With Obama reelected, a push to extend the Production Tax Credit is likely but not guaranteed. The credit is crucial for wind power, but the ‘fiscal cliff,’ a skeptical House, and stiff competition from natural gas stand in the way.
Much time was spent in energy circles discussion leading up to the election on how the outcome would affect the future of wind power in the U.S. The general consensus was that an Obama reelection would lead to an extension of the Production Tax Credit (PTC), and with that the rescue of the wind industry in the U.S. Current turbine orders for U.S. delivery in 2013 sit near (if not at) zero, as the lack of the support from the PTC makes it extremely difficult to produce wind power at a cost low enough to compete with natural gas derived electricity due to continued weakness in natural gas prices.
It’s premature to proclaim the industry saved by Obama’s re-election.
It’s not clear when or even if, an extension will be passed. A push during the November session of Congress is likely, and a PTC extension could easily slot in as part of a broad set of tax extenders (research and development credits, new market tax credits and several other broadly supported tax incentives are all expired or expiring as well).
While this is a reasonably good possibility, as action on tax extenders is likely, and there is some bi-partisan support for the wind credit, it is far from certain. The impending cliff will cloud discussions of all fiscal legislation and passage of clean energy support by the House will be a significant challenge. I would start the handicapping today at a slightly better than even chance (call it 60% likelihood) for an
extension this calendar year.
The current extension being pushed by the American Wind Energy Association would act as little more than a band aid. It is a one-year extension (this would allow the credit to apply to any projects for which construction started in 2013). Certainly if passed this would lead to a big push of projects getting underway by late next year – I am aware of more than a dozen (and expect the total number is several dozen) good projects that are ready to go forward in 2013 if the PTC is renewed.
The challenge the industry faces is that at current pricing wind power generally doesn’t compete with natural gas generated power until gas prices rise to roughly $6/mmbtu. That’s significantly higher than current prices and most forecasts don’t have gas prices breaking the $6 threshold for several years. So a one-year extension would provide a little quick relief, and then the industry would be right back in the same position.
Another key point that typically gets lost is that the PTC supports not just wind, but also biomass, hydroelectric upgrades, geothermal power, municipal solid waste and some other discreet energy types. While the credits for all of the non-wind technologies runs through the end of 2013, that sunset date limits financing possibilities for these projects now (the 2013 cut-off as written is based on an asset being in service rather than construction starting). Expect some continued challenges in those sectors as well until there is some certainty on future of the credits.
A serious discussion about a long-term extension with a phase-out, or with the amount of the credit indexed to natural gas prices would likely get some bi-partisan support and provide a long enough bridge that the industry could be commercially competitive by the end of that credit period. This type of support regime would allow for a clear and certain path forward for the industry allowing growth and per-unit cost reductions. Until that becomes the focus of the policy discussion, it’s hard to see the wind industry building any momentum in the U.S.
– This article is a modified version of a story in Energy Trends Insider, a free subscriber-only newsletter that identifies and analyzes financial trends in the energy sector. It’s published by Consumer Energy Report.
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