TODAY’S STUDY: THE JOB AND REVENUE OPPORTUNITIES IN A DOMESTIC WIND INDUSTRY

U.S. Wind Turbine Manufacturing: Federal Support for an Emerging Industry
Michaela D. Platzer, September 23, 2011 (Congressional Research Service)

Summary

Increasing U.S. energy supply diversity has been the goal of many Presidents and Congresses. This commitment has been prompted by concerns about national security, the environment, and the U.S. balance of payments. More recently, investments in new energy sources have been seen as a way to expand domestic manufacturing. For all of these reasons, the federal government has a variety of policies to promote wind power.

Expanding the use of wind energy requires installation of wind turbines. These are complex machines composed of some 8,000 components, created from basic industrial materials such as steel, aluminum, concrete, and fiberglass. Major components in a wind turbine include the rotor blades, a nacelle and controls (the heart and brain of a wind turbine), a tower, and other parts such as large bearings, transformers, gearboxes, and generators. Turbine manufacturing involves an extensive supply chain. Until recently, Europe has been the hub for turbine production, supported by national renewable energy deployment policies in countries such as Denmark, Germany, and Spain. Competitive wind turbine manufacturing sectors are also located in India and Japan and are emerging in China and South Korea.

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U.S. and foreign manufacturers have expanded their capacity in the United States to assemble and produce wind turbines and components. Nearly 400 U.S. manufacturing facilities produced wind turbines and components in 2010, up from as few as 30 in 2004. An estimated 20,000 U.S. workers were employed in the manufacturing of wind turbines in 2010. Because turbine blades, towers, and certain other components are large and difficult to transport, manufacturing clusters have developed in certain states, notably Colorado, Iowa, and Texas, which offer proximity to the best locations for wind energy production. The U.S. wind turbine manufacturing industry also depends on imports, with the majority coming from European countries, where the technical ability to produce large wind turbines was developed. Although turbine manufacturers’ supply chains are global, recent investments are estimated to have raised the share of parts manufactured in the United States to 50-60%, up from 25% in 2005.

The outlook for wind turbine manufacturing in the United States is partially dependent upon federal and state policies. A variety of federal laws and policies have encouraged both wind energy production and the use of U.S.-made equipment to generate that energy. Some of these policies are subject to change at the end of 2011, and others are scheduled to expire in 2012. Future decisions about these policies will affect the extent to which wind turbine manufacturing becomes an important industrial sector in the United States.

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Introduction

This report discusses the U.S. wind turbine manufacturing industry, its supply chain, employment and international trade trends, major federal policy efforts aimed at supporting the industry, and issues affecting its future. The wind industry’s national trade group, the American Wind Energy Association (AWEA), reported that an estimated 20,000 Americans were employed directly and indirectly in wind turbine manufacturing in 2010, compared to 2,500 in 2004. Another 55,000 U.S. workers reportedly were employed in other parts of the wind industry in 2010, including construction and services.1 The U.S. wind turbine market has grown in size from an estimated $2.7 billion in 2005 to $12.5 billion in 2009.2 Following an unprecedented period of growth in the U.S. wind power market between 2005 and 2009, about half as many new wind turbines were installed in 2010 (some 3,000) as in 2009.

Aside from GE Energy and Clipper Windpower, most of the manufacturers that sell, assemble, or manufacture turbines and wind-related components in the U.S. market are headquartered outside the United States. Vestas, Gamesa, and Siemens are among the European manufacturers that have responded to government regulations that mandate the use of renewables including wind power. Other firms manufacturing wind turbines for the U.S. wind market include Japanese and Indian companies such as Mitsubishi and Suzlon. Manufacturers from South Korea and China are also expanding production capacity and entering the U.S. market.

