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Wind Wins Again

The federal Production Tax Credit (PTC) for wind energy was allowed to expire at the end of 2013. Wind energy investors were hardly blown away by the ending of the incentive program as production credits have expired several times in the past only to be extended sometime during the following year. To the surprise of very few, the wind energy Production Tax Credit was extended in early April, which will help to support clean wind energy, which has become unnecessarily dependent on federal incentives for at least another two years.

Dependence on subsidies
Though not seen all across the U.S., wind energy is growing, and has accounted for almost one-third of new power capacity in the U.S. over the past five years. Wind power has been shown historically to depend on support from the Production Tax Credit (PTC), and though the cost of wind power has been steadily dropping over the past half-decade, it still appears to be heavily reliant on government incentives.

Source: American Wind Energy Association

The Renewable Energy Production Tax Credit has encouraged wind power installations by providing a 2.3 cents per-kilowatt-hour tax credit for energy production good for ten years after the date when the facility was put in place. With the new extension in place through the end of 2015, tax credits are scheduled to potentially continue through 2025 for new installations.

When combined with dropping costs, the PTC has helped wind power remain competitive with the rest of the renewable energy world. In the long run, however, wind power will have to prove that it can compete in particular with solar power without government assistance as solar costs continue to drop in-line or faster than wind power costs while at the same time increasing panel efficiencies to provide an even stronger long-term return. That said, wind power is not without the capacity to improve turbine performance as demonstrated most recently by LM Wind Power's project to develop new, flexible tip length blades with the potential to cut wind energy production costs by up to 10%.

Who wins when wind wins?
Finding a pure play in wind energy is surprisingly difficult, though extending the PTC will have a positive impact for wind technology companies, utility companies, and potentially consumers as well.

General Electric (NYSE: GE  ) is the largest manufacturer of wind turbines in the United States, but wind nonetheless makes up only a small portion of the giant company. Wind energy is part of the company's Power and Water segment, which made up about 17% of the company's 2013 revenues, actually a decline from the portion of overall revenue generated by the segment in the previous two years.

Despite the segment encompassing energy generation from gas, wind, oil, and water, revenues for the segment have in the past been largely affected by the volume of wind equipment sales. Strong sales in 2012 helped drive segment revenues higher in 2012, while declining sales of wind equipment in 2013, perhaps in part due to the pending PTC expiration, contributed to dropping segment revenues. The extension of the PTC can only help GE moving forward over the next two years.

The PTC provides a 10-year payback, so the expiration at the beginning of the year had no real impact on existing wind energy infrastructure of utility companies. The PTC will impact the likelihood of utilities expanding their wind holdings in the near future, however, and was likely a large contributing factor to the agreement between Berkshire Hathaway's MidAmerican Energy and Google (NASDAQ: GOOG  ) for the supply of up to 407 megawatts of wind energy to Google's Council Bluffs facilities.

Google has a strong history of looking to renewable sources to provide energy for their facilities, and the latest agreement could be a selling point for other companies looking to MidAmerican Energy and other utilities to expand their renewably sourced energy.  Extension of the PTC will only help to grow the number of wind energy projects, including new builds for consumer use of wind power.

The takeaway
The PTC has been extended for short-term intervals since its start over twenty years ago. Wind energy today still shows a heavy reliance on government subsidies, but it is difficult to predict how it would fare with its competition on an even playing field with subsidies removed across the board.

As that is unlikely to ever be the case, investors should expect that wind energy will remain reliant on the PTC in the short-term. The new extension brings new life to the industry, but if allowed to expire in 2016 it will be interesting to see if the dropping costs of production would be enough to let wind sail on its own.

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Read/Post Comments (3) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 15, 2014, at 3:44 PM, speculawyer wrote:

    We need big wind and rooftop solar. Wind works best with larger and larger turbines. Solar PV works great at any scale so why not install it directly on the buildings that consume the electricity (eliminate transmission lines) and have rooftop space available for free?

  • Report this Comment On May 15, 2014, at 3:46 PM, dwardawea wrote:

    Wind power helps attract up to $25 billion in private investment a year into our national economy. Wind energy and the PTC are compatible with well-functioning power markets and adding wind power diversifies our energy mix and creates a more secure, reliable energy supply that helps keeps the lights on across the country.

    The Production Tax Credit provides tax relief that helps enable wind power to improve its technology and lower its costs. In fact, the wind power's costs have dropped 43% in just four years, benefiting utilities and consumers. Over 550 manufacturing facilities across 43 states make equipment for wind power and supports over 50,000 jobs.

    Wind power already reliably provides more than 25 percent of the electricity needs in Iowa and South Dakota and according to the Department of Energy's Wind Vision report is on track to supply 35 percent of the country's electricity needs by 2050.

    This past winter, wind energy’s output provided the critical difference that allowed grid operators to keep supply and demand in balance and the lights on. Wind energy also helped by offsetting natural gas consumption at gas-fired power plants, keeping natural gas prices in check by making more natural gas available for building heat.

    Plus, wind power keeps money in the pockets of consumers by keeping electricity rates low. New Department of Energy data show the eleven states with the most wind energy have saved more on their electric bills than ratepayers in all other states.

    Learn more about the PTC's great return on investment here:

    David Ward, AWEA

  • Report this Comment On May 19, 2014, at 5:20 PM, ProfessorFunk wrote:

    In a surprising move, the wind power PTC that was passed through the Senate Finance Committee as part of the EXPIRE Act (Expiring Provisions Improvement Reform and Efficiency) has stalled in Congress over a political protest of sorts. We will have to wait and see how this plays out for the wind industry moving forward...

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Shamus Funk

Shamus is a freelance writer for the Motley Fool focusing on energy, agriculture, and materials. He has his Ph.D. in Chemistry from North Dakota State University. After graduation, Shamus worked at a small biotechnology firm before becoming a professor of chemistry.

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