It May be Lights Out for the Wind Energy Come the Midterms

The International Energy Agency recently cut its forecasts for oil demand growth for this year. Nevertheless, production in North America is exploding led by the shale oil boom. Already, the U.S. has become the world’s largest producer of oil and natural gas.

For energy products like oil and natural gas operating in the marketplace, this excess production means lower costs for consumers. Lower prices have their own consequences for the industry as well. Analysts at Sanford C. Bernstein & Co recently released a report revealing that current at prices as much as one-third of U.S. shale oil production will be “uneconomic” to harvest.

For government-backed industries such as wind energy, the relationship is directly the opposite -- the more they produce, the more it costs ratepayers and taxpayers. Recent analysis shows that states with the largest use of wind power have the highest electricity bills. Such factors have caused private investors to largely bypass wind companies and leave them largely dependent upon the government for their survival.

Wind energy companies rely heavily upon a government construct known as the “Production Tax Credit” (PTC) to support their bottom lines. The PTC is a federal program that provides billions of dollars annually to subsidize renewable energy facilities such as wind farms. Generally speaking a clean technology facility receives a tax credit for 10 years after the date the facility is placed in service with the tax credit amount ranging from $0.23 per kilowatt-hour (kWh) for wind to $0.011 per kWh for qualified hydroelectric.

Looking at the International Journal of Sustainable Manufacturing, researchers concluded that “in terms of cumulative energy payback, or the time to produce the amount of energy required of production and installation, a wind turbine with a working life of 20 years will offer a net benefit within five to eight months of being brought online.” This raises the question as to why any tax credit for wind energy would span more than just a few years at most let alone 10 years after the facility is up and running.

Congressional support for the PTC is largely split along party lines. Fifty-five Members of the House led by Rep. Mike Pompeo, (R-Kan.), have written a letter to the tax writing committee demanding an end to the wind energy subsidies. The letter stated:

“We offer our full support of the current process undertaken by the House Committee on Ways and Means that will allow the most anti-competitive and economically harmful tax provisions, specifically the wind energy production tax credit (PTC), to expire. Ensuring that our nation’s patchwork tax code undergoes significant reform is a noble goal and, as part of this process, we believe Congress should stop picking winners and losers and finally end the wind PTC.”

It is presumed that a GOP controlled Congress would see the PTC on the chopping block in 2015 and a Democrat-controlled Congress will fight for renewal.

It would be an understatement to say that the outcome of the 2014 elections is important for wind energy producers. In an effort to see PTC friendly Harry Reid as Majority Leader, the wind industry has essentially turned the League of Conservation Voters (LCV) into their own personal Trojan horse.

Much of the LCV leadership has deep ties to the wind energy:

Tom Kiernan, CEO of the American Wind Energy Association (AWEA) serves as the Treasure of the LCV.
Peter Mandelstam, former AWEA board member and founder of Green Sails wind energy company also serves on the LCV board.

Unsurprisingly, much of the LCV’s campaign activities have been aimed squarely at renewal of the PTC. The organization brags that it will spend over $25 million supporting pro PTC candidates and attacking their opponents before November elections.

Should LCV’s campaign fail, loss of the PTC could prove fatal to some wind companies. As Warren Buffet recently told his loyal investors, "I will do anything that is basically covered by the law to reduce Berkshire's tax rate. For example, on wind energy, we get a tax credit if we build a lot of wind farms. That's the only reason to build them. They don't make sense without the tax credit."

The outcome of the elections remain far from certain as does the fate of the PTC under any election outcome scenario and Washington D.C.’s capacity for cronyism should never be underestimated.

That said, it should leave investors holding off if not second-guessing the potential of First Trust ISE Global Wind Energy ETF (FAN) shares or its holdings that include Capstone Turbine Holdings (CPST), Otter Tail Corp. (OTTR), NextEra Energy (NEE) and others. Especially if the Republicans take control of Congress as expected, and run a full tally of their friends and enemies during this election cycle, it may well be lights out for the wind energy industry sooner than anyone expects.