Impact of Policy Uncertainty on Renewable Energy Investment: Wind Power and the PTC

Impact of Policy Uncertainty on Renewable Energy Investment: Wind Power and the PTC Merrill Jones Barradale PhD Candidate, Energy and Resources Group, UC Berkeley 27th USAEE Conference, Houston, TX, September 17

Presentation Overview The PTC and boom-bust investment How does PTC uncertainty affect wind investment? Precisely what causes this volatility? Beyond the PTC What would a post-ptc world look like? What are the alternatives to a PTC? 1

Federal Production Tax Credit (PTC) Income tax credit of 1.9 /kwh Paid to wind plants for electricity production during first 10 years of operation Plant must come online by PTC expiration date to qualify Initial legislation lasted 6.5 years (1993-1999) Renewed 5 times, generally for 1-2 years each 2

PTC Legislative Acts Enacted Dec 19, 1999 Enacted Mar 9, 2002 Enacted Oct 4, 2004 Enacted Aug 8, 2005 Enacted Dec 20, 2006 3

PTC Legislative Acts Enacted Dec 19, 1999 Enacted Mar 9, 2002 Enacted Oct 4, 2004 Enacted Aug 8, 2005 Enacted Dec 20, 2006 4

PTC Legislative Acts Enacted Dec 19, 1999 Enacted Mar 9, 2002 Enacted Oct 4, 2004 Enacted Aug 8, 2005 Enacted Dec 20, 2006 U.S. Annual Net Wind Capacity Additions Source: AWEA 5

PTC Legislative Acts Enacted Dec 19, 1999 Enacted Mar 9, 2002 Enacted Oct 4, 2004 Enacted Aug 8, 2005 Enacted Dec 20, 2006 U.S. Annual Net Wind Capacity Additions Source: AWEA 6

U.S. Annual Net Wind Capacity Additions Source: AWEA 9

In fact, this investment volatility is unrelated to the underlying economics of wind. Instead, it is due to the dynamic of PPA* negotiations in the face of uncertainty. * PPA = Power Purchase Agreement 10

Wind Capacity by Power Off-Take Arrangement (MW, per End 2006) Off-Taker PPA Non-PPA Total IOU 5,567 1,191 6,758 POU 1,349 308 1,657 Power Marketer 1,839 0 1,839 Merchant 0 1,297 1,297 On-Site 0 24 24 Total 8,755 2,820 11,574 76% 24% IOU = Investor-Owned Utility POU = Publicly Owned Utility Power marketers are corporate intermediaries that purchase power under contract and then re-sell that power to others. Merchant power is sold on the spot market rather than under long-term contract. Power used on-site by plant owners (generally commercial entities) to offset their other electricity load. 11 Source: Wiser, R. and M. Bolinger (2007). Annual Report on U.S. Wind Power Installation, Cost, and Performance Trends: 2006, LBNL.

PPA Agreements Under PTC Certainty and Uncertainty PTC? Net cost to IPP* Why? PPA price Conditions for agreement * IPP = Independent Power Producer. Assuming a 2 /kwh PTC and a 5 /kwh cost of producing wind power. These are illustrative numbers only, not meant to represent exact costs. 12

PPA Agreements Under PTC Certainty and Uncertainty PTC? Net cost to IPP* Why? PPA price Conditions for agreement Yes 3 2 PTC 3 As long as value to utility 3 * IPP = Independent Power Producer. Assuming a 2 /kwh PTC and a 5 /kwh cost of producing wind power. These are illustrative numbers only, not meant to represent exact costs. 13

PPA Agreements Under PTC Certainty and Uncertainty PTC? Net cost to IPP* Why? PPA price Conditions for agreement Yes 3 2 PTC 3 As long as value to utility 3 No 5 No PTC 5 As long as value to utility 5 * IPP = Independent Power Producer. Assuming a 2 /kwh PTC and a 5 /kwh cost of producing wind power. These are illustrative numbers only, not meant to represent exact costs. 14

PPA Agreements Under PTC Certainty and Uncertainty PTC? Net cost to IPP* Why? PPA price Conditions for agreement Yes 3 2 PTC 3 As long as value to utility 3 No 5 No PTC 5 As long as value to utility 5 Maybe 5 PTC not bankable No deal No matter how valuable wind is to utility * IPP = Independent Power Producer. Assuming a 2 /kwh PTC and a 5 /kwh cost of producing wind power. These are illustrative numbers only, not meant to represent exact costs. 15

It is not the lack of the PTC that drives such drastic dips in investment during off years, but uncertainty over its return! 16

Negotiations Evidence According to 2006 Wind Survey 1 respondents: Who do you think would generally absorb the cost difference between a PTC and a no-ptc world? Utilities are considered the major beneficiary of the PTC Other Evidence Responses: 291 In a 2005 request for proposal (RFP) with and without PTC renewal, the bids differed by exactly the value of the PTC 2 According to an industry insider, 99% of the time, PPAs pass the value of the PTC to the utility - Feo (2007) 3 1 Online survey sent to 3800 attendees of wind industry conferences, May 2006 2 Author interview with utility representative, July 2005 3 Feo, E., Partner, Milbank LLP, Panel Discussion Debt & Equity, WINDPOWER 2007, Los Angeles, CA, 3-6 June 2007 19

Suppose the federal production tax credit no longer existed and you knew it would never come back. Do you think any new wind projects would be planned and developed in the U.S.? What percentage of new projects (i.e., not already under construction) do you think would go forward even without the PTC? 33.3% of all projects in U.S. 37.0% of respondents own projects Responses: 300 21

How likely would you consider the following types of renewable energy incentives, once enacted, to stay in effect (i.e., law not likely to be reversed) long enough to influence long-term investment planning? Regional-level portfolio standards National-level portfolio standard Favorable depreciation rules Production tax credits Favorable pricing or tariff mechanisms Production subsidies 24

Thanks Professors Alex Farrell, Rich Lyons, Isha Ray, University of California at Berkeley Climate Decision Making Center (National Science Foundation/Carnegie Mellon University)* Link Energy Foundation Survey respondents and supporters * CDMC is located in CMU s Department of Engineering and Public Policy. This Center has been created through a cooperative agreement between the National Science Foundation (SES-0345798) and Carnegie Mellon University. 25

UNUSED SLIDES

Wind Plant Supply Curves in a PTCand no-ptc World P S no PTC S PTC D Q Conditions for flat demand curve: There exist multiple buyers in the market (therefore no strategic behavior on the part of buyers); AND All buyers have (an) alternative source(s) of power available to them at the same backstop price (e.g. coal at 5 cents) Not a common situation for electricity markets! 28

How long beyond 2007 do you think the U.S. government will continue extending the PTC? Responses: 292 29

2006 Wind Industry Survey Methodology Online survey conducted May 2006 Sent to attendees of various wind industry conferences, including AWEA s WINDPOWER 2005 conference in Denver Sent to 3800 people Overall response rate: 8.9% 30

Generating Respondents 4274 3799 420 338 272 Response rate: 8.9% Emails sent Emails arrived (not returned) Clicked on link Went past 1st question Reached end of survey 31

Other Motivations for Wind Investment State and local policy incentives for wind investment Demand for wind power from green consumer programs Particularly profitable project development opportunities 32