July 2012 and June 2013 saw more than 1.25GW of onshore and 1.46GW of offshore wind capacity installed in the UK, an overall increase of 40% on the previous 12 months. The long-term future of offshore looks particularly bright: an additional 3.8GW is either in construction or has planning approval, with a further 7.8GW in the planning system, according to RenewableUK.
Across the Atlantic, the US’s ongoing boom-and-bust cycle has the sector in what looks to be a temporary rut. Following 2012’s unprecedented capacity increase of 13.1GW, just 1.6MW was added in the first half of 2013. The industry is already showing signs of recovery, however, with US utilities agreeing to purchase 5.7GW of new wind power installations and receiving building approval for a further 1.9GW, according to the American Wind Energy Association (AWEA).
Such positive figures (the US’s dip was widely predicted and the sector is expected to pick-up again come 2014) should result in high levels of investor confidence. But in both the UK and US, a sense of wariness pervades: precarious government subsidies, fickle political support, a lack of environmental legislation and underinvestment in industry all threaten the future, frightening the investors that wind so desperately needs to thrive.
The UK: a ‘hairy’ regulatory landscape
In the UK, future market confidence is closely tied up with the final terms of the Energy Bill, first presented to the UK Parliament in November 2012 and now passing through the closing stages before becoming law. At its centre, a switch from the Renewables Obligations (RO) subsidy to the Contracts for Difference (CfD) scheme aims to provide greater certainty for investors in low-carbon technologies by guaranteeing a fixed price for energy supplied.
Though CfD support only lasts 15 years rather than the two-decade-long RO, the UK’s Department of Energy and Climate Change (DECC) considers its risk profile to be substantially lower. Many of those within the industry, however, have yet to fully come round to this way of thinking.
"It looks pretty hairy until the policy and regulatory environment has been tied down some more," says Dr Gordon Edge, director of policy at RenewableUK, the country’s leading not-for-profit renewable energy trade association. "While the government is moving to get rid of some of the uncertainty – eating away at the biscuit, shall we say – there’s still a jammy bit in the middle that they haven’t quite got to yet."
High on Edge’s list of concerns with the current bill is the sharp proposed reduction in offshore subsidy strike prices, which jumps from £155/MWh in 2014-15 to £135/MWh in 2018-19. The figures were predicated on the UK installing 18GW of offshore capacity by 2020 – enough to bring down relative manufacturing costs – but Edge believes that 10-12GW is a more realistic target, rendering the steep decline in benefits unfeasible.
"A lot of my members thought it was somewhat too aggressive, given the amount of volume we’re expecting to get out of this," he explains. "The issue’s exacerbated by DECC’s insistence on doing this in £5 increments. We need to go away and think about how much cost reduction we can deliver on a more limited amount of volume, and that’s not a simple question."
Others have criticised the uniformity of the offshore strike-price design, which is the same regardless of sea depth, arguing that it will bias the market towards shallow-water projects. There are also concerns about the CfD application process: existing legislation requires developers to apply before design work is complete, although at such an early stage they are often unsure of what their final capacity will be.
The quest for binding UK targets
The UK Energy Bill has also thrown doubt on future government support for the renewables sector by omitting a 2030 emissions target, despite clear advice from the Committee on Climate Change (CCC) to include one. Existing milestones require the UK to achieve a 34% reduction in UK greenhouse gas emissions by 2020, and 80% by 2050. The CCC called for a goal of 50g/KWh by 2030 to be included in the forthcoming bill, but only a clause enabling a 2030 target to be drawn up in 2016 – after the next general election – has been added.
"We would argue that you’d need to have something more, earlier on, to give people that long warning," Edge comments. "And certainly also in the ongoing European debate, we’d argue that having a binding renewable target gives people the sense that we’re really up for this; that the investments we’re going to make are lower risk.
"You bring down the risk, you bring down the cost of capital and the price of energy drops like a stone," he continues. "It’s about having that sense that this is the route we are taking. Make it a target, and then everybody can have the confidence that that’s where we’re going."
Beyond politics and legislation, the state of the UK’s wind infrastructure – particularly manufacturing and supply-chain facilities – is central to boosting market confidence. The government has taken a proactive approach to the issue, focusing particularly on the offshore sector to which it has pledged £20 million to improve wind supply chains and £46 million to enhance innovation between industry, government and academia, and help companies bring new products to market, along with a string of other initiatives.
"It’s really important that we focus a lot of effort on making UK companies fit for purpose," says Edge. "One of the things that’s been a real headache for us heretofore has been the fragmentation and difficulty in trying to work out who’s responsible for what in the innovation chain, where the money is, and if they’ve got enough at that point as opposed to the other point. I’m hopeful that the offshore renewable energy catapult [a £1-billion public and private investment over the next five years] can help pull that together."
