Corporate America and the government are also doing their part. Big power users such as Facebook, Google, Ikea and Microsoft are building their own wind farms or purchasing wind power directly from developers, while retailing colossus Wal-Mart is buying utility-scale turbines to power stores, warehouses and factories.

The US military has been told to procure and produce 3GW of renewable energy, while the Department of the Interior has been directed to permit an additional 10GW of renewables on public lands by 2020. And with the Obama administration clamping down on emissions from older coal-burning plants, the Department of Energy estimates that 60GW of coal capacity will be closed by 2020 and replaced by cleaner alternatives.

The wind industry has also been helping itself.

The American Wind Energy Association (AWEA) estimates that the cost of wind power dropped 43% between 2008 and 2012.

Taller towers, larger rotor diameters, more reliable turbines and better siting technology have enabled most project owners to achieve better capacity factors. These are above 40% in most parts of the country and have exceeded 50% in excellent wind-resource regions. Companies such as GE, the leading turbine manufacturer, are trialling innovative new concepts to push the cost of energy even further down, closer to grid parity.

“All along the power curve you are getting more megawatts for any given amount of wind,” says Bruce Hamilton, a director in Navigant Consulting’s energy practice, pointing to improved controls and materials, and lower cut-in and higher cut-out speeds.

For most manufacturers, 2013 was a tough year, with installations falling 92% to 1.08GW due to the expiry of the PTC at the end of 2012.

About 30,000 full-time jobs were lost in the US wind sector, with seven major plants and seven smaller ones shuttered.

It is easy to see why. Of the 583 turbines installed in the US last year, 532 were made by GE and 37 by Siemens. Vestas, which has about 11.4GW of installed capacity in the country, only erected two 2MW turbines, with minor players Sany, EWT, PowerWind and Vergnet making up the remainder. The likes of Gamesa, Nordex, Senvion (REpower), Suzlon and Mitsubishi were shut out.

Several prominent companies, including turbine maker Clipper, exited the market, while others sharply downsized. Gamesa shuttered its Pennsylvania blade plant in January; Nordex closed its $40m nacelle plant in Arkansas in the fourth quarter of 2013, only three years after opening it. In 2012, both DMI Industries and Katana Summit quit the tower business, closing four plants and leaving hundreds of workers jobless.

At the end of 2013, the US supply chain contained nine nacelle-assembly facilities, 12 for utility-scale blades and 14 for towers. About 560 other factories make products for the wind industry across 43 states, with 60 dedicated to the sector.

“The US supply chain has shown great flexibility in both directions — going up and down,” says Hamilton. “Vestas is one example.”

Despite its lack of installations in 2013, Vestas decided to retain its four Colorado plants, and managed to win enough business from tower orders and overseas sales to keep them in operation, albeit with the loss of more than 500 jobs. However, Vestas expects to hire 850 temporary staff this year with a view to some becoming full-time employees in the future. In recent months, the Danish company has announced 1.73GW of firm orders in North America — mainly in the US, with about 960MW in Texas alone — with potential for 2.6GW more.

“We are going to be extremely busy making blades, nacelles and towers this year through at least 2015,” says Chris Brown, president of Vestas’ sales and service division in North America.

Analysts say that while the industry shakeout was harsh, it was necessary to adjust to a smaller market going forward. AWEA estimates that the US can now produce more than 12GW of turbines per year, much more than the expected 6-8GW in annual installations this decade.

Some of the industry survivors should emerge stronger with less competition, and some jobs have already returned as the sector rebounds. But analysts say the employment outlook is tenuous given that the supply chain is still too large for what the market can support this decade, even if the PTC were in place. If the credit disappears, many more layoffs are certain.

The boom-bust nature of the industry is largely due to the $23-per-MWh PTC and the way it has been regarded by the increasingly lethargic, partisan and unpredictable Congress.

Short-term extensions have been favoured by Congress, but in an industry where projects typically take years from inception to fruition, this is an extremely inefficient and damaging way to develop the sector.

Even worse, the PTC renewals have often occurred near or soon after expirations, with lawmakers providing little clarity beforehand as to their intentions.

“Wind has been and continues to be a policy-driven business,” says Rob Freeman, chief executive of Kansas-based developer TradeWind Energy. “The political dysfunction as it relates to the industry is a significant risk, there is no question.”

Months of dithering before the PTC expired in 2012 led to developers rushing projects forward to commission them before the year’s end — a key qualification requirement. The result was a single-year installation record of 13.13GW, almost double the 6.82GW installed in 2011. But developers then halted work on their pipelines, waiting for the policy environment to improve.

The one-year PTC extension that was passed in January 2013 had one crucial difference to previous renewals. Rather than insisting on commissioning beginning by the expiry date, developers were only required to incur 5% of their projects’ costs by year-end to qualify, allowing wind farms to be built in 2014 and 2015. “Nobody at this point is going to stop construction,” says Hamilton. “We have 12.5GW over the next two years, pretty evenly split between them.”

Keeping the PTC in play is becoming more difficult with each passing year amid growing fatigue in Congress over how long it has been around and the perceived cost to taxpayers. Wind also faces an intensified assault from well-financed opponents, some tied to fossil-fuel interests.

“It’s reasonable to say that the days are limited when you can rely on PTC extensions,” says Hamilton.

But the industry is determined to defend the PTC, hoping to squeeze one last renewal from the outgoing Congress after the national elections on 4 November, possibly with a smaller payout.

The proposed two-year extension would allow wind projects to qualify until 31 December 2015, allowing them to come on line in 2016 through early 2018. There is also the option to make the extension retroactive to 31 December 2013.

If the current Congress does not act, the task may become much harder if the increasingly conservative and combative Republicans gain control of the Senate. Even though most wind farms and factories are in districts held by Republicans, that doesn’t always ensure their support. In Kansas, a leading wind state, two of the four Republican US representatives are leading the charge to repeal the PTC.

If the PTC is not extended and all other policies remain unchanged, annual wind installations would range from 3-5GW a year from 2015-20, according to the National Renewable Energy Laboratory.

However, hopes were raised in early April when the Senate finance committee added the PTC to a bill containing extensions to dozens of expired special-interest tax breaks. The so-called “tax extenders” bill is now on the Senate floor for consideration.

Experts urge caution. “It’s an awfully long road from the Senate finance committee to the bill actually becoming law,” says David Burton, a partner in the tax practice at law firm Akin Gump Strauss Hauer and Feld. “[It is] the first round of a pretty long process.”