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June 2013
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Wind Power and the Production Tax Credit By Austen Sherman
Uncertainty regarding the future of tax credits is causing some volatility for wind power providers and slowing the industry’s growth Energy tax credits are being hotly debated as the government seeks to curb spending
According to the US Energy Information Administration, wind energy accounted for 3.4% of total US energy demand in 2012, more than any other renewable. The Production Tax Credit (PTC) is driving the vast majority of wind power development. Depending on the form of energy, this credit provides 2.3 or 1.1 cents per kilowatt-hour of energy that operators and energy providers produce and sell; wind receives 2.3 cents. While the PTC is also applicable to biomass power, geothermal energy, landfill gas, solid waste energy and hydroelectric power, with differing compensation, its impact on the Wind Power industry has been most noticeable. The PTC credit has expired and been extended multiple times since its inception in 1992, resulting in some volatility within the industry. Fortunately for industry operators, the PTC was recently extended through December 31, 2013, as a part of the fiscal cliff deal in January. Although it is difficult to anticipate if the PTC will continue to be extended during the next five years, IBISWorld’s forecast is built on the assumption that the PTC will phase out over the next 6 years, which is discussed in more detail later in this report. As a result of the
uncertainty surrounding extending and implementing the PTC, IBISWorld forecasts industry revenue will increase at a slightly more moderate annual average of 8.6% during the next five years. IBISWorld also anticipates that the recent extension will result in significant opportunities for operators in the Wind Power industry during 2013. Nevertheless, growth is likely to slow from 2012 onward as the industry catches its breath after a record-setting year in which providers added the most megawatts of wind energy ever. The incentive extension should also benefit operators in the Wind Turbine Manufacturing and Wind Turbine Installation industries (IBISWorld reports 33361b and OD4491). Additional growth over the next five years will heavily depend on continued extension of the PTC. The PTC has become a hotly debated subject on Capitol Hill, as the federal government looks to cut spending to curb a rising national debt. However, proponents argue that its removal will stifle the industry; previously, wind installations fell between 73.0% and 93.0% after the PTC expired. Consequently, the American Wind Energy Association (AWEA) has looked to find common ground moving forward
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Wind Power and the Production Tax Credit
State of the industry The Wind Power industry has been blowing past other renewable forms of energy; revenue has grown at an average annual rate of 16.9% during the five years through 2013. Not only does wind power currently generate more energy than any other alternative form, but it is also the fastest growing. Wind power became the number-one source of all new electricity generating capacity for the first time in 2012, generating about 42.0% of all new capacity, including fossil fuels, and 76.4% of all renewable capacity. In 2012, the industry set new records, installing 13.2 gigawatts (GW) of new capacity and reaching more than 60.0 GW of total capacity. The industry is expected to benefit from the recent PTC extension and is anticipated to grow an additional 8.6% in 2013, following substantial growth in 2012. Operators within the industry have also benefited greatly, as a result of the PTC. The industry’s largest company, NextEra Energy Resources installed more than 1.5 GW of new capacity in 2012, the only company to break the gigawatt benchmark. As NextEra continues to expand its wind power capacity, the company’s wind energy revenue is expected to exceed $1.5 billion in 2013, after totaling less than $900.0 million in 2008. In addition, with the PTC in place for the majority of the past 20 years, operators have been able to maintain large profit margins; the average profit margin within the industry is 30.0%. With demand remaining high for wind turbines as a result of the PTC, wind power providers and wind turbine manufacturers have used profit to invest in new technologies and turbine designs to enhance efficiency. As a result, costs of inputs, such as iron ore, and shipment
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in order to reduce expenditure on the PTC and continue to provide support for the industry.
