Wind Industry Manufacturers Forced To Reassess As The PTC Nears Expiration

Includes: BWEN, KDN, ZOLT
by: Blake Tyler

Since the Great Recession, industrial policy has become a fashionable approach to stimulating strategic economic growth. Yet these efforts to develop domestic industry have met conservative opposition grounded in free market ideals and fiscal responsibility. This debate reflects the political and philosophical context within which economic legislation is discussed, and dominates discourse at the expense of constructive policy analysis. Renewable energy subsidies are no exception, and as the Production Tax Credit (PTC) nears expiration, discussion of sustainability and the effective development of America's wind resources is subjugated by an overarching ideological confrontation.

The Production Tax Credit was established under the Energy Policy Act of 1992 as an alternative to failed investment based subsidies. It has been extended periodically over the past two decades with the intention of stimulating efficient, long term wind energy investment. By subsidizing wind power generation per kwh, the PTC promotes turbine innovation and a sustainable rate of industry growth. While the income tax credit has been adjusted over the years, utility-scale turbines currently receive 2.2 cents per kwh. Most recently re-implemented in 2009 under Section 1101 of the American Recovery and Reinvestment Act, the PTC was extended through December of 2012. By reducing the cost of wind power by approximately one third, the PTC has proven instrumental in integrating wind turbines into the American energy infrastructure. In her testimony before the Senate Finance Committee in March of 2007, Dr. Ryan Wiser, a Scientist at the Lawrence Berkeley National Laboratory, argued " It is difficult to overstate the importance of the PTC to the wind industry over this timeframe, as well as the negative consequences of PTC expiration for the industry in 2000, 2002, and 2004." Her comments are complemented by the obvious positive correlation between the rate of installed wind capacity and the availability of federal subsidies. The graph below illustrates this association, and highlights the decrease in newly installed American wind capacity during the years when the PTC was not renewed.

impact of PTC expiration graphic 350px w

Regardless of your ideological position on the government's manipulation of renewable energy markets, there is no questioning the PTC's ability to stimulate substantial industry growth. In theory it is designed to correct for a market failure that disregards the environmental externalities of fossil fuel emissions by using public money to promote socially responsible power generation. As a result, the PTC has become a decisive factor in industry growth.

Having only been extended through the end of 2012, the PTC will expire if not renewed in the next six months. In his address before Congress on June 12, Senator Udall of Colorado made a case for extending the PTC. His call for Congressional action reflects the degree to which the PTC has made wind energy economically, socially and politically relevant. He cited the industry's substantial growth over the past decade, and noted that on average $15 billion in private investment was spent annually on wind energy development since 2001. Second only to natural gas, over the past four years wind turbines have represented 35% of all new power installations. Also during this period, turbine technology has evolved to generate 30% more power. Sustaining this rate of wind energy expansion is contingent on renewing the PTC.

Earlier this year, the Senate voted on an amendment, Section 1603, to a highway transportation bill, S.1813, that would have extended the PTC until the end of 2013. The amendment lacked Republican support and was eleven votes short of the sixty votes needed to be adopted. Yet the outcome is less of an indication of policy preference and more a reflection of the current political context. Given the partisan divide and the upcoming election, it is unlikely that a decision will be reached before November. Surprisingly, many Republican states stand to benefit from a growing wind industry. Stretching from northern Texas to Canada, the wind corridor provides Oklahoma, Kansas, Nebraska South Dakota and North Dakota with the opportunity to benefit from economic growth and to promote sustainable energy development. Texas leads the nation in installed wind capacity and has effectively fostered a wind industry that continues to stimulate job growth. Currently generating eight percent of the state's power, the wind industry in Texas not only has room to grow, but also an established infrastructure that aligns economic, political and social interests. With an estimated cost of $1.3 billion for the upcoming fiscal year, the PTC tends to incur conservative opposition. Yet should Republican leaders evaluate the PTC in terms of state and local benefits, they may be inclined to lend political support.


Turbine component manufacturers are well aware of the relationship between industry growth and federal subsidies. In the 2012 first quarter Conference Call for the Kayden Corporation (NYSE:KDN), Chairman and Chief Executive Jim O'Leary noted, "In the event that the extensions of PTC is not enacted in 2012, we will need to consider additional operating cost reductions in the second half of the year to align wind energy-bearing capacity with market demand in 2013." The uncertainty of its extension alone threatens what he describes as an unquestionable "drop off in wind shipments and production". As an industrial manufacturer, KDN has come to specialize in the Friction Control Products used in wind turbines. In the first quarter of this year KDN generated $116.5 million in sales, over half of which were from Friction Control Products. While wind turbine producers are not the only consumers for these products, detailed discussion of the PTC in the 2012 Conference Call reflects the industry's importance to KDN.

Manufacturers, like KND, that have shifted operations to capitalize on increased turbine demand will be forced to evaluate production in the coming months. Their ability to do so in a way that minimizes having to abandon assets will impact long term success. According to O'Leary, navigating industry uncertainty requires transferring operations to heavy equipment manufacturing without abandoning the company's presence in the wind market. Given the long term potential for renewables, he hopes to strike a balance that allows the company to move in and out of the wind industry depending on the political climate. He defines optimizing the company's assets not only in terms of immediate income, but also based on a preparedness to benefit from the inevitability of renewable expansion. Manufacturers that have become dependent on wind energy expansion, like KND, Zoltek Companies (NASDAQ:ZOLT), and Broadwind Energy (NASDAQ:BWEN), must demonstrate the flexibility to meet changing demand by re-allocating assets in a volatile wind market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.