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January 3rd, 2013

Wind Power Avoids Fiscal Cliff ‚?? Production Tax Credit Extended

by Andrew Price, President & COO

Although it received very little attention outside of the wind industry, an extension of the production tax credit (PTC) for wind power was included in the American Taxpayer Relief Act of 2012, the last minute legislation that was signed into law by President Obama on January 2nd, to avoid the fiscal cliff. The PTC is worth 2.2 cents for every kWh produced by a wind turbine for the first 10 years of operation. Although the cost to produce electricity with wind has fallen as turbines have gotten larger and the number of manufactures expanded, the PTC is still necessary for most wind projects to be economically feasible.

The US wind industry rushed to complete projects before the expiration of the credit on December 31st 2012. The industry may set a record by installing about 12,000 MW of wind energy capacity in 2012, surpassing the previous record of 10,000 MWs installed in 2009. The 12,000 MWs projected to have been installed in 2012 represents about 45% of all electric generating capacity installed in the US during the year, as shown in the below chart from the US Energy Information Administration. Wind power surpasses natural gas, at about 30%, as the leading source of new nameplate electric production capacity.

The extension of the PTC probably came too late to avoid a significant slowdown in wind farm construction in 2013. Many wind turbine factories announced layoffs months ago as orders for 2013 dried up. Most wind farms take much longer than 12 months to permit and construct. For this reason, the industry craves the certainty of a multi-year extension in the PTC.

Without the PTC extension the wind industry would have almost certainly ground to a complete stop in 2013. The new law allows for any project that has started construction by December 31, 2013 to qualify for the PTC. This is a key change from 2012; last year wind projects had to begin generating electricity by December 31st to qualify for the PTC. Although I would anticipate fewer projects in 2013 compared to 2012, the extension is certainly good news for the wind industry.

Now that the PTC has been extended, the most significant headwind for more wind power in the near term, is the abundance of cheap natural gas being produced from the hydraulic fracturing of shale. Natural gas is the dominant fuel in many regions of the country in regards to setting electricity prices. As long as natural gas remains near historic low prices, it will be difficult for wind power to compete without the support of subsidies like state renewable portfolio standards and the PTC.     

 (Tags: Wind Power, Production Tax Credit, natural gas, American Taxpayer Relief Act of 2012)

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