(The author is a Reuters market analyst. The views expressed
are his own.)
By Gerard Wynn
LONDON, Jan 8 (Reuters) – The latest short-term extension of
a U.S. wind tax credit risks creating a glut of capacity unless
states ratchet up regional renewable power targets.
The U.S. 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 U.S. 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 Jan. 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is withdrawn as expected in the next five years or so.
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Chart 1: (click on compliance data) http://goo.gl/OsMl0
Chart 2: (page 4) http://goo.gl/TWX8Y
Chart 3: http://goo.gl/d4ruR
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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. (See Chart 1)
Some 21 out of the 23 states where data were available
achieved 90 percent or more of their RPS obligations in 2010.
In 2011, seven out of eight states reporting data achieved
98 percent 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 U.S. 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 percent of these
sales were from renewable sources in 2011, up from 17 percent in
2010, just beating a mandate for 20 percent 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 programme from 2003-2011. (See Chart 2)
As a result, it is reasonable to suppose the state is now
near or surpasses its RPS obligation of 25 percent 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
percent 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
“U.S. Renewable Electricity: How Does the Production Tax Credit
(PTC) Impact Wind Markets?”.
But the American Wind Energy Association (AWEA) 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 U.S. 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. (Chart 3)
Lawmakers would do well to take heed next time around.
(Editing by Keiron Henderson)
