Wind power driven by fickle investment breeze
Monday, 21 June 2010

By Peter Maloney

A recent post on this site lamented the lack of capital expenditures for renewable energy in the United States and, in particular, for wind power.

In fact, wind power has been booming in the United States for the past several years, showing steady gains in terms of installed capacity since the latter part of the last century.

Surprisingly, last year, coming as it did at the tail end of the recession, was no exception. There was a total of just over 10,000 megawatts of wind power capacity added to the US grid in 2009, beating out the previous record of 8,366 megawatts of installations set in 2008, according to the American Wind Energy Association.

With a average cost of about $1.3 million per megawatt installed, that comes to about $13 billion of investment, which is not too shabby. But those numbers have to be put in perspective.

Wind still represents only about 3 percent of the total generation capacity in the US, and about half that amount in terms of the actual amount of electricity generated.

And reaching any really significant penetration would require an investment that is a multiple of the amount of capital already deployed. For that to happen, a much steadier commitment to this source of power will be required from politicians than they have exhibited to date.

About half the states in the union now have some form of "renewable portfolio standard" that requires utilities in the state to source some portion of their generation from renewable sources. That has provided a "pull" for developers of wind farms because wind power is the most technically advanced and commercially feasible form of renewable energy. But the single largest factor driving the wind power industry was a change in the federal tax code.

The Production Tax Credit, which Congress enacted in 1992, provides a payout to wind farm owners, expressed in cents per kilowatt hour generated, for the first 10 years of operation of the facility.

A cash incentive is pretty compelling, but that alone was not enough to spur a boom in building wind farms. The development of wind farms didn't really take off until bankers devised ways to monetize the tax credit. The resulting partnership flip structure has had as much to do with getting wind farms built as have technological advances or green legislation.

In a partnership flip a financial institution takes the majority of the equity and the tax credits. Many developers of wind power projects do not have enough revenue to make use of the tax credits their wind farms can generate. A financial entity, however, can either use the tax credits or package them for sale to some other entity, such as an insurance company, that can use them.

When the tax credits are paid out, the original developer "flips" its small equity stake in the project back to a majority stake.

The success of the PTC and the financial engineering that made it useful for developers of wind farms is readily apparent in the on-again, off-again track record of wind farms installations. To avoid a large hit on the budget, Congress crafted the PTC to expire in two years, so it has gone through multiple cycles of expiration, or near expiration, and renewal, most recently in the stimulus bill (the American Recovery and Reinvestment Act of 2009).

Simply extending the PTC, as had been done in the past, was not deemed sufficient this time around. The recession killed the tax appetite of many of the traditional investors in tax credits. To address this problem, the stimulus bill instituted a cash grant for up to 30 percent of the cost of a renewable energy project in lieu of the PTC.

If one were looking for a big boost in renewable energy capital expenditures one might think it could be found in the stimulus bill. In fact very little of the $97 billion allocated for energy project by the $787 billion Recovery Act is allocated for capital projects. Huge chunks of the funds are allocated for research and development and for low-level programs such as home weatherization.

In terms of direct investment in capital projects, the stimulus bill provides only about $18 billion for such things as advanced coal-fired power plants and transmission lines to move renewable power supplies to demand centers. The biggest single impact in the stimulus bill, in fact, comes from the $15 billion in cash grants.

To date the Treasury has handed out nearly $4.5 billion in cash grants, and the lion's share of those grants have gone to owners of wind farms. But, like the wind, tax credits do not blow continuously. To be eligible for a cash grant, a developer has to have his renewable energy project in operation or under construction by year end.

Time will tell how many new wind turbines will dot the landscape if the headwind of the tax incentives coming out of Washington stops blowing.

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