US onshore wind generation is booming with tax equipment incentives instrumental in ‘land banking’ wind power projects. With so much capacity being installed on land, can an offshore wind power boom be far behind?
Onshore wind generation is getting a huge boost in the United States these days, with developers rushing to order and take delivery on turbines in the next few months. At the same time, longstanding and fierce resistance to offshore wind shows signs of dissipating, as this country’s first offshore wind farm nears completion. That could signal the beginning of significant offshore generation in the US, which lags way behind Europe. Wind turbines, which include the blades, the tower and the turbine machinery called nacelles, form a vitally important component of project cargo, perhaps the single most valuable item on an industry-wide, project cargo-related manifest. Transportation of a single blade, which can now top 200 feet in length, can cost tens of thousands of dollars and involve specialized equipment and expertise.
Tax Incentives A single, 2MW wind turbine can cost more than $2 million. Turbines constitute about two-thirds of total development price of a wind farm, which can easily cost more than $100 million to develop.
Federal tax incentives are at the heart of the rush. Under Congressional legislation enacted the end of last year, so-called production tax credits for wind power will have a graduated 20% decrease per year beginning 2017, until they end completely in 2020. The tax credit now equals 2.3 cents per kilowatt-hour generated.To qualify for these credits, a developer must begin a project during the calendar year in question, not place the wind farm into service. However, the regulations don’t require that developers physically break ground and begin construction to qualify for credit. A wind farm developer can order machinery worth just 5% of total project cost this year and claim credit for the entire project, as long as the representative machinery is delivered within 105 days of purchase and the entire project is completed within four years. So, major developers are buying turbines designated for multiple projects on the drawing board. For example, a developer plans to construct wind farms throughout the Southwest and Midwest over the next four years for a total cost of $2.4 billion. The developer buys turbines this year for $120 million, designates those turbines for various wind farms and gets the full tax credit for the entire cost of all the projects, even though physical work may not be started until, say, 2018, and the other turbines for a particular project not ordered and delivered until 2019. In fact, the purchase of equipment is considered a safer way to insure tax credits than beginning physical construction, explained Edward Zaelke, who chairs the global project finance practice for the law firm, Akin Gump Strauss Hauer & Feld LLP. “You can dig a hole and then you have to argue with the IRS, is that a big enough hole,” Zaelke said. “But the IRS has created a safe harbor and said if you spend 5% of the project costs this year, you take delivery of the equipment within 105 days of payment, we’ll deem that 5% is safe-harbored in those projects.”
What’s more, Zaelke added, many investors prefer this so-called “bright line” IRS designation. That’s particularly true of so-called tax equity investors, those who underwrite a certain percentage of the project costs, in return for the tax incentives as well as some of the income from the wind farm, once it is operational.
“As a tax equity investor, I’m going to use my tax equity money first on those projects that are 100% qualified by the IRS. Once we’ve gone through all those projects, I’ll start taking a look at those projects that started construction via physical work, where there’s no safe harbor,” he said.
Banking on Wind
So, turbines are being ordered this year. Once delivered, they will be stored in warehouses, sometimes for years before being installed.
This rush to order, which could last for at least one more year, has had an unintended effect of causing a potential shortage of wind turbines. “There is a battle to secure turbines,” said Zaelke. “The turbine makers right now are in the catbird seat.”
Project cargo logistics specialists and specialized ships and trucks that can transport this kind of cargo are also in great demand.
Wind energy projects are accelerating. Last year, new wind power generation accounted for more than 40% of all power capacity additions in the US, according to the American Wind Energy Association, or AWEA.
It should constitute even more this year. During the second quarter of 2016, developers announced more than 3,000MW of new projects and a total 12,450MW of wind capacity projects under development, AWEA said. That development represents a 23% increase over the first quarter. In turn, the first quarter logged more than 3,500MW of new projects announcements.
