With PTC secured for now, industry focuses on long-term growth

Source: Nick Juliano, E&E reporter • Posted: Friday, May 10, 2013

CHICAGO — Blessed with some breathing room, the wind industry is taking a step back from last year’s aggressive lobbying push, which ended with a renewal of its lucrative tax credit, to chart a path away from the boom-and-bust cycle that has been inherent in its heavy reliance on government support, industry leaders said this week during a conference here.

With the production tax credit effectively in place to support wind farm development at least through early 2015, the industry is brainstorming on how to get through the next five to six years, which developers and manufacturers say they need before they can compete — subsidy-free — with natural gas and other forms of electricity generation. At the same time, attention is focusing more heavily on the states, where mandates that utilities purchase renewable energy have increasingly come under attack from Republicans and conservative activists.

Attendance at this year’s American Wind Energy Association Windpower conference here was lower than in previous years, but the industry employees and executives who spent three days networking and showing off their newest products were optimistic. Policy uncertainty remains as much of a concern as it ever has been, but manufacturers said their technology continues to become less expensive, developers say they are familiar with the permitting thicket they have to navigate and financiers say deals to fund wind projects are becoming more familiar.

On the policy front, the PTC clearly remains the top priority, and relatively few new ideas merited much attention.

The exception was legislation that has been introduced in Congress to extend master limited partnership (MLP) status to clean energy developers — allowing them to take advantage of favorable tax rules that have aided oil, natural gas and coal production for nearly 30 years. Industry officials welcomed the proposal, but there was a concerted effort to stress that MLPs shouldn’t be seen as a replacement for the more lucrative PTC.

MLPs are taxed as partnerships but have shares that are traded like traditional stock and extending them would allow developers to raise money from a broader pool of investors. However, that additional capital would not be enough to replace the benefits developers see from the PTC, which provides $23 for every megawatt-hour of electricity produced for a decade.

Paul Gaynor, CEO of First Wind, estimated that MLPs would be worth 25 to 30 percent of a PTC, but he stressed that the two incentives should not be compared in those terms.

“This is not about replacing the PTC; this is about what’s equitable in the context of the energy complex,” he said at a press conference this week, pointing out that the oil and gas industry has been able to raise tens of billions of dollars by taking advantage of the MLP structure.

Industry sources also say the structure is more beneficial to smaller companies that face higher financing costs, as opposed to the PTC’s more widespread benefits.

“If you look in the oil and gas space, not everybody uses MLPs, so you’re almost favoring one group of investors,” said Pete Duprey, president and CEO of Broadwind Energy, which manufactures towers and provides other services to wind farm developers, “whereas the PTC, if you’re NextEra, you can use it, or you’re a First Wind and you sell those benefits to JP Morgan. Every developer is benefiting from those economics, whereas the MLP, it’s not necessarily the same thing.”

The issue was subject to a “spirited debate” when AWEA’s legislative committee met this week, said Rich Glick, a lobbyist for Iberdrola Renewables, during a panel on policy options. But Glick stressed that AWEA is “united” in seeking to ensure that the MLP does not become a replacement for the PTC.

‘You have to be pragmatic’

Incoming AWEA CEO Tom Kiernan plans to spend the next few months working with the trade association’s member companies to develop a long-term plan for the industry. Details of what that approach would entail were few and far between this week — largely to allow Kiernan, who formally takes the reins at the end of this month, to fully guide the approach, several attendees said.

But Kiernan said the “top priority” in the near term remained clear: Win another extension of the PTC and the related investment tax credit.

Over the long term, he said at a press conference earlier this week, he wants to put together a “suite” of policy priorities to guide AWEA’s future lobbying efforts.

“What do we need? I don’t think there’s a silver bullet or home run,” said Steve Dayney, CEO of REpower USA, a turbine manufacturer. “I think it’s going to be a lot of singles, and there’s a lot of different alternatives and options that are available to policymakers that people in the industry are advocating for and we’re going to push for all of them.”

Among the long-term policy options and ongoing activities that could benefit the industry, Dayney listed policies to address climate change and reduce air pollution, such as U.S. EPA’s new and impending rules that are leading many coal plants to shut down rather than perform expensive upgrades. He also said wind boosters should look for any opportunity to promote more natural gas demand, such as for transportation or via exports to other countries.

“Anything we can do to encourage demand for gas to increase the price of gas will be good for our business,” he said.

The drop in natural gas prices, driven by hydraulic fracturing, has made it difficult for wind to compete against natural gas-fired power plants. While gas prices have increased in the last year to about $4 per million British thermal units (MMBtu), from lows around $2, that price is still below prevailing trends and makes it difficult to compete.

Gas prices are expected to continue to rise, although it remains unclear where they will settle. It is a key variable in determining how viable wind would be without the PTC, although it is one over which the industry in itself has relatively little control.

