First Wind chief executive says life without PTC is possible

By his own admission, First Wind chief executive Paul Gaynor will never win a popularity contest in the US wind industry by suggesting it can succeed without the federal production tax credit (PTC).

“I think it would be great if we could come to a conference and not talk about being subsidized by the federal government,” he told the Renewable Energy Finance Forum-Wall Street event here this week.

“I know the industry has needed it. I think the question for all of us is, ‘Do we need it anymore or forever? I believe the answer is no,’” he says. “We shouldn’t need it.”

Gaynor says without the PTC, the wind industry would eliminate all Washington politics around extending the subsidy every year or two. It could also differentiate itself from other renewable energy sectors by being able to stand up on its own two feet, he adds.

The PTC, which pays $22/MWh, inflation-adjusted for a project’s first decade in operation, expires on 31 December. It has been the main driver for industry growth since first enacted 20 years ago.

The wind lobby wants the PTC extended until 2016, which would place the sector on an even footing with solar energy, whose main tax credit expires then. But lobbyists are divided over what to do with it after then, with some preferring it continue in some form.

Most speakers at the conference were cautious that Congress would renew it beyond 2013. Developers say such a short extension would provide too little time to complete projects. Lawmakers are under pressure from voters to curb runaway budget deficits. One way to help do this is to end tax breaks for special interests such as the wind industry.

Pessimists at the event argued that if challenger Willard “Mitt” Romney can defeat President Barack Obama and opposition Republicans gain control of Congress in 6 November national elections, the PTC will die. Wind supporters say that would be unfair unless accompanied by an end to tax breaks enjoyed by fossil fuel industries for decades.

The Navigant consultancy forecasts 1GW to 4GW in US installations next year versus 9GW to 12GW in 2012, according to Lisa Frantzis, managing director for energy.

A third possibility and one that some in the industry would accept, is a so-called “glide path” toward 2015 or 2016 with the understanding the PTC would then end. Gaynor says that is his preference, as it would facilitate longer-term business planning, which does not exist in the US wind industry.

Getting to a world without the PTC means finding ways to reduce costs to compensate for loss of the subsidy. “We think there is a path to do that, but everybody has to contribute,” he says. Turbine manufacturers will have a key role to play as follows:

*Asset life. While banks and engineers focus on 20-year turbine life and others at 25 years, equity investors such as First Wind are looking at 30 years. “If we can move asset life to 30 years, then we will have a pretty big impact on bringing down the cost of power,” he says.

First Wind recently did a 30-year power purchase agreement in Washington State that brought down the electricity cost between 10% and 15% from the standard 20-year deal, he says.

*Turbine availability. Gaynor says a further 10% improvement over the next three or four years in net capacity factor, or efficiency, will be worth $7/MWh. “That’s a big bump and probably do-able,” he contends.

*Turbine prices. They have come down $3/MWh in the past several years. Gaynor says they would need to decline another 15% from 2011 pricing to help make up for loss of the PTC. “Is that possible? Based on all the manufacturing that has been built in the US, I think it is possible,” he says.

*Financing. Gaynor says that by eliminating tax equity investors, wind projects could be built for less. “If we didn’t have to deal with the tax equity investor, I think you could bring down the weighted average cost of capital quite a bit,” he argues. “We love them but they are expensive.”

Perhaps $7/MWh in a power purchase contract could be squeezed out if financing was lowered 150 basis points on a weighted average cost of capital basis, he says. “I think there are cheaper sources of capital out there,” Gaynor says. He did not name them.

There were about $3.5bn of tax equity raised for wind farms in 2011 in 19 transactions and more is expected this year as developers rush to beat the PTC expiration deadline, according to John Eber, head of energy investments at JPMorgan Capital Corp. About 55% of transactions last year involved production tax credits.