Risking a boom-bust wind cycle

The latest short-term extension of a US wind tax credit risks creating a glut of capacity unless states ratchet up regional renewable power targets.

The US wind market has followed a boom-bust cycle because the main subsidy is usually only extended for a year or two, creating a surge to develop projects before the next expiry deadline, contributing to a record year in 2012.

The US industry has been driven by the federal wind power production tax credit (PTC) plus state-level targets for renewable power generation.

The tax incentive is a vital driver, illustrated by the rush of installations last year as a January 1 2013 expiry deadline loomed.

It works by providing a tax credit of 2.2 cents a kilowatt hour of power generation for the first 10 years of operation.

A one-year extension under the "fiscal cliff" budget legislation will spur a new rush, by supporting all construction started in 2013 and thereby accommodating an 18-24 month lead time to develop projects, which are still uncompetitive without the subsidy.

However utilities are in some cases already over-achieving against state renewable portfolio standards (RPS) which oblige utilities to supply renewables at a certain proportion of total sales or generating capacity.

Without a further ratcheting of those targets, or a longer term PTC extension, or an unexpected hike in gas prices or power demand, the wind industry faces a slowdown once the tax subsidy is withdrawn as expected in the next five years or so.

Mandates achieved

State-level RPS policies set annual, rising targets for sales or generating capacity of renewable power.

Currently 29 states and the District of Columbia have binding RPS policies in place.

The targets are rather opaque, differing according to ambition, qualifying technologies and timeline, with complex rules for example governing the eligibility of large legacy hydropower.

Rules vary by state, but electric utilities can meet their targets through a combination of either generating their own renewable power for sale on to customers, or purchasing renewable power from generators, or by purchasing "unbundled" renewable energy certificates (RECs) from generators who are then disqualified from selling the corresponding power towards RPS targets elsewhere.

The mandates have largely successfully driven electricity suppliers to ramp up production, Lawrence Berkeley National Laboratory data show.

Some 21 out of the 23 states where data were available achieved 90 per cent or more of their RPS obligations in 2010.

In 2011, seven out of eight states reporting data achieved 98 per cent or more of their mandate.

Too easy?

The trouble is that significant states, in terms of electricity sales, are poised to meet (California) or already exceed (Texas) RPS targets several years into the future, casting doubt on incentives for further growth, especially following a likely record year in 2012 for both wind and solar power development.

Texas is the largest US state by electricity sales and the biggest generator of renewable power, and sets its renewable goals by generating capacity.

The state adopted in August 2005 a target for 10,000 MW of renewable generating capacity by 2025, but met this in early 2010, 15 years ahead of schedule.

Texas supports further wind power growth but acknowledges constraints including grid connection costs and competition with shale gas, in the state's "Texas Renewable Energy Industry Report" published last July.

The second biggest state by power consumption is California which in 2011 adopted a target for electricity utilities to supply one third of power from renewable sources by 2020.

California's three large private utilities currently provide just over two thirds of the state's electric retail sales.

They reported last year that some 20.1 per cent of these sales were from renewable sources in 2011, up from 17 per cent in 2010, just beating a mandate for 20 per cent from 2011-2013.

But the state regulator forecast that a staggering 3,070 MW of renewable power capacity was scheduled to come online last year, more than the total, cumulative 2,541 MW of capacity added under the RPS program from 2003-2011.

As a result, it is reasonable to suppose the state is now near or surpasses its RPS obligation of 25 per cent of electricity sales for 2014-2016, even after accounting for a declining share of unbundled RECs as required under the scheme.

"The state's utilities have met the goal of serving 20 per cent of their electricity with renewable energy and are already on track to far surpass that goal in 2012," the regulator, the California Public Utilities Commission, reported last year.

Other states are at various stages of meeting or progressing towards their long-term targets in 2020 and beyond.

Motive

Both the tax credit scheme and state mandates have worked in driving wind power, but the repeated rushes to qualify for PTC tax credits before short-term expiry deadlines will create an ensuing bust cycle when the subsidy is finally phased out.

The Congressional Research Service in June reported estimates of RPS-driven demand for all sources of renewable power at 4,000 MW to 5,000 MW annually until 2025, in its report "US Renewable Electricity: How Does the Production Tax Credit (PTC) Impact Wind Markets?".

But the American Wind Energy Association reported that in 2012 alone an additional 13,158 MW wind capacity had been installed or was under construction as of September.

On top of that, the US Solar Energy Industries Association estimates that the country will install a record 3,200 MW of solar power this year, bringing installed renewable power in 2012 to more than three times the estimated RPS annual demand.

The AWEA wind lobby itself acknowledges the danger of the boom-bust cycle of repeated short-term expiry deadlines, calling for a phasing out of the tax credit in 2018 in return for a clear trajectory of support until then, in a letter to Congress members last month.

Lawmakers would do well to take heed next time around.

This article was originally published by Reuters. Republished with permission.