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Federal interest in the U.S. wind turbine manufacturing industry is based on: (1) increasing the role of clean energy technology in energy production; (2) encouraging advanced manufacturing and the creation of skilled manufacturing jobs; and, (3) enhancing the diversity of U.S. energy sources.3 In 2009, the Obama Administration stated that it has the goal of:

“doubling U.S. renewable energy generation capacity from wind, solar, and geothermal by 2012. This was a bold goal—to install as much renewables in the next three years as the U.S. had in the previous thirty. In addition, President Obama set the goal of doubling U.S. renewable manufacturing capacity, so that the U.S. can gain leadership in manufacturing these technologies as well.”

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Wind energy, like many energy technologies, benefits from government incentives…Without them, it does not appear likely that there would be a U.S. wind turbine industry. To a large extent, the federal government sets the framework and influences the pace of domestic wind power development.

One of the main federal policy tools to encourage wind generation is a tax credit, known as the production tax credit (PTC), which is slated to expire at the end of 2012…Other policy drivers include state renewable portfolio standards, which have been adopted by more than half the states to mandate production of electricity from “clean” sources…No nationwide renewable electricity standard currently exists, but the Obama Administration and some members of Congress have endorsed the concept…These policies do not directly address manufacturing, but greater wind power adoption supports the development of a U.S. wind energy manufacturing base. In addition, the federal government and some state governments have maintained programs that provide financial incentives for manufacturing of wind power equipment.

Many international wind turbine manufacturers and component suppliers have opened manufacturing facilities in the United States since 2005. In 2010, there were nearly 400 U.S.-based wind turbine manufacturing facilities—a ten-fold increase in five years—ranging from wind turbine assembly plants to factories producing various wind-related components including large bearings, castings, electrical wiring, fasteners, hydraulics, and power electronics. Given the interest in wind power around the world, manufacturers with U.S. production facilities may be able to increase exports of advanced wind-energy components. Less than $150 million in fully assembled wind turbines were exported from the United States in 2010.

The industry’s future in the absence of government support, however, is open to question. While the cost of electricity from land-based wind turbines is less than the cost of power from other alternative sources, such as concentrated solar plants and geothermal installations, it is still, in general, somewhat higher than the cost of power from new gas-fired generators. This means that without government support, electricity suppliers’ demand for wind turbines would be relatively limited. It is possible that, if existing policy tools are allowed to expire at the end of 2012, wind industry manufacturing will face a difficult future. On the other hand, it is imaginable that technological improvements in wind generation and higher costs for construction of fossil-fuel power plants could at some point make wind cost-competitive with coal and gas as a source of electricity, creating a bright outlook for wind turbine manufacturing.

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Wind Turbine Manufacturing

Wind turbine manufacturing is at the core of the multifaceted wind power industry. Because of the use of castings, forgings, and machining, turbine manufacturing is a significant contributor to U.S. heavy manufacturing. By the end of 2010, over 35,600 wind turbines were installed in the United States.9 Procurement of wind turbines accounts for an estimated 60% to 70% of overall expenses for wind energy developers…

The market potential of offshore wind power is not covered in this report. No offshore projects have been installed in the United States to date, and the industry faces difficulties with permitting, financing, and infrastructure availability.11 So far, Cape Wind, off the coast of Nantucket in Massachusetts, is the only project that has a commercial wind energy development lease from the U.S. government. Also, this report does not cover small wind turbine manufacturing, which AWEA defines as turbines with rated capacities of 100 kilowatts (kW) or less. This segment of the wind turbine market appears to be growing, with 95 manufacturers of small wind turbines based in the United States in 2009, up from 66 in 2008…

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Historical Overview

The use of a wind turbine to generate electricity is an American invention of the late 19th century.13 The development of U.S. commercial wind turbine manufacturing can be traced back to the 1970s, when the U.S. government advanced the technology in response to the oil crises of 1973 and 1979 as an alternative to power generation from fossil fuels.

