(UtiliPoint.com - May 23, 2005)

By Ken Silverstein Director, Energy Industry Analysis

The renewable energy community feels as if the wind is at its back. The wind sector specifically is upbeat given that it is in the midst of boom times as a result of favorable tax policies and a global emphasis on sustainable fuel sources. And while the drumbeat for cleaner air won't subside, those in the industry are concerned about the inconsistency of national policies and the uncertainty that such indecision creates.

That's the general view of 4,000 attendees who gathered for the American Wind Energy Association's annual conference in Denver last week. Indeed, citizens around the globe are demanding renewable fuel sources if they can be reliably and competitively delivered. To achieve that objective, governments internationally are stepping up the incentives they are giving producers and utilities alike.

The measures that governments are taking range from the signing of the global warming pact Kyoto Protocol to creating renewable portfolio standards that challenge utilities to incorporate more sustainable energy forms into their generation mixes. In the United States, 19 states have such standards while federal lawmakers have extended the production tax credit provided to wind producers, or 1.9 cents per kilowatt-hour for electricity generated from wind turbines in the first 10 years of operation.

But the irregularity of authorization for this credit has created indecision and provided ammunition to those who say traditional fossil fuels are favored through a wide range of tax benefits that engulf those provided to wind producers. While tax breaks for coal and natural gas are ongoing, wind's credits are intermittent: Only 400 megawatts came on line in 2004 when the tax credit expired.

Now that the credit has been re-enacted, the industry is on target to hit 2,500 new megawatts this year in the United States alone. That would put the country at 7,000 megawatts of wind capacity coming from 30 states. And wind is not just competitive at 3-6 cents per kilowatt hour. It's also a healthy choice: Development of 10 percent of the wind potential in the 10 windiest U.S. cities would cut carbon dioxide emissions by almost a third, adds the American wind energy group.

The production tax credit should be extended for a minimum of five years at a time, say wind energy manufacturers, many of which are now seeing double digit growth. Without aggressive public policy that touts tax credits, companies cannot reasonably plan and optimize their use of capital.

“A longer extension would create more certainty and attract more investment all along the supply chain,” says Thomas Carbone, president of wind manufacturer Vestas Americas.

Best Value

MidAmerican Energy is on course to construct a $323 million, 360 megawatt wind project in Iowa—an investment it emphatically says would not have been made had it not been for the re-enactment of the tax credit. It also has come at a time when Iowa policymakers have challenged regulators, businesses and utilities to work toward achieving 1,000 MW of renewable energy by 2010.

Altogether, about 8 percent of MidAmerican's capacity will come from renewable energy by then. Meantime, in exchange for key tax breaks and approval of a new coal-fired plant, the company has agreed to freeze its rates until 2010. The investments in wind are economical, says Dean Crist, vice president of regulatory and legislative affairs for the Iowa-based company. They allow the utility to increase its wholesale power sales as well as supplement its existing fuel portfolio in an effort to hedge against high prices.

“Wind is our best value,” says Eric Markell, senior vice president of Puget Sound Energy in Washington state. That's followed by coal, biomass and natural gas. In Puget's case, the cost of integrating wind with its transmission system is modest while the power source enables the utility to maintain an “excellent” cash flow, giving the company a chance to recover its initial investment in just six years.

If the wind industry were to consistently grow at a rate of 18 percent per year, the wind association says that 6 percent of the nation's electricity could be generated by wind power by the year 2020, resulting in more than $100 billion of investment in rural America where such farms are typically built. Over the last five years, U.S. wind capacity has expanded at an annual average rate of 28 percent, showing that the supply chain can ramp up quickly to meet the nation's power needs.

Boosting U.S. wind energy installations to approximately eight times today's levels could create 150,000 manufacturing jobs nationwide, the wind association says. In the European Union, about 50,000 are now tied directly to renewable energy.

Robust Markets

But not everyone is gung ho for new investment in wind energy. Wind development competes with other energy forms. So, while the vendors that supply the wind industry may win in one instance, those that supply the natural gas or coal industries may lose economic opportunities. And nowhere is that tension more noticeable than in West Virginia where coal reigns as king and where some U.S. lawmakers are fighting wind development there. They are arguing that proposed windmills in the eastern part of the state would blight the landscape while adding little new energy or jobs to the mix.

“Anything that looks like it will decrease profit margins on coal in West Virginia will get opposition,” says Mike O'Sullivan, senior vice president of development of FPL Energy, which is a major player in the state and which invest $5-$10 billion annually in the global wind market. “It provides a decent return on equity and it is a good deal for shareholders.”

Obstacles no doubt abound and particularly in today's high-priced steel environment—where prices have risen over the last year by 50 percent because of demand in China. Steel, of course, is the major component in all aspects of wind energy technologies. And, despite the improved equipment such as bigger and more effective turbines, the financial pressures are taking a toll. The U.S. Department of Energy says that roughly 80 percent of the cost of wind projects is the machinery, with the balance being site preparation.

Meantime, the intermittency of wind means that most utilities have to keep other fossil-fired generators on call. At the same time, an inadequate transmission infrastructure carries huge implications for the wind industry, which oftentimes builds farms in windy, rural areas that must link into an infrastructure that is far away. The Bush administration says that it is ready to ease the permitting process and says that such progress requires a “partnership effort” between private and government interests. Billions are expected to be invested in transmission as a result.

Many of the fundamentals are in place to bring about a more robust renewable energy market. Public awareness has been heightened and the wind sector says that it is ready to meet future demand. But, manufacturers and utilities alike say that they require consistent public policy that lends some initial support to development—all in the name of creating fair profits, energy security and a cleaner environment.

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