Dallas Morning News – Power plans cooled by end of tax credit

March 2nd, 2004  |  Published in Articles

By SUDEEP REDDY; Staff Writer
Location of Article – Dallas Morning News
Date – March 2, 2004
Edition: SECOND
Section: BUSINESS
Page: 1D

Fueled by rising energy prices, the wind power industry rushed to erect its spindly turbines across the nation’s prairies and mountaintops in the last three years.

But the unprecedented growth spurt, which built more capacity than in the previous two decades combined, has come to a sudden halt.

Congressional gridlock over the federal energy bill is crippling the nation’s wind business. Even with high prices for oil and gas, the wind industry still relies heavily on a federal tax credit that expired in December. Renewal of the credit hinges on the bill’s passage.

Meanwhile, thousands of jobs have been cut or furloughed. About $2 billion in economic activity remains on hold as the industry turns dormant, the American Wind Energy Association says.

“We’re being held hostage in this process in a more dramatic way than anybody that I’m aware of,” said Randall Swisher, the trade group’s executive director.

As providers of pollution-free renewable energy, wind companies have benefited from the tax credit since 1993.

Despite high hopes for the industry, it’s still relatively immature. Wind power today accounts for less than 1 percent of the nation’s electricity output. It’s expected to produce 16.7 billion kilowatt hours this year, enough for about 1.6 million households.

With 1,293 megawatts of capacity installed, Texas ranks behind California as the nation’s No. 2 producer of wind energy. Texas also is home to some of the nation’s leading makers of parts for wind towers.

Hit hard

When wind energy companies learned in November that their tax credit wouldn’t be renewed on time, they responded by cutting back.

Austin-based Cielo Wind Power LLC, a project developer and operator, has idled $130 million worth of development for this year. Each of the projects it had planned, including one near Midland and another in New Mexico, would have provided about 300 construction jobs through subcontractors.

“It’s really disappointing just because the places where these jobs are created are places that are pretty hard-pressed for new work,” said Walt Hornaday, Cielo’s president. “Those counties really had hard times hit them. This was a nice shot in the arm to the economy.”

Across the industry, Mr. Hornaday estimates that one-third of the industry’s 2,000 job cuts have come from Texas. Cielo alone has cut a quarter of its 60 employees since the fall. And the best-case scenario is for the industry to take nine months to ramp back up once the production tax credit is passed, he said.

Dallas-based Trinity Industries Inc., which builds wind turbine towers, eliminated dozens of jobs and restructured a manufacturing facility to work on other projects. At least half the 100 people who worked in the five-year-old wind division have been sent to other projects. Others have been laid off.

“As far as the wind tower business goes, we’re twiddling our thumbs and waiting to see what happens,” said Mark Stiles, Trinity’s senior vice president.

At Lone Star Transportation of Fort Worth, which trucks the giant wind towers across the nation, the gridlock means lost revenue and idling special equipment as the company redirects its employees to other projects.

David Ferebee, Lone Star’s vice president of sales and marketing, said wind projects offered some of the best returns for his company.

“When the wind power business is moving, it is very good business,” he said. “We try to put as many assets to work in that business as we possibly can.”

Lead times for wind projects mean that much of the year is lost once the tax credit expires. “If they pass the PTC [production tax credit] today, that doesn’t mean wind power is going to start tomorrow,” Mr. Ferebee said. “It may not start for another six months again.”

Wind power firms and manufacturers say they shouldn’t have to slash jobs. If more consistent policies were in place, many say, they could expand their operations with long-term plans that could support many more positions than they do now.

Energy bill

Congressional leaders have vowed to reopen debate on the energy bill this month.

The bill died three months ago amid a battle over provisions to protect companies from litigation over MTBE, a gasoline additive.

Legislators have vowed to slash the energy bill from its previous $31 billion price tag. One version now stands at $16 billion, though the Bush administration says it wants the bill closer to $8 billion.

Congress first passed the wind tax credit in 1992, the last time legislators agreed on a comprehensive energy bill. The provision was included to help propel the infant wind industry – along with the solar power business and others involved with renewable energy – and to lower development costs as new technology became available.

Adjusting for inflation, the tax credit gives project owners 1.8 cents for every kilowatt-hour of power produced over a 10-year period. Even though the provision has strong support from Democrats and Republicans alike in major wind power states, it has expired twice in the last five years, leading to an on-again, off-again development cycle.

The tax credit expiration in 1999 stalled development, but high energy prices and strong mandates in Texas and other states in 2001 propelled the industry forward with 1,696 megawatts of new capacity built nationwide.

After the 2001 expiration, the provision was renewed in March 2002. But the delay meant that only 410 megawatts of capacity were installed in 2002. Strong development resumed last year, leading to 1,687 megawatts of installations as companies scrambled to complete their projects by the end of December to receive the tax credit.

Some legislators and officials have called for a longer extension of the tax credit – for up to 10 years – to give the industry a longer planning horizon.

“We all have great visions of what it could do,” said Mr. Stiles of Trinity. “If people will spend the kind of money they spent with two-and three-year tax credits, I can only imagine what would happen if the program were in place and had some stability.”

The tax credit has already achieved much of its purpose. Technology costs have been falling steadily as new equipment is ordered and projects are launched.

For states such as Texas with lots of strong breezes and available land, the costs have come down so much that wind sometimes can be cheaper than power generated from natural gas. Gas prices are expected to stay higher for years, which could help wind become competitive in other states as well.

Transmission policies

Other than the tax credits, the greatest remaining barrier to the wind industry is a lack of transmission infrastructure to move power from wind-rich areas such as West Texas to major consuming areas like Dallas and Houston.

“The economics of the technology are there,” said Mike Sloan, president of Virtus Energy Research Associates, an Austin-based consulting firm for renewable energy. “But there is a national policy to offer a tax credit to incentivize wind production. If somebody thinks that’s being held out there somewhere in the future, they’re definitely going to wait until that gets clarified before moving forward.”

A few projects would get built even without the tax credit, officials say. But the credit makes a major difference in the industry’s planning.

“Does gas still need the incentives that it gets? Does coal still need the incentives it gets?” said Mr. Swisher of the wind energy association. “Should wind have to compete unsubsidized when every other major resource seems to have many millions of dollars of subsidies that accompany them?”

Despite the debate over incentives for private business, Mr. Hornaday said, the wind industry has a strong track record of creating jobs without negative effects like pollution.

“Wind power’s a pretty good performer for your dollar,” he said. “You’re effectively creating jobs out of wind. I don’t think you can get any better shot in the arm to a sagging economy than that.”