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Fact check: Myhrvold off target on energy incentives

Fact check: Myhrvold off target on energy incentives

Venture capitalist Nathan Myhrvold, a former chief technology officer at Microsoft, has a Bloomberg opinion article extolling the virtues of, not surprisingly, research and development (R&D) of new energy technologies.

While R&D definitely has a valuable place in the energy arena, it's no replacement for the stable tax policy the wind energy production tax credit (PTC) provides to businesses and consumers. Mr. Myhrvold's article overlooks some important facts:

Government incentives are successfully lowering the cost of wind power: This has been made clear by two recent studies of the wind power industry, one from the Lawrence Berkeley National Laboratory (LBNL) and a second from Bloomberg New Energy Finance.

LBNL found that wind turbine prices have dropped sharply in recent years, due largely to the scaling up of turbine size to reduce cost of energy (COE) and the growth of a domestic supply chain as the U.S. dollar has declined against other major currencies.

BNEF, meanwhile, said land-based wind farms will be “fully competitive” with conventional electricity sources in five years. BNEF said it sees the cost of electricity from land-based wind turbines declining 12 percent by 2016 “thanks to a mix of lower”cost equipment and gains in output efficiency,” adding, “The best wind farms in the world already produce power as economically as coal, gas and nuclear generators; the average wind farm will be fully competitive by 2016.”

BNEF also sees reason for optimism on wind power's economics looking ahead: “Due to structural overcapacity and growing competition in the wind industry, we expect turbine prices to continue to fall over the next few years. At the same time, as designers roll out yet larger turbines with longer blades designed to capture more energy, even in low”wind locations, capacity factors will continue to increase. These two changes will drive the cost of wind energy down further, to parity with conventional energy sources. Assuming specific learning rates for these components, we expect wind to become fully competitive with energy produced from combined”cycle gas turbines by 2016 in most regions offering fair wind conditions.” (emphasis added)

BNEF lead wind analyst Justin Wu commented, “The public perception of wind power tends to be that it is environmentally friendly, but expensive and intermittent. That is out of date in the best locations, where generation is already cost”competitive with fossil fuel electricity, and that will be the case for the majority of new onshore turbines installed worldwide by 2016.

The press is reacting to the recent price drops in solar equipment as though they are the result of temporary oversupply or of a trade war. This masks what is really going on: a long”term, consistent drop in clean energy technology costs, resulting from decades of hard work by tens of thousands of researchers, engineers, technicians and people in operations and procurement. And it is not going to stop: In the next few years the mainstream world is going to wake up to wind cheaper than gas, and rooftop solar power cheaper than daytime electricity. Add in the same sort of deep long”term price drops for power storage, demand management, LED lighting and so on – and we are clearly talking about a whole new game.” (emphasis added)

Real-world confirmation of these studies' findings comes from Xcel Energy, a major U.S. utility, which recently announced plans to purchase more wind power for its Public Service of Colorado subsidiary.  In doing so, Xcel commented, “This proposed purchase contains the lowest-cost wind energy we’ve seen, making it competitive with other energy sources.”

Government incentives have led to the rapid growth of a domestic U.S. wind power industry: The U.S. has an inherent competitive advantage in manufacturing turbines to supply the American wind farm market, which, because of our enormous wind resources, is one of the world's largest and best markets. That competitive advantage arises from the fact that turbines and their main components (towers, blades, generators and gearboxes) are heavy and expensive to transport around the world.  According to one major manufacturer, transportation costs make up nearly 20 percent of the installed cost of a new wind farm. In a highly competitive world, that's a big number, and most manufacturers are looking to shave those costs as much as possible. Obviously, one of the best ways to do that is to assemble the turbines and manufacture major components as close to the wind farm site as possible. The result? More than 10 turbine manufacturers have opened factories in the U.S. in the past five years–in other words, European turbine manufacturers are not opening new factories in Europe or in China to supply the U.S. market, they are building them here. They are also seeking to build supply chains here in America, to reduce shipping delays and increase efficiency.

As recently as 2005, only about 25 percent of the content of wind turbines installed in the U.S. was domestic. Today, that number is more than 60 percent, and there are more than 400 factories in 43 states from coast to coast producing wind turbine components. A recent report from the nonpartisan Congressional Research Service (CRS) on the wind power industry underlines this, finding that 1) domestic content of turbines is indeed increasing rapidly and 2) turbine manufacturing creates good jobs in heavy industry. Wind power remains a sound investment in America's future.

Policy certainty is a key issue: The primary force driving wind's success in lowering costs and generating domestic manufacturing jobs is the federal wind energy Production Tax Credit (PTC), which reduces the risk in financing new wind farm projects and leverages private capital–an average of $17 billion per year over the last four years. The PTC is currently scheduled to expire at the end of 2012, and an extension is urgently needed.

While a lot of progress has been made, the industry's not out of the woods yet.  One analyst puts it this way: “The industry is at a very interesting inflection point where technology and innovation are really helping to drive down the cost of wind substantially, But the problem is that the industry still needs the PTC to sustain a sizable level of build each year. Wind would have a very challenging time competing without the PTC, that much is clear.”

Companies that install and operate wind farms need a stable tax policy environment in order to make business plans, determine how much to invest, order turbines, arrange for construction, etc., and as the credit's expiration draws near, that period of stability is growing short. There is no lack of opportunity–one company spokesman notes, “We have massive amounts of land still that can be developed for power production and really good wind resource”–but without knowing what the financial playing field will be, companies will be forced to move to the sidelines. Investment will dry up, workers will be laid off, and America will fall behind in the international race to dominate the emerging energy industries that will power future prosperity and jobs.

More reading:

Wind power increasingly competitive and productive, new reports find, November 10, 2011
National lab report: Wind turbine prices drop as designs improve, U.S. supply chain develops, November 1, 2011
Xcel Energy: More wind, less cost, October 31, 2011
Citing lower costs, Mich. utility slashes renewable energy surcharge, September 8, 2011
Mythbusting fact: Wind power is not expensive, June 27, 2011
Unconventional wisdom: Wind power is not expensive, April 4, 2011
Mythbusting fact: wind's costs are competitive, October 29, 2010
20% Wind Energy by 2030 Fact Sheet
 

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