Community Developments Investments (Fall 2013)
State of the Wind Market
Courtesy of David SchwartzThe Goodnoe Hills Wind Project, in Klickitat County, Wash., contains 47 turbines that each stand 414 feet tall.
Paul Holshouser, Finance Policy Manager, American Wind Energy Association
The U.S. wind energy industry has presented a dynamic growth story over the past decade—a story of technological innovation, a new manufacturing sector, and increased investment. Wind energy offers a clean, affordable source of electricity that provides long-term price stability for American ratepayers.
The U.S. wind energy industry turned in its strongest year ever in 2012, installing a record 13,131 megawatts of electric generating capacity (see figure 1) and leveraging $25 billion in private investment.1 Total U.S. wind capacity (installed) surpassed 60,000 megawatts in December 2012, just four months after reaching 50,000 megawatts (see figure 2). Wind farms generate enough electricity to power over 15 million American homes—equal to all the homes in Colorado, Iowa, Maryland, Michigan, Nevada, and Ohio combined. These wind farms provide enough wind energy to save about 98.9 million tons of CO2 and avoid 37.7 billion gallons of water consumption annually. According to a 2008 projection by the U.S. Department of Energy (DOE), wind energy is capable of providing 20 percent of America’s electricity by 2030 based solely on current technology.2 As of 2012, installed capacity in the United States was running ahead of the projections in that report.
Figure 1: Annual Installation of New Wind Capacity
Text description of figure 1
Figure 2: Cumulative Capacity of Wind Energy Installations
Text description of figure 2
Last year for the first time, wind energy became the number one source of new electric generating capacity, providing 42 percent of all new capacity brought online in the United States (see figure 3). This bested the recent trend of wind being the second largest source of new generation capacity, behind natural gas for the prior five years.
Figure 3: U.S. Annual Power Capacity Additions Over Time, by Percentage
Note: Percentages do not total 100 due to rounding.
Text description of figure 3
In the early stages of the wind industry, turbine imports were common, but two factors have led to increased domestic manufacturing. First, it is more economical to locate the supply chain closer to projects due to high transportation costs associated with such heavy equipment. Second, unique meteorological and topographic characteristics motivated domestic turbine manufacturers to make changes to the equipment, dramatically improving performance at U.S. wind projects. The domestic supply chain now includes more than 500 wind-related manufacturing facilities, the cost of wind energy is lower, and the American Wind Energy Association estimates that the U.S. wind work force stood at 80,700 direct and indirect jobs at the end of 2012.3 In addition to manufacturing jobs, there are jobs for installing turbines and maintaining the installations. New wind turbines are much larger and generate power at lower wind speeds than equipment manufactured as recently as five years ago. Instead of using imported equipment from foreign countries, around 70 percent of a typical wind turbine manufactured today is made in America,4 supporting the domestic economy. A wind project is a long-term economic investment in a local economy with jobs that cannot be outsourced.
Wind energy has brought projects and jobs to all 50 states (see figure 4). By the end of 2012, 39 states and Puerto Rico had installed utility-scale5 wind projects, and every state has either a project or a manufacturing facility. Wind development works especially well in many low- to moderate-income agricultural communities, where land can continue to support crops or livestock while a wind project generates land-lease income for farmers and tax revenues for local governments. Land leases contribute at least $180 million to rural communities each year.
Figure 4: Location of Wind Energy Projects in the United States
Text description of figure 4
The DOE’s National Renewable Energy Laboratory (NREL) studied the economic impact of wind energy from 2000 to 2008 in a 12-state region running from Texas to North Dakota, where more than half of all installed wind capacity in the country is located. The NREL found that each megawatt of additional wind capacity raised county-level personal income by about $11,150 and increased county employment by 0.48 percent during the eight years studied.
If the public welfare benefit test can be met, investments in wind energy installations in many of these rural areas may qualify under the national bank and federal savings association public welfare investment (PWI) authority, which would allow these institutions to make equity investments in these projects. A quick review of Texas (the highest wind capacity state in the United States) shows that several thousand megawatts of wind capacity are located in areas that qualify as low income or rural distressed or underserved tracts. Investments in such areas may qualify under the PWI authority if certain job creation criteria are met. See the article “Using the Public Welfare Investment Authority to Make Wind Energy Investments.”
Wind Energy Production Tax Credit
A major driver of this success is the production tax credit (PTC), which has supported the developing wind industry, fostered wind technology improvements, and helped drive down the costs of wind energy for consumers. Created in 1992, the PTC is an inflation-adjusted tax credit awarded to a wind or otherwise qualifying energy project (geothermal, hydroelectric, landfill gas, and other technologies) for the first 10 years of operation. The amount of the tax credit is based on the quantity of energy that a project produces. Presently, the PTC rebate amount is 2.3 cents per kilowatt-hour of electricity produced (or $23.00 per megawatt-hour). The tax credit offsets the federal tax liability of the project owner for each unit of electricity that is delivered to the grid. This tax credit has encouraged wind manufacturers to innovate in favor of lowering costs and building more efficient turbines that are capable of producing more electricity.
Figure 5 illustrates how the PTC increases in value for a theoretical 100 megawatt project, when the performance of a project increases by 5 percent as measured by the capacity factor. (Capacity factor measures the output as compared to full capacity over an 8,760-hour year.)
