The U.S. renewable energy landscape has changed significantly over the last five years, with foreign investors, energy companies and utilities entering the market in significant numbers. According to leading statistics, the U.S. renewables industry is drawing in more foreign investors than any other sector of the electric energy industry and commentators expect the inflow of new participants in the U.S. market