Tax credit uncertainty in the US
The US investment market shares many of the UK’s issues, with uncertainty over government subsidies dominating the agenda. An almost surreal state of perpetual long-term crisis reigns, with the production tax credit (PTC), which grants 2.2¢ to wind energy suppliers per kilowatt hour generated for the first decade of operation, constantly under threat of expiration. First enacted in 1992, it has elapsed and been renewed eight times, most recently on 1 January 2013 as part of the fiscal cliff deal. It is currently due to expire on New Year’s Day.
According to the Economist, the US Government and World Resources Institute believe that the subsequent uncertainty surrounding the PTC subsidy is leading to underinvestment in the US wind sector. It is also a major threat to workers, with industry experts warning that allowing the PTC to expire at the close of 2012 would cost the US around 40,000 jobs.
"For a long time, we’ve argued for longer extensions so that we can smooth out the boom-and-bust dynamic that we’ve sometimes seen in the industry," says Paul Holshouser, finance policy manager at the AWEA.
"If you look at the times where we had the longest extensions, such as the 2005 Energy Policy Act and then the stimulus programme, you actually see a very steady pattern [of capacity increase]. So it’s definitely true that we would benefit from having a longer extension than just a year. But we have to accept the constraints congress puts upon us."
Tax incentives for energy generation
Despite the constant doubt surrounding the PTC, however, the country’s clear focus on rewarding the amount of electricity produced has proven effective. The US wind industry is quickly expanding: having taken 25 years to reach its first 10GW of capacity in 2006, it passed both the 50 and 60GW milestones in 2012 – the same year in which it attracted over $25 billion of investment for new projects. Moreover, technological innovations, also driven by the subsidy, are improving turbine efficiency.
"The old US capacity farms that were being built from 2008-09, came in at around 30%," says Holshouser. "But the projects that were built in 2012 and are being built now are almost universally more than 40%. Some are breaking 50%. That’s because of these innovations, which themselves are partly driven by the fact that our tax incentive directly rewards generation."
According to Holshouser, ongoing innovation in the wind sector – made possible by the PTC – is responsible for wind’s continued competitiveness in an energy market flooded by natural gas, and which has left the US coal industry struggling. He points to two recent events on the stock exchange as evidence: NRG Energy’s recent agreement to purchase most of bankrupt Edison Mission Energy’s assets for $2.64 billion and the highly successful initial public offering (IPO) of Pattern Energy Group, owner of six wind power projects in the US and Canada, and two developments in Chile and Canada.
"The wind assets, as well as the gas assets, of Edison Morrison were the part of that company that was attractive to NRG," he says. "And Pattern Energy received a vote of confidence by having a nice little price bump on the first day [from $22 IPO to $23].
"So those are a couple of signs that are what I call boots on the ground. It’s saying there’s a future for wind. And the energy portfolio mirrors what you hear from the utility companies that are talking about wind as a big piece of their strategy."
The solution
While this all bodes well for future investment in the sector, the real key to long-term growth in the US is arguably the same as in the UK: a reliable subsidy source with ongoing political support and a sound industrial infrastructure. Legally binding emissions targets – seen as so crucial to achieving these goals in the UK – are, however, highly unlikely to happen. Only 29 of the 50 US states have renewable portfolio standards, along with Washington DC and two territories.
"The federal government have dragged their feet on a similar binding target at a national level," comments Holshouser. "It’s not a very good outlook in the near term for one of those. We’ve supported a national renewable standard for a long time."
A more realistic path to a secure investment environment would be extensive tax reform. Holshouser expresses support for such a move – "we have emphasised the need for a longer-term policy for a stable environment and tax reform offers the possibility of that" – but concedes that immediate prospects are low. Despite ongoing discussion of the subject in congress, many are sceptical that it will ever happen. The last major reform was back in 1986.
Even with its seemingly immovable cycle of boom and bust, the US wind industry continues to grow. So, too, does the UK’s, although at a somewhat steadier pace. Improving investor confidence is vital to the future of both; the UK is arguably taking a more proactive approach to the issue – bringing in new subsidies and spending government money on industry infrastructure – although more, particularly in terms of emissions targets, could certainly be done. Despite his government’s comparative lack of activity, however, Holshouser remains positive about the US wind sector’s future.
"Six years ago, it was unthinkable that coal would be less than 50% of total US power," he says. "We have completely forgotten that mindset now."
Let us hope that tomorrow’s investors share his confidence in wind.
