April 26, 2008
Iowa, U.S.

Rapid growth in wind industry puts critical tax subsidy at risk

Times have never been better for wind power. The industry’s growth rate doubled last year, and additional turbines are going up across the country.

But the industry is heavily dependent on a federal tax subsidy that’s set to expire at the end of this year. And the industry’s growth is steadily increasing the cost of the subsidy and making it tougher for lawmakers to keep it going.

“The bigger the market, the bigger the price tag and the more challenging that becomes for the Congress,” said Randall Swisher, executive director of the American Wind Energy Association.

“At the same time, the benefits that this industry provides only become more compelling as each year goes by – the number of jobs, the clean-air benefits.”

Iowa has pinned its hopes on receiving the benefits of wind. The state ranks first in the nation in the percentage of wind-generated electricity on its grid, and Iowa is fourth in total generation capacity, according to the wind energy association. Six major wind-generation manufacturers – Acciona, Siemens, Clipper, Hendricks, Trinity Structural Towers and TPI Composites – have located or plan to come to Iowa.

The subsidy, worth 1.9 cents per kilowatt hour, is provided in the form of a tax credit against the corporate taxes owed by electric utilities or other owners of wind turbines. The companies can keep claiming the credit for the first 10 years that a turbine is in operation.

Last year, the industry added 5,244 megawatts of capacity, more than twice the 2,454 megawatts added in 2006. That brought the nationwide capacity to 16,818 megawatts.

But that growth also means that continuing the subsidy for one more year, through 2009, would cost taxpayers $3 billion.

“The problem with a long-term extension is that it’s cost-prohibitive as long as the industry continues to expand. Budget-wise, it’s hard to do it for an extended period of time,” said Frank Maisano, an energy industry lobbyist.

Even getting it extended for a year isn’t proving easy.

Industry officials have been urging Congress to pass a one-year extension by June as a signal to companies and investors that the credit will continue beyond this year. Without a quick extension, projects may be delayed, officials said.

“It just puts a big kink in the industry” if the credit is not extended, said Tom Wind, an aptly named industry consultant based in Jefferson who recently came to Washington, D.C., to lobby lawmakers.

Michael Revak, director of Wind Energy Americas, a division of Siemens that opened a blade manufacturing plant in Fort Madison last year, echoed the concern.

“We need to have action now to ensure that the market continues,” he said.

The credit, which first took effect in 1994, was allowed to temporarily expire in 1999, 2001 and 2003, and each lapse led to a steep drop in construction.

After the credit expired in December 2003, construction fell from 1,687 megawatts in 2003 to 389 megawatts in 2004. The credit was reinstated in October of that year.

Since then, projects have gotten bigger, and lead times for construction are now longer, according to the industry. At the same time, the cost of installing turbines also is going up with the increased price of components.

In 1990, construction projects cost nearly $2,500 per kilowatt. By 2001, the cost had fallen to under $1,500, but it turned upward again in 2006, according to the Energy Department. The average cost for projects that were proposed in 2006 was $1,680 per kilowatt, or $200 a kilowatt higher than it was for projects that were actually completed that year, the department said.

The best chance for renewing the tax subsidy will be as part of a package of tax-credit extensions that Congress will consider this year. But lawmakers probably won’t act until the last half of the year, Kevin Book, an analyst for FBR Capital Markets, wrote in a recent report to investors.

Iowa Republican Sen. Charles Grassley, one of the tax credit’s chief backers in Congress, is looking for other ways to keep the tax credit going, said spokeswoman Beth Pellett Levine.

Jerry Taylor, an energy analyst for the Cato Institute, a libertarian think tank in Washington, said the wind subsidy has broad support in Congress and is likely here to stay.

But he doesn’t think it’s a good idea for the government to subsidize energy sources that wouldn’t be economical otherwise. Wind is a poor source of energy for several reasons, including its variability – winds are often the strongest in the winter when the need for power isn’t as great – and the distance of the turbines from population centers.

Without government assistance, the “wind energy industry itself would tell you that they would for the most part disappear,” he said.

By Philip Brasher
Register Washington Bureau