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have decreased 33.0% during the past three years alone. Without the PTC, wind energy providers would not be able to sell power at competitive prices because of the costs associated with new product investment. More turbines are being produced domestically, and the industry standard for size has grown from 80 to 100 meters, with longer blades that allow turbines to take advantage of stronger winds found at higher altitudes. In addition, the standard capacity for a turbine has risen to two megawatts and is progressing to three, as carbon fiber materials and new shaping techniques have improved blade efficiency. Furthermore, companies are changing the design of turbine gear boxes to require less maintenance over their 30-year lifetime. Such changes are partly financed thanks to the PTC. As a part of the most recent extension, Congress also altered the wording of the PTC to allow more renewable energy projects to be eligible. Prior to the extension, wind farms had to be “placed in service” and producing power prior to the expiration deadline to receive the PTC. However, following the extension, wind farms could benefit at the commencement of construction. Recently, the Internal Revenue Service
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Wind Power and the Production Tax Credit
The future of the PTC Many government officials believe it is time to remove the PTC once and for all; many argue that if the industry is not economically viable yet, then it will never be, especially given recent technological advancements. Currently, the PTC is once again set to expire on December 31, 2013. However, there have been multiple plans proposed for the incentive program. In December 2012, the AWEA suggested a 6-year phase-out of the tax incentive. The AWEA plan reduces the value of the PTC 10.0% each year beginning in 2014 until it reaches 60.0% of its original value in 2017. The PTC value would then remain at 60.0% in 2018 before being entirely removed in 2019. The AWEA argued that the plan allows the industry to gradually adjust to the reduced support and establish a base market. More recently, President Barack Obama submitted his fiscal year 2014 budget request to the US Congress. The proposed budget increases funding for clean energy initiatives and calls for a permanent production tax credit. While the industry appears to be establishing itself on land, which would allow for phasing out the PTC, wind power is just now making its way out to sea in the United States. Cape Wind, a project approved for development in Nantucket Sound off the coast of Massachusetts, recently secured $2.0 billion in funding and is hoping to begin construction in 2013. If the project gets underway, it would be the first of its kind for the United States. The expectation is
to have 130 turbines in place by 2015 to provide enough electricity to power between 100,000 and 200,000 homes in the Cape Code area, depending on the season. The development of offshore farms and turbines typically requires a much greater amount of capital than land-based projects and would likely benefit significantly from a more permanent PTC. Cautionary breeze IBISWorld estimates that the Wind Power industry has a low level of risk in 2013. IBISWorld assesses risk on a nine-point scale, with nine representing the highest risk; the Wind Power industry scores a 2.9. Increasing demand for power and falling input prices have helped keep the industry’s risk low. In addition, the industry will continue to benefit from a push by the United States to become energy independent. However, the industry’s future risk is directly related to the extension of the PTC. Without the extension, risk will likely reach medium-to-high levels because the price of wind energy production would rise. In turn, operators would be forced to charge more for wind power compared with other forms of energy generation to remain profitable. Consequently, revenue would decline as Electric Power Consumption 5 4 3
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(IRS) clarified “commence construction,” mandating that projects must be able to show “significant work of a physical nature” and that 5.0% of the total project costs had already been incurred. In addition, the IRS increased the 2013 credit to 2.3 cents, up from 2.2 cents; the last time the incentive was raised was in 2010.
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Wind Power and the Production Tax Credit
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consumers opt for more affordable alternatives. Nevertheless, the industry is not at risk during 2013 as a result of the recent PTC extension. Conclusion Despite some uncertainty, support for further development of wind power is broad. While not mandated, the US Department of Energy released a report that cites the possibility of wind power fulfilling 20.0% of total US energy demand by 2030. The PTC has managed to survive during the past 20 years, despite intense scrutiny along the way. If the PTC is removed, the industry will
likely stagnate or experience crawling growth as it continues to work toward establishing itself in the energy marketplace. Fortunately, state regulations regarding renewable portfolio standards, which demand a certain share of a state’s energy portfolio be generated from renewable sources by a certain date, also support industry growth. However, many of the current state standards are relatively aggressive because of recent wind power advancements; without the PTC in place, many states are likely to reduce their standards and further damage future industry expansion.
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