Future of Solar and Wind Power May Hinge on Federal Aid

Source: Kate Galbraith, Austin, TX • Posted: Wednesday, October 26, 2011

IN recent years, wind and solar power have been among the fastest-growing sources of energy in the country.

But questions loom over their future: Will federal incentives that are important to their growth continue? And what happens if those incentives expire?

For wind power, the situation is especially precarious, energy specialists say. The federal production tax credit, which has provided incentives for wind farm operators to produce power since 1992, expires at the end of 2012. Congress has extended it in the past, most recently in 2009 as part of the federal stimulus package. But this time, some in the industry fear that the mood for limited government in Washington could imperil an extension.

If Congress does not extend the credit, “I believe 2013 would have minimal if not close to zero wind built in the United States,” said Michael O’Sullivan, the senior vice president for development at NextEra Energy Resources, a huge clean energy developer in Juno Beach, Fla.

The solar business faces the expiration of an important grant program at the end of this year. The grants were created as part of the stimulus package, and the industry is lobbying for a one-year extension.

The expiration of the program would have a “really significant compressing effect on the amount of renewable energy that gets financed,” said Edward Fenster, the chief executive of SunRun, a San Francisco-based company that leases solar installations to homeowners. An extension would allow SunRun’s business to grow 50 percent faster, though the company would grow even without it, he said.

Even if the grants expire, the solar industry can still use a 30 percent federal investment tax credit in place through 2016. Some other technologies, like fuel cells and small wind turbines, have access to similar tax credits through 2016.

The solar industry argues that the grant program is far more effective than the tax credit because it provides incentives for a broader range of private investors to help finance projects, as opposed to merely those with high tax obligations (the credit helps offset these).

The grant program also applies to wind power, though wind developers say the tax credit is more important for their industry.

Another major federal program, the provision of loan guarantees to aid large renewable energy projects, ended last month. That program became controversial after Solyndra, the first solar recipient, filed for bankruptcy, leaving taxpayers potentially liable for more than $500 million.

Rhone Resch, president and chief executive of the Solar Energy Industries Association, said that while the loan guarantee program helped finance emerging technologies that were “higher-risk projects by definition,” the grant program aided “extremely low-risk projects where you’re using off-the-shelf technology.”

In arguing for the continuation of federal incentives, advocates of renewable energy often point out that all forms of energy — including fossil fuels — rely on a complex web of state and federal credits and aid. Mr. Resch argues that more established technologies including oil and gas, coal and nuclear power are still taking advantage of incentives that were established in the 20th century.

“In the same way we’ve invested in oil and gas, it’s time to invest in renewables,” he said.

For younger technologies trying to establish themselves and reduce their costs, government incentives may be a make-or-break situation.

“Unlike oil and gas, where those companies could still make money doing their operating if they didn’t have some of the credits they currently have, I’m not sure that would be true for the wind industry,” said Amy Jaffe, director of the Energy Forum at Baker Institute at Rice University.

Solar and wind companies also argue that the perpetual threat that their incentives will expire makes long-term planning difficult.

“Our biggest issues is, we don’t have certainty,” said Danny Kennedy, founder of Sungevity, a residential solar installer in Oakland, Calif., who said he hoped that the federal grant program would be renewed but planned for its expiration. Fossil fuel companies, Mr. Kennedy said, “assume tax credits and subsidies as permanent and given.”

One important federal incentive for oil and gas drilling, for example, has been in place since 1910s, though the Obama administration has proposed repealing it.

For renewable energy developers, the threatened expiration of incentives may have a few benefits. Mr. O’Sullivan, of NextEra Energy Resources, said that the wind deadline at the end of 2012 is “causing customers to accelerate decisions, which is good.”

For that reason, many specialists expect 2012 to be a banner year for wind.

“At this point 2012 is poised to be one of the largest years, if not the largest year in the U.S. wind market, in terms of installation,” said Alex Klein, research director for Renewable Power at IHS Energy Research, whose clients include renewable energy companies. “But the downside is, there’s a strong likelihood of a pretty dramatic fall-off in 2013.”

Greg Efthimiou, a spokesman for Duke Energy of Charlotte, N.C., said that although Duke built renewable energy projects to meet customer demands as opposed to the tax credit deadline explicitly, the federal incentives did help — and Duke planned to build five large wind farms next year, including two in Texas and two in Kansas.

If Congress renews the production tax credit for four years, wind power will probably reach 4 to 5 percent of the country’s electricity supply by 2016, Mr. O’Sullivan said, up from 3 percent year to date.

And if it does not? “We call it the P.T.C. cliff,” he said of the production tax credit. “Everyone’s making preparations,” he said. The severe halt in 2013 would occur, he said, as companies waited to see if Congress would renew the credit even after it expired. If Congress did not, work may resume but would be significantly eroded, he said.

The costs of solar and wind have dropped substantially in recent years, although when, and if, the technologies will become competitive with fossil fuels without tax credits or grants is anyone’s guess. (It bears noting that the technologies are cleaner than fossil fuels, and therefore create fewer pollution costs for society, many of which are not counted in the price of electricity.)

However, low natural gas prices have made it tough for wind to compete, especially if the production tax credit ends.

Meanwhile, uncertainty reigns.

“We’re entering another boom-and-bust cycle for the wind industry that it hasn’t had to face for several years,” Mr. Klein said.