With an industry tax credit in jeopardy and new projects at a virtual standstill in the U.S., you might have expected the wind industry to come limping into RETECH2012. Instead, the audience heard from a sector that’s honing in on what it can control — namely cost reductions and innovation.
“We haven’t placed any orders for turbines for 2013,” said First Wind’s Julia Bovey in the opening remarks. That’s been the norm in 2012 for wind developers and turbine manufacturers as utilities and power purchasers have adopted a wait-and-see approach when it comes to the Production Tax Credit (PTC).
As a result, she added, three primary drivers have taken hold: reducing costs, improving turbine technology, and accessing capital in different ways.
Life Beyond The PTC
While the PTC has taken up much of the industry’s focus, wind proponents like Bovey and other green advocates are pushing for other ways to access capital. Two that have captured the discussion recently are master limited partnerships (MLPs) and real estate investment trusts (REITs). Both are used by oil and gas companies and have driven more than $300 billion in private investment. Here’s the way it was described in a NYT Op-Ed piece.
“Some economists and green tech entrepreneurs have advocated a change in federal tax law to allow renewable energy companies to use a tax-advantaged investment device known as a master limited partnership, which has attracted $350 billion in private investment but is limited to oil and gas extraction and pipeline projects. Another proposal is to allow real estate investment trusts, which are like mutual funds for real estate, to cover energy transmission networks and renewable energy generation.”
The wind industry says the subsidy discussion is really about equal footing. An LA Times report showed how lopsided it can seem depending on the data being analyzed.
“Fossil-fuel producers reap tax accounting breaks such as the depletion allowance, which is worth an estimated $1 billion a year, according to the Environmental and Energy Study Institute, a Washington think tank created to advise Congress on energy policy. Tax-expensing options for drillers bring them $1.9 billion a year. Relief on royalty payments due to drillers on government property: $53 billion over the lifetime of the leases.”
However the subsidies play out, panelists agreed something similar to the current renewable portfolio standard should be a goal. As much of a hot potato that it might be politically, more than thirty states are already enrolled to spark renewable growth. As one of the speakers mentioned, RPS is the closest thing we have to a national clean energy standard.
Innovation Brings Multiple Benefits
The pace of innovation in the wind business was certainly one of the bright spots. Taylor Geer, with energy consultancy Garrad Hassan, said turbine efficiency and reliability have improved dramatically over the last five years, something he attributes to better manufacturing processes and more R&D earmarked for things like forecasting and storage.
“We definitely have a better idea of what we need to look like within three-to-five years,” said Geer. “Not to mention we’re getting a better sense of what our cost of energy will be, and that’s a big lift.” Like other panelists, Greer emphasized the impact that energy storage would have on levelizing electricity costs. As the storage infrastructure improves, most agreed wind farms would likely resemble a generation model closer to conventional power plants.
To get a sense of how fast turbine technology is evolving, you can look at “repowering” efforts, which replace older turbines with new ones. According to Jeff Schlichting at wind developer Sustainable Legacy, one turbine can now replace up to five others as wind farms are upgraded.
Taking Costs Out Of The System
Cost reduction was another area where technology improvements are having an impact. But it’s not just better rotor technology or lighter materials that are helping, it’s supply chain efficiencies and the way wind farms are commissioned. “As the industry has matured, we’ve gotten better at everything from construction to logistics,” said Schlichting. “
And perhaps a sign of that maturity was the fact that IBM was on hand to address the operations and management (O&M) market for wind. According to Biren Gandhi of IBM Global Business Services, O&M costs can approach one-third of the total capital expenditures for a wind farm.
The company was pitching its IT-driven approach to managing large-scale wind operations, experience that it’s gained from running big servers and cloud applications for customers in the automotive industry and other manufacturing-intensive operations. IBM projects the O&M market could grow by as much as $6 billion over the next decade.
At last week’s RETECH 2012 session on Renewable Energy in Mexico, Miguel Vazquez from the U.S. Commercial Service in Mexico City presented a detailed look at the challenges and opportunities for U.S. businesses wanting to market renewable solutions in Mexico. With its own presidential election looming, Vazquez says that Mexico’s renewable energy policies would likely get a boost, but warned its regulatory framework would continue to be a challenge as American businesses expand across the border.
He said things will likely be compounded by the fact that Mexico ‘s largest utility, CFE, has a mandate to buy the cheapest energy available. That’s a policy decision that helps zero out solar all the way into the year 2026. U.S. companies are also limited in terms of how they can work with CFE, said Vazquez. Today, only power generation projects are considered, not distribution or transmission.
But all that aside, the market for exports to Mexico can’t be ignored, especially in wind and biofuels, where Mexico ranks in the top three globally, according to Dept. of Commerce data. And from a U.S. perspective, Mexico ranks ninth for potential renewable energy exports.
Vazquez also touched on some of the current renewable incentives in Mexico . One is aimed at taxpayers, and provides a 100% deduction incentive for investing in renewable energy equipment as long as the equipment is operational for at least five years. And in 2009, the Fund for Energy Transition and Sustainable Exploit of Energy was established. In less than two years, it had a capitalization of $260 million that could be spent on sustainability projects.
Mexico is also bringing its educational institutions into the mix, making funds available for renewable R&D from the Ministry of Energy and CFE. Lastly, U.S. business could also get some help from Mexico ‘s “Green Mortgage” program, which provides a lower APR if homeowners purchase renewable energy equipment.
Even with all the incentives, Mexico ‘s renewable portfolio will still only approach 25% by 2026. Because of that, Vazquez said U.S. companies really need to do their “homework” and streamline the way they approach the market. Legal challenges, permitting and land ownership were cited as some of the biggest obstacles. He mentioned it can still take a few years for permits related to power generation projects.