BET ON WIND IN 2010

US Wind Power Markets and Strategies: 2009–2020
May 2009 (Emerging Energy Research)

SUMMARY
The question is this: Can the U.S. wind industry sustain its unprecedented 4-year growth trend in spite of the economic downturn? If not, when will it come back?

According to US Wind Power Markets and Strategies: 2009–2020 by Emerging Energy Research (EER), the latest numbers suggest the wind industry, though faring far better than other U.S. industries, will not sustain in 2009 the kind of growth it has seen for the last 4 years.

From 2004 to 2006, the industry doubled its installed capacity and then, defying all likelihood, doubled its installed capacity again from 2006 to 2008.

click to enlarge

At the end of 2008, the U.S. had 25.5 gigawatts of total wind power capacity installed. 2008 was the industry’s biggest year of growth, with 8.5 gigawatts added.

Overall, the industry has had a remarkable 40% compound annual growth rate since 2004, when relative certainty in federal regulatory policy began.

But the 2008 economic downturn cut off the wind industry’s sources of financing. It lost most of its third-party tax equity investors, such as Lehman Brothers. What project debt financing remains comes at high interest rates that erode wind project rates of return. Growth has dramatically slowed.

click to enlarge

Prior to 2008, wind’s growth was largely based on monetizing the Production Tax Credit (PTC). After 2008 that was almost impossible. Recognizing the problem, the Obama Administration and the US Congress created a Treasury cash grant program in the American Recovery and Reinvestment Act of 2009 (ARRA) economic stimulus package.

EER reports that favorable policies like the Treasury grant are generating a momentum in the industry, setting the stage for tremendous long-term growth once economic recovery takes hold and the financial sector is ready to let its liquidity once again flow.

When that happens, according to EER, the wind industry can be expected to grow well into the next decade, driven by the new federal incentives, state Renewable Elecricity Standards (RESs) and a developing national transmission superhighway.

EER’s estimates of near-term growth (2009 thru 2011) in 3 forecast scenarios vary by as much as 4 gigawatts because it is not yet possible to be sure about (1) the rate and efficiency of stimulus implementation, (2) the speed that liquidity will return to the wind project debt, equity, and tax equity markets, and (3) what the trends will be in the price of natural gas power generation.

In all three forecast scenarios, 2011 is seen as the likely point at which growth from the stimulus bill’s Treasury cash grant will certainly have a noticeable impact. The Treasury cash grant applies to projects that start construction after the beginning of 2010 and go on line by the end of 2012. Many new wind projects will, therefore, likely begin construction in the second half of 2010 and be activated in 2011.

click to enlarge

COMMENTARY
Proposed and enacted federal policy initiatives will be a foundation for long-term, stable US wind market growth. They include the pending national Renewable Electricity Standard (RES), the pending Waxman-Markey energy/climate legislation and the enacted but only just now becoming available benefits in the Stimulus Packages of late 2008 and early 2009.

The American Recovery and Reinvestment Act of 2009 (ARRA) economic stimulus package provides the Treasury grant option as an alternatitve to the PTC. The grant (1) eliminates the risk assumed by project owners using the PTC and (2) is directly relative to an eligible wind farm’s capital expenditures and indirectly proportional to a wind farm’s capacity or estimated production. For wind farms with relatively high capital costs and relatively low wind resources planned for construction in 2009, the new ARRA Treasury cash grant option offers an improved rate of return on investment.

The wind industry will pick up when the Obama administration Treasury Department works through the details and processing and makes the grant money available. That probably means a temporary postponement of 2009 projects until 2010.

click to enlarge

Unfortunately, Treasury has no experience dispersing cash grants to energy projects. Bureaucratic red tape will slow the process down, especially because the ARRA gives little guidance on the grant’s implementation or disbursement. The Treasury Department currently expects to finalize the application process by June-July 2009, making early autumn 2009 the earliest the use of the monies is likely to be seen.

Momentum will pick up in January of 2010 because eligible projects must have begun by the end of next year. Construction is expected, therefore, to be fast and furious in the 2010's second half.

