Despite recent growth, the US wind industry now fears a sharp slowdown. As the Wall Street Journal reports, domestic demand for wind turbines is falling. With the production tax credit (PTC) set to expire at the end of this year, manufacturers are not receiving many new orders. The CEO of Vestas, the world’s largest producer of wind turbines, forecasts that the US market will decline by 80 percent over the next year. Although the PTC originated during the George H.W Bush administration and originally reflected bipartisan consensus, clean energy policy has become increasingly politicized. A congressional agreement to extend the credit is unlikely during a contentious election year. Even if policymakers renew the tax credit after the election, the market will remain uncertain and investments in the wind energy sector in 2013 are bound to be much lower than the record levels we have seen in the recent past. Unlike previous instances in which the PTC was temporarily withdrawn, the US now has a manufacturing base for wind turbines which will be negatively impacted by a decline in demand, placing several thousand jobs at risk.
The uncertain future of the PTC is characteristic of a US renewable energy (RE) policy that lacks long-term predictability. No national target for RE development exists, and most programs have traditionally only been extended in one- and two-year intervals. Unless Congress can agree to extend some of the expiring initiatives, the only federal clean energy policies left after 2014 will be a 30 percent investment tax credit (ITC) for the solar industry, several underfunded RD&D programs, and a few initiatives for energy efficiency and conservation. Some of the core RE policies passed as part of the 2009 American Recovery and Reinvestment Act expired last year and were not renewed. Examples include the Department of Energy (DOE)’s Section 1705 loan guarantee program, famous for its loans to Solyndra, and Section 1603 treasury grants allowing RE projects to receive an up-front cash grant in lieu of tax credits.
Even with this uncertainty, the RE sector in the US has grown. Without a national target, the main driver of RE deployment in the US has been a combination of these federal financial incentives and a number of state initiatives. For example, 29 US states and the District of Columbia currently employ a mandatory renewable energy portfolio standard (RPS). A total of 8 states have RE goals and 18 offer additional financial incentives such as feed-in tariffs or tradable RE credit schemes. The combined impact of these policies has been rather successful. Renewable energy in the United States is maturing, evolving from a niche market to an increasingly competitive alternative to fossil fuel-based generation. For US sites with the best natural conditions, wind power can already produce power as economically as coal, gas and nuclear generators. Solar photovoltaic (PV) has experienced an unprecedented boom over the past few years and Crystalline silicon PV modules now cost as little as USD 1/watt. The share of total US electricity generation from non-hydropower RE increased from 3.7 percent in 2009 to 4.7 percent in 2011. Last year, nine states generated more than 10 percent of their electricity with non-hydro RE, up from only two states a decade ago.
This dynamic can continue to succeed, but only if the right policy framework is in place. RE technologies are still far from their full potential – and further substantial cost reductions can be expected. However, various RE technologies require different levels and forms of support to further them on their pathway to competitiveness. The federal policy environment remains a key variable in this. Several effective policy tools are available.
Production tax credits (PTC) play a key role in securing the profitability of RE projects. Qualifying projects receive about 2 cents per kilowatt hour (kWh) in tax credit, usually for the first ten years of operation. With these credits, wind energy becomes a competitive alternative to fossil fuels in most regions of the US. The PTC effectively complements state RPS that require a certain percentage of a utility’s power plant capacity or generation to come from renewable or alternative energy sources by a given date. The effectiveness and efficiency of specific RPS policies depend greatly on design features such as the ambitiousness of the standard and the inclusion of financial incentives through a tradable credit scheme. However, international experience has demonstrated the inability of RPS to offer as much investment certainty as feed-in tariffs. Their incentive structures alone therefore seem insufficient. Production tax credits remedy this problem – at least to some degree – by indirectly ensuring investors a steady income equal to at least the amount of the tax credit as long as the installation generates electricity.
Grants play an important role when the ability of developers to monetize tax credits through equity financing is lacking. Currently, corporations with large tax obligations provide funds to projects and then use the credits to offset their own tax burdens. This way, projects can monetize benefits upfront. However, because demand exceeds supply, availability of equity finance remains a constraint. The aim must be to attract new tax equity providers such as pension funds. For this to happen, the perceived risk of renewable energy investments has to be lower. The easiest way for the government to achieve this is by offering a clear vision and a long-term policy framework for renewable energy.
Despite the harsh criticism it has received, the DOE Loan Guarantee Program has been another important component of the RE policy mix. The program provides leverage and low-cost debt to innovative projects that would not otherwise receive funding. Typically, such projects are either at an early stage of development or use new technologies that are not yet commercially proven – both reasons why banks might be hesitant to provide loans. Without the availability of guaranteed government loans, many innovative energy ventures would fail to attain commercialization and would end in the so-called valley of death.
Many of these technologies promise to bring great societal value; some might prove transformative. Ideally, the much-publicized examples of Solyndra and Beacon would not have received any public support. To avoid such mistakes in the future, the review process of loan recipients must be improved. It is important to note, however, that some defaults are inevitable at the innovation stage. Any bank assumes a certain default rate on their loans; the aim is to keep them as low as possible. Despite the defaults of companies like Solyndra and Beacon, the overall financial performance of the loan program has been much better than public perception would indicate. While the government budgeted $2.47 billion to cover potential project defaults, actual defaults have been much lower. Solyndra and Beacon received loans worth $535 and $43 million respectively. Even in the unlikely event that no portion of these funds can be recouped, more than 75 percent of the money put aside for losses would remain in the Treasury.
The potential for renewable energy in the US is vast. The National Renewable Energy Laboratory (NREL) very recently confirmed that renewable energy sources could conceivably cover 80 percent of US electricity demand by 2050. Great natural resource availability coupled with falling costs make RE an increasingly attractive option in many locations. However, investors need greater government commitment and a better long-term vision on the future role of RE in the US. They seek a degree of consistency and market certainty that the current policy framework lacks. An extension of the current policy mix is a minimum requirement to attract further investment. A federal RE target combined with a carbon tax would be an even better option.