The first U.S. wind farms were developed in California, and the state dominated worldwide wind development in the early 1980s.14 This created a market for wind turbine manufacturers. Enertech, U.S. Windpower (renamed Kenetech in 1988), and Zond were among the American suppliers. Other U.S. manufacturers included technology and aerospace firms such as Westinghouse and Boeing. In 1986, 60 U.S. firms produced turbines for the California market…Foreign suppliers from Denmark, Germany, Japan, and the Netherlands, among other countries, also sold their wind turbines in California…The California “wind rush” became the training ground for several firms, including the Danish manufacturer Vestas, now the world’s largest manufacturer of utility-scale wind turbines…

However, a drop in oil prices, along with reductions in government tax credits, caused a near total collapse of this market in the mid-1980s.18 In 1986, Congress eliminated the investment tax credit for wind...By the end of the decade, many wind turbine manufacturers went bankrupt as the industry adjusted to a much smaller market.

For the next two decades fuel prices were low and U.S. incentives spotty. In the United States, annual installed wind power capacity slowed from 1987 to 2000. The entire U.S. wind fleet exceeded 1,000 megawatts (MW) for the first time in 1986, but then took 13 years to reach approximately 2,400 MW…

In the 1990s a more sustained market for wind power and wind turbine manufacturing evolved overseas. Strong, consistent government incentives and policies, which have included a policy mix of direct government investment, tax breaks, loans, regulations and laws that cap or tax emissions, supported the development of manufacturers abroad, particularly in Europe…This allowed wind turbine manufacturers to establish themselves in countries such as Denmark, Spain, and Germany, where many wind turbine manufacturers are now based…

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Demand for Wind Turbines and Components

Demand for wind turbines and components is driven by growth in wind power capacity. More consistent U.S. policies have resulted in a substantial increase in cumulative utility-scale wind power capacity, growing from 9,000 MW in 2005 to more than 40,000 MW in 2010.23 The United States was second to China in cumulative and new installed wind power capacity in 2010.24 China and the United States accounted for over 40% of total installed worldwide wind power capacity at the end of 2010.25 The size of the U.S. market, notwithstanding the sharp decrease in new installed capacity in 2010, has made the United States an attractive investment location for wind turbine and wind component manufacturers…

Major customers for wind turbine manufacturers are large independent power producers (IPPs) and utilities such as Iberdrola Renewables, NextEra Energy Resources, Horizon-EDPR, Terra-Gen, Duke Energy, or Xcel Energy, which purchase wind turbines for commercial electricity generation…Other wind turbine customers include universities and military bases, but these customers account for a very small share of the market.

Commercial utility-scale onshore wind turbines are installed at wind farms, which are clusters of wind turbines grouped together to produce large amounts of electricity. Currently, there are more than 800 wind farms in the United States.28 The largest wind projects are located in Texas (see Table 1), which is by far the leading state in wind energy output with over 10,000 MW of total installed capacity by year-end 2010…Other large wind-power projects are in Indiana, Oregon, and Colorado. Several large U.S. wind farms are owned and managed by overseas companies. For example, the world’s largest wind farm, in Roscoe, TX, is owned and operated by Germany-based E.ON Climate and Renewables. It consists of more than 600 wind turbines purchased from three different manufacturers: Mitsubishi, General Electric (GE), and Siemens…

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Federal Support for the U.S. Wind Power Industry

Worldwide the wind power industry is driven by various types of government support, which range from tax credits to incentive policies like feed-in tariffs…These incentives have been much larger in several foreign countries than in the United States, which has helped to spur the manufacturing of wind turbines in Europe and Asia.

In Europe, feed-in tariffs…are among the policy tools that have been used to promote wind power, and have been credited by industry advocates like the European Wind Energy Association…with driving renewable energy growth particularly in Denmark, Spain, and Germany. However, faced with current fiscal realities, including a global recession and large budget deficits, some European countries have reduced their wind power feed-in tariffs and are taking a more critical look at their renewable energy policies.114 For instance, in 2010, Spain announced it would reduce its wind subsidies by 35% from January 1, 2011 to January 1, 2013…What these changes might mean for European manufacturers, and their overseas production strategies, remains to be seen. As many of the largest European manufacturers are already export oriented and rank among the largest and most competitive manufacturers in the world the impact might be limited.