Other factors:

(1) Some traditional financing from large institutions, through the PTC, has returned to the wind industry, underscoring the impression of the 2009 disruption as a temporary phenomenon resulting from the financial crisis.

(2) The Waxman-Markey energy/climate bill now making its way through the House of Representatives and its counterpart in the Senate being sheparded by Senator Bingaman both provide for a national Renewable Electricity Standard (RES) requiring regulated utilities to obtain ~15% of their power from New Energy sources by 2020. Democratic Congressional leaders and the White House are driving for enactment of this legislation by December, though it could be blocked by a filibuster in the Senate. Either way, it cannot impact the wind industry in 2009 and will only reinforce a returning expansion in the 2010-11 period.

(3) Competition and consolidation are expected to characterize the wind industry in 2009, with developers, independent power producers (IPPs) and utilities moving cautiously to survive the short-term recessionary circumstances. A company's access to capital and experience with building transmission will be sustaining factors.

A wide range of companies, equally active in the U.S. wind market, remain capable of emerging as leaders. At the end of 2008, the top 25 U.S. wind industry asset owners owned 22.8 gigawatts of the total 25.5 gigawatts of installed capacity, ~89% of the total US wind. NextEra continued to lead the U.S. wind market, with 6.29 gigawatts of cumulative installed capacity and 1.22 gigawatts of 2008 installed capacity, but only 200 megawatts of capacity separated #12 Shell WindEnergy and #25 NRG Energy.

click to enlarge

(5) So far, the dominant survival strategy appears to be vertical integration. Successful IPPs are now supply-chain owners, developers and installation owner-operators. They tend to be backed by financial resources from a big utility or generation player and in-house national pipeline-building teams with expertise in permitting and siting.

(6) 2008 changes in the supply chain reflected unequivocally (a) the shift of the wind industry to North America and (b) the growing scale of the North American wind industry. 99% of the supply chain in 2008 was dedicated to turbines larger than 1 megawatt. 27% went to turbines larger than 2 megawatts. 14 manufacturers opened or planned new North American supply chain facilities in the last year.

(7)Though offshore wind is an increasingly important part of the European wind industry, offshore wind will account for no more than 3% of the U.S. market during the coming expansion.

(8) 2008 expansion shifted from predominantly in Texas and California to the broader Midwest, Southwest and Pacific Northwest.

(9) One additional uncertainty is the price of natural gas, wind’s main competition in the new generation arena. A protracted worldwide economic recession could suppress demand for natural gas, keeping prices low. This would lower the cost of gas-powered electricity in several important U.S. wind regions, leaving wind generation less competitive. Less investment capital would flow to it and there would be continued slow growth. But larger demographic trends make almost inevitable a rise in world energy demand, virtually guaranteeing the eventual return of wind's competitiveness.

click to enlarge

QUOTES
- From the EER paper: “The United States wind energy market has been growing rapidly for the past four years, nearly doubling in cumulative installed capacity between 2004 and 2006, and more than doubling again between 2006 and 2008. This explosive growth is poised to continue into the next decade…To reach such levels of growth, however, the industry must first overcome the near-term negative impacts of the global financial crisis and the economic recession, which have sent shock waves through the US wind project development market in 2009. While the next one to two years may prove difficult to weather for US wind companies…accelerating policy momentum is setting the stage for tremendous long-term growth potential once liquidity returns to the financial sector and once the level of economic activity recovers.

click to enlarge

- From the EER paper: “By the end of 2008 approximately two-thirds of total US retail electricity sales were covered by existing state renewable portfolio standards (RPS), establishing a foundation upon which any federal renewable energy mandate may be considered. Momentum to enact a federal renewable energy
mandate has been building quickly since the Obama Administration took office…If passed and enacted…[such legislation could] nearly triple what the current 28 state RPS mandates in aggregate will require by [2020]…Although much positive momentum exists in the Obama Administration and the US Congress for a federal RPS, it remains uncertain…In the current economic recession, many members of Congress have concerns that a federal RPS would result in higher retail electricity prices for consumers…In addition, utilities in the US Southeast region with relatively few indigenous renewable energy resources strongly oppose the proposal for a federal RPS, with any ultimate legislation likely to include provisions that placate this important lobby segment.”