“If natural gas were at $6, I think the turbine technology that’s being deployed today could probably compete without incentives, but with natural gas at $4-per-MMBtu, it’s a little harder,” Duprey said in an interview.

In the meantime, there was little enthusiasm among conference attendees to return to the fight that demanded so much of its time and attention last year. But there also was a recognition that it was the fight the industry was most likely to win — as opposed to a fight over more desirable but infeasible approaches like instituting a nationwide renewable portfolio standard or a carbon tax.

“You have to be pragmatic and work within the political environment that we’re in right now,” said Karen Conover, an industry consultant and member of AWEA’s board of directors. “So while if we were given a blank page to write our future, it may not look exactly like this, you balance the amount of time you spend on those things with what you think you can really accomplish.”

The most feasible approach that could provide the long-term certainty the industry says it desperately needs would be to convince Congress to extend the PTC for several more years, eventually phasing it out as part of a comprehensive tax reform bill that also strips away permanent benefits for fossil fuels.

“I would like to see us get off the PTC,” Dayney said. “But … I don’t think that you do that in an on/off way like a light switch. I think we need a reasonable ramp-down that allows the market to adjust. The market will adjust.”

State battles over RPS

AWEA last year detailed an analysis indicating that the wind industry could remain viable with the credit phased down between now and 2019. AWEA officials emphasized this week that the phaseout was not a “proposal” but was merely the result of internal analysis of what the industry would need. That point was reiterated in comments submitted last month to the House Ways and Means Committee, and industry officials stressed this week that a phaseout should only be considered in the context of overall tax reform, not in isolation.

Even that faces long odds, as most observers see little prospect of a tax code overhaul being enacted this Congress, so the industry may be left fighting for another shorter-term PTC renewal as part of a “tax extenders” bill that typically is enacted every couple of years to renew dozens of temporary incentives.

When Congress extended the PTC in January, it changed the law’s requirements on when developers can claim the credit: Developers now have to merely start constructing their projects by the end of this year, rather than completing them. The change is expected to allow development to continue at a steady pace for the next two years or so, albeit not at the frenetic pace of 2012, which saw a record 13,000 megawatts of wind brought online

The extension has allowed AWEA to dial back its federal lobbying — the group spent $540,000 lobbying over the first three months of this year, compared to $875,000 in the last quarter of 2012, according to disclosure records. But that won’t last for long with executives predicting that a lack of clarity by sometime late next year will lead to the same downturn in activity and spate of layoffs that buffeted manufacturers and others in the industry last year.

Ideally, industry players say they would like to see a nationwide renewable portfolio standard or carbon tax, but neither of those is viewed as having much chance of getting enacted anytime soon.

With the federal fight heading for a rerun unless something shakes up the tax reform picture, the industry is increasing its focus on protecting and expanding state-level renewable portfolio standards. The RPS mandates in 30 states plus Washington, D.C., are a primary driver of demand for wind energy, and they have come under attack in many states over the last several months.

The wind industry and its allies have so far defeated every attempt to repeal an RPS in states including North Carolina, Arizona, Ohio and Kansas. And a few states, like Colorado, have even implemented more aggressive requirements this year.

AWEA has not yet done much to tout its success in preventing the RPS laws from being weakened, in part because many state legislative sessions are ongoing and the industry doesn’t want to declare victory prematurely. But that likely will change, assuming its track record continues.

“I hope that’s a clear message that’s getting sent to the opposition — this is something that people want,” Conover, vice president of the consulting firm DNV Renewables, said of the state-level victories.

Companies bullish about 2013

While the industry’s lobbyists focus on Congress and state legislatures, its engineers, salespeople and factory workers are busy turning out new products, filling orders and constructing turbines.

General Electric Co. and Vestas Wind Systems A/S — the world’s two leading turbine manufacturers — said this week that they are excited about the growth prospects for this year.

GE announced this week that it already has received orders for 1,000 MW of turbines in the United States, a development it tied to the PTC renewal in January. Vestas has not divulged specific order numbers, but executives with the company say they expect to see an uptick in U.S. orders toward the second half of this year as developers work through the new PTC requirements and strive to begin construction or achieve “safe harbor” status by Dec. 31.

Chris Brown, the president of Vestas Americas, said that stable policy remains a primary concern, but he is confident that AWEA’s lobbying team can sort through the details of how to achieve that.

Brown is focusing on the business side of things, developing better turbines, ensuring that the company is not too large and learning how to compete in an unpredictable market.

“In terms of trying to figure out how to politicize an industry, that’s not our game,” Brown said in an interview. “I think in the long term, you need a sustainable wind industry, and what you’re trying to figure out is how do you deliver that? … You’re trying to figure out what’s a predictable, stable market.”