China’s Renewable Energy Law, which took effect in 2006, is one measure that has driven growth in the domestic market.116 China introduced a feed-in tariff for wind power generation in 2009…The Chinese government also implemented various policies to encourage the development of local manufacturing and technology development…

In the United States, various federal policies also have been instrumental in the development of a domestically-based wind power sector, including:

 the production tax credit (PTC)/Investment Tax Credit (ITC), which will expire at the end of 2012;

 an advanced energy manufacturing tax credit (MTC), which reached its funding cap in 2010 (no additional funds were allocated to continue with the MTC);

 the Section 1603 Treasury Cash Grant Program, which requires that wind projects begin construction by December 31, 2011 and be placed in service by December 31, 2012; and

 the Section 1705 Loan Guarantee Program for commercial projects, which includes manufacturing facilities that employ “new or significantly improved” technologies.

The wind industry asserts that a national renewable electricity standard (RES) is needed to create long-term stability and to continue to attract investment in new turbine production facilities. Table 5 provides an overview of selected federal programs affecting the U.S. wind power industry.

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Production Tax Credit (PTC)/Investment Tax Credit (ITC)

The PTC, the main policy tool in the deployment of U.S. wind power, was first adopted during the administration of President George H.W. Bush as part of the Energy Policy Act of 1992 (P.L.102-486). It has been a significant driver of the recent growth of the U.S. wind industry. In each of the years during which the PTC lapsed (2000, 2002, and 2004), meaning that it expired prior to being renewed, the level of additional deployed wind capacity slowed or collapsed when compared to the previous year’s total: 93% in 2000, 73% in 2002, and 77% in 2004 (see Figure 6).119 Yet, when the PTC incentive was extended in 2004, 2007, and 2009, the industry responded positively, increasing wind power capacity compared to the previous year. 2010 was an exception to this trend with a drop in wind capacity of nearly 50% from 2009, even with the PTC in place.

Congress provided a three-year extension of the PTC through December 31, 2012, as part of the American Recovery and Reinvestment Act. The PTC provides an inflation-adjusted per kilowatt-hour (kWh) income tax benefit over the first ten years of a wind project’s operations, which in 2010 was 2.2 cents per kWh, and is a critical factor in financing new wind farms. In order to qualify, a wind farm must be completed and start generating power while the credit is in place, which would be by the end of 2012.120 The stimulus bill also allows wind project developers to select to receive a 30% investment tax credit (IRC §48) in place of the PTC if the projects are placed in service prior to the end of 2012…

AWEA advocates for a long-term extension of the PTC to encourage long-term investment in the industry, which it claims would allow for continued growth of domestic turbine manufacturing. The Governors’ Wind Energy Coalition has called for a seven-year extension of the PTC…Given the uncertainty about the continuation of the PTC beyond 2012, along with other tax benefits, some in the industry have begun to refer to 2013 as “the valley of death.”123 They worry that industry support programs will end without any replacement policies.

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Advanced Energy Manufacturing Tax Credit (MTC)

The Advanced Energy Manufacturing Tax Credit, also referred to as Section 48C of the Internal Revenue Code, was authorized in Section 1302 of American Recovery and Reinvestment Act.124 The MTC provided a 30% credit for companies for investments in new, expanded, or reequipped clean energy domestic manufacturing facilities built in the United States. Wind, solar panels, and electric vehicle batteries were among the 183 projects funded through the MTC before reaching its cap of $2.3 billion in 2010. The Obama Administration has requested another $5 billion for the 48C tax program. An extension of the MTC has been proposed through the Security in Energy and Manufacturing Act of 2011 (S. 591), or SEAM Act. It includes one significant change from the original MTC; higher priority would be given to facilities that manufacture—rather than assemble—goods and components in the United States…

Fifty-two wind manufacturing projects were awarded $364 million in tax credits under the MTC program.126 Beneficiaries included many manufacturers that were already active, or that had announced that they intend to open new facilities, in the United States. Selected manufacturers of wind turbines, blades, towers, and gears that received tax credits under the 48C program are listed in Appendix C.

