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Obama reelection: a future for wind power?

With Obama reelected, a push to extend the Production Tax Credit is likely but not guaranteed. The credit is crucial for wind power, but the 'fiscal cliff,' a skeptical House, and stiff competition from natural gas stand in the way.

Much time was spent in energy circles discussion leading up to the election on how the outcomeÌýwould affect the future of wind power in the U.S. The general consensus was that an ObamaÌýreelection would lead to an extension of the Production Tax Credit (PTC), and with that theÌýrescue of the wind industry in the U.S. Current turbine orders for U.S. delivery in 2013 sit nearÌý(if not at) zero, as the lack of the support from the PTC makes it extremely difficult to produceÌýwind power at a cost low enough to compete with natural gas derived electricity due to continuedÌýweakness in natural gas prices.

It's premature to proclaim the industry saved by Obama's re-election.

It's not clear when or even if, an extension will be passed. A push during the November sessionÌýof Congress is likely, and a PTC extension could easily slot in as part of a broad set of taxÌýextenders (research and development credits, new market tax credits and several other broadlyÌýsupported tax incentives are all expired or expiring as well).Ìý

While this is a reasonably goodÌýpossibility, as action on tax extenders is likely, and there is some bi-partisan support for the windÌýcredit, it is far from certain. The impending cliff will cloud discussions of all fiscal legislationÌýand passage of clean energy support by the House will be a significant challenge. I would startÌýthe handicapping today at a slightly better than even chance (call it 60% likelihood) for an
extension this calendar year.

The current extension being pushed by the American Wind Energy Association would act asÌýlittle more than a band aid. It is a one-year extension (this would allow the credit to apply to anyÌýprojects for which construction started in 2013). Certainly if passed this would lead to a big pushÌýof projects getting underway by late next year - I am aware of more than a dozen (and expect the total number is several dozen) good projects that are ready to go forward in 2013 if the PTC is renewed.Ìý

The challenge the industry faces is that at current pricing wind power generally doesn't compete with natural gas generated power until gas prices rise to roughly $6/mmbtu. That's significantly higher than current prices and most forecasts don't have gas prices breaking the $6 threshold for several years. So a one-year extension would provide a little quick relief, and then the industry would be right back in the same position.

Another key point that typically gets lost is that the PTC supports not just wind, but alsoÌýbiomass, hydroelectric upgrades, geothermal power, municipal solid waste and some otherÌýdiscreet energy types. While the credits for all of the non-wind technologies runs through the endÌýof 2013, that sunset date limits financing possibilities for these projects now (the 2013 cut-offÌýas written is based on an asset being in service rather than construction starting). Expect someÌýcontinued challenges in those sectors as well until there is some certainty on future of the credits.

A serious discussion about a long-term extension with a phase-out, or with the amount of theÌýcredit indexed to natural gas prices would likely get some bi-partisan support and provide a longÌýenough bridge that the industry could be commercially competitive by the end of that creditÌýperiod. This type of support regime would allow for a clear and certain path forward for theÌýindustry allowing growth and per-unit cost reductions. Until that becomes the focus of the policyÌýdiscussion, it's hard to see the wind industry building any momentum in the U.S.

– This article is a modified version of a story inÌýEnergy Trends Insider, aÌýÌýthat identifies and analyzes financial trends in the energy sector. It'sÌýpublished byÌý.ÌýÌý