Figure 5: PTC Performance Incentive from 35% to 40% Capacity Factor
Note: Annual PTC=100 megawatts × capacity factor × 8,760 hours in a year × PTC value
Another strength of the PTC is its ability to attract private investment for new wind farm installations. Project developers include large energy companies with significant resources as well as smaller, more entrepreneurial companies that need to raise capital from third parties to build projects. This market appeals to investors with a significant federal tax obligation. Many project developers may not be able to utilize the tax credit themselves, because they do not generate sufficient income to offset a credit. In those cases, the project developer can seek partners that are willing to invest capital in wind energy projects in order to take advantage of the tax credit. These tax equity investors provide capital in exchange for an ownership stake in a wind project, and they receive their return by taking the bulk of the tax benefits from the PTC as well as from a combination of project cash flows and equipment depreciation.
Because banks have been significant investors in the low-income housing tax credit market, they are accustomed to the sophisticated accounting necessary for tax credit compliance. These banks may also be a natural fit for the wind tax equity market. Banks are bringing the same level of compliance, due diligence, and market discipline regarding the economics of a project to PTC investments. This investor influence has been a strong force in making wind technology more efficient and profitable over the years.
The PTC has been periodically renewed by Congress since 1992. Most recently it was renewed in 2012, when a one-year extension included important modifications. Now, to be eligible for the PTC, a new facility must be “under construction” by the law’s expiration date (December 31, 2013), rather than “placed in service” as previously required.6 This change in eligibility timing shifts the availability of the current extension well beyond the end of 2013. Second, the legislation extended the option to choose between taking either the 30 percent energy investment tax credit (ITC) or the PTC for wind installations. (See the OCC publication “Investing in Solar Energy Using the Public Welfare Investment Authority,” July 2011.)7
The ITC and the PTC provide support to different types of wind projects. For most utility-scale wind projects, the PTC is more successful at driving down the price of electricity. The value of the PTC is based on a project's energy generation, while the 30 percent energy ITC is calculated using the total cost of a wind installation, including both equipment and labor. Industry improvements in cost reduction and efficiency gains generally have favored choosing the PTC, because cost reduction lowers the value of the ITC while efficiency gains increase the value of the PTC. The ITC value is driven by cost accounting while PTC investments require detailed projections to predict power output. However, ITCs are simpler to calculate, which gives a particularly strong incentive for smaller projects to favor the ITC.
The PTC has been instrumental to the wind sector. In the early 2000s, there were three periods when the credit was temporarily allowed to expire before being retroactively renewed. In the years when the PTC expired, project development dropped 93 percent, 77 percent, and 73 percent, respectively, compared with the previous year. In each case, the market recovered strongly in the year after the PTC was restored. The multiyear extensions enacted in 2005 and 2009 created more policy stability and helped spur tremendous growth in the wind industry. With those longer-term extensions and the change to the “under construction” eligibility this year, the U.S. Congress has acknowledged the need to pair the PTC life cycle with the project planning process so that developers can more effectively finish production-intensive wind projects in time to qualify for the incentive.
Energy tax credit investors include a range of parties, but most of the investors are banks, including Bank of America, Citigroup, Morgan Stanley, JPMorgan Chase, Wells Fargo, and U.S. Bank. Large companies active in the power sector also recognize the investment opportunities of wind, so companies like GE Capital and power utilities like San Diego Gas & Electric have provided tax equity capital to wind projects. Another high-profile tax equity investor is Google, a company with long-term power needs and a keen interest in stable energy prices. This market is attractive to new investors because several of the key tax equity investors exited following the 2008 financial crisis, when the prospects for their long-term taxable income became more uncertain. Although investment activity has rebounded since the financial crisis, the limited supply of willing investment capital makes the return/risk profile stronger for tax equity investors.
1 AWEA U.S. Wind Industry Annual Market Report Year Ending 2012, www.awea.org/Resources/Content.aspx?ItemNumber=5361&RDtoken=57282&userID=4377.
3 AWEA Wind Energy Facts at a Glance, www.awea.org/Resources/Content.aspx?ItemNumber=5059.
4 2012 Wind Technologies Market Report, U.S. Department of Energy, www1.eere.energy.gov/wind/pdfs/2012_wind_technologies_market_report.pdf.
5 The term “utility-scale” applies to large turbine installations requiring transmission system interconnection.
6 The Internal Revenue Service (IRS) provided guidance on the meaning of “begun construction.” Notice 2013-29, issued on May 13, 2013, indicates that in order to be eligible to receive the PTC or ITC, a renewable energy facility must begin construction before January 1, 2014, by showing that either (1) “physical work of a significant nature” has begun, or (2) at least 5 percent of the total cost of the project has been incurred (referred to as “safe harbor”). Additionally, “continuous efforts to advance towards completion of the facility” must be made after construction has begun. Subsequently, the IRS issued Notice 2013-60, on September 20, 2013, which provides more certainty through a “deemed satisfaction” rule, so that developers could offer more assurance to investors that projects will qualify for the PTC or ITC. This clarification treats a facility as having satisfied the continuous construction test or the continuous efforts test if the taxpayer places the facility in service before January 1, 2016.