Installed wind capacity in the United States as of June 30, 2016 totaled 74,821MW, according to AWEA. (The US is second in the world in wind energy behind China.)
So, this half-year alone, developers announced new projects that total almost 10% of existing capacity. The renewable energy consultancy MAKE estimates from this year through 2020, the US will install 45,800MW of new wind-powered generation.
Take, for example, MidAmerican Energy, based in Des Moines, Iowa. On August 26, the Iowa Utilities Board approved a $3.6 billion wind project that MidAmerican proposed in April. The project will add “up to 2,000 MW” of wind energy through 1,000 wind turbines in multiple locations throughout Iowa, the company said, and represents MidAmerican’s biggest ever foray into wind energy. The sites will begin generating power in 2017 and phased in over a three-year period.
MidAmerican cited the tax credits for the timing of this ambitious project. “The Wind XI project has been timed to allow MidAmerican Energy to make maximum use of available wind PTCs for the benefits of customers,” the company said in April. “Without PTCs to help fund the cost of wind development, Iowans will pay more for building wind turbines in the future.”
In its most recent press release, MidAmerican pinpointed two additional selling points for this type of renewable energy: jobs and landowner lease payments. According to the company, the project, dubbed Wind XI, will create thousands of construction jobs and hundreds of new permanent jobs. In addition, MidAmerican said that it will generate more than $1.2 billion in landowner easement and property tax abatement.
Farmers in projects like this can offer their land to utilities for as much as $10,000 per wind turbine per year, a substantial and stable boost to farm income.
“In addition to clean energy, they’re providing other benefits,” said Zaelke. Farmers become great advocates of the energy source. “Farmers love them. For every turn, they make dollars.”
One question now is whether this kind of accelerated development means that new wind power projects will fall off dramatically in the years ahead. The industry has said that it won’t need subsidies forever and should be able to be competitive with other forms of energy sources. According to AWEA, the cost of wind power generation has decreased by 66% in just six years. Towers are taller. Blades are longer. The turbines are ever more efficient.
The tax credits certainly add to wind power’s appeal. However, the industry claims that by the time the credits are removed entirely, wind turbines will cycle through two more iterations and the installed costs will decrease even more.
Whether they will be truly competitive is another matter. Onshore wind power in the US last year cost about $80 per megawatt hour. That’s far below solar power’s $107MWH, but it’s still more than power fueled by cheap natural gas, which now costs about $65MWH.
Offshore Wind Power
Meanwhile, offshore wind gets a modest, but substantial nod in the next few weeks when the US’s first-ever offshore project is completed. Off Block Island in Rhode Island, Deepwater Wind’s initial project consists of just five turbines totaling 30MW, or enough to power 17,000 homes. Even that has raised the ire of homeowners, some of who seem to object more to their ocean view being spoiled than having to pay outrageously high prices for electricity now produced by diesel generators. But Deepwater Wind, with deep pocket owners, persevered and the project could go online next year. Deepwater Wind has said it wants to build several more projects off the coast of New York, New Jersey, Rhode Island and Massachusetts.
That vision got a boost as well last month. Massachusetts Governor Charlie Baker signed into law legislation aimed at diversifying energy sources and promoting renewable energy as both good for the environment and for job creation. The legislation cites offshore wind in particular as well as hydroelectric power.
There’s more than a bit of irony here, as Massachusetts is the site of a marathon struggle against offshore wind farms. Well-heeled and well-connected residents on Cape Cod have blocked the proposed $2.6 billion Cape Wind project for more than a decade. Cape Wind, located in the Nantucket Sound, would generate almost 500MW, if it’s ever allowed to proceed.
The potential for offshore wind power is enormous. Oceans offer stronger, more consistent winds than onshore and the installed blades can be much bigger. The relatively narrow shelf off the east coast of the US lessens the technological challenges of constructing the turbines and transmitting the power, not to mention lessen the visual impact.
Advocates believe, the US will develop offshore wind. But it will come slowly.