Other Wind-Related Programs

Tax benefits for wind projects include accelerated tax depreciation and bonus depreciation; the latter allowed wind farm owners to write off more than 50% of the capital costs of building a wind farm in 2008, 2009, and 2010. The 2010 Tax Act127 increased the first-year bonus depreciation to 100% for new qualified property acquired and placed in service between September 8, 2010 and December 31, 2011, rather than 50% for the qualifying property. Bonus depreciation drops to the lower 50% rate in 2012…

Another ARRA incentive is a grant system administered by the U.S. Treasury Department. In lieu of tax credits, wind projects can receive a cash payment of up to 30% of the qualified capital costs. The Section 1603 Treasury cash grant program allows developers to opt for a cash payment instead of a tax break. To qualify, construction must begin by December 31, 2011…Wind projects under construction by year-end 2011 must be placed in service by December 31, 2012. Many in the wind industry are crediting the grants for keeping the sector healthy during the 2008 and 2009 recession…

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The Section 1705 loan program, a temporary ARRA program, administered by the Department of Energy is another financing program which authorizes loan guarantees for certain renewable energy projects, including wind projects. The program expires on September 30, 2011. So far, 32 projects have been completed or received conditional commitments; five were wind generation or wind manufacturing projects. The combined wind commitments totaled $1.6 billion, comprising 9% of the $18.8 billion in 1705 program funding.131 The Caithness Shepherds Flat wind generation project, which upon completion will be the largest onshore wind farm in the world, received a $1.3 billion loan.132 GE will manufacture the wind turbines. Loan guarantees were also extended to three other wind generation projects: Kahuku Wind Power, Granite Reliable, and Record Hill Wind.(see Table 6). One wind manufacturing project—an expansion of the Nordic Windpower assembly plant in Idaho—received a conditional commitment of $16 million in 2009. Nordic planned to design and manufacture an innovative two-bladed utility-scale wind turbine at the Idaho facility, but in late 2010, Nordic Windpower announced that it would relocate its production facilities to Kansas City, MO, to be closer to its market…To receive the loan guarantee the project must be under construction by September 30, 2011.

State Renewable Portfolio Standards

State renewable portfolio standards (RPS) are also credited with encouraging the growth of the U.S. wind energy industry. As of June 2011, mandatory RPS programs existed in 29 states and the District of Columbia.134 A portfolio standard creates demand for renewable energy by requiring companies that sell electricity to retail customers to obtain a specified share of their electricity from renewable generation.135 The U.S. wind industry has long called for a national standard to increase investor confidence in the sector’s long-term prospects. No such measure has passed Congress, although national renewable standards have been passed by the Senate on three occasions and by the House of Representatives once…

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Conclusion

The expansion of U.S. wind power generation will depend, at least in part, on government policy decisions. If state and federal governments continue to support wind generation, manufacturing of wind generating equipment in the United States is likely to increase. The production costs of U.S. plants that make turbine components appear to be competitive with those in other countries, and the difficulty and expense of transporting very bulky products over long distances serves as an obstacle to import competition.

Nonetheless, there are several obstacles that may impede the expansion of wind energy manufacturing in the United States. One is the history of policy-induced boom-and-bust cycles in wind energy investment, which may lead wind turbine manufacturers and component suppliers to conclude that future U.S. demand for their products is too uncertain. Another significant challenge affecting the sector’s future is the availability of adequate transmission for power generated by wind farms. Most wind farms are located at a distance from the urban areas where most electricity is consumed, and a shortage of transmission capacity could hamper wind farm creation or expansion. Congress may wish to evaluate the seriousness of transmission issues in the context of other federal efforts to support wind generation.

The structure of the wind manufacturing industry is also likely to undergo significant change. As is typical in budding industries, a large number of companies now compete in wind manufacturing. Mergers and failures are likely to lead to consolidation as the sector matures. As this report describes, competition in the wind turbine sector from new Asian entrants will likely become more significant in future years, but it is unclear whether many of these companies have the technological abilities and financial resources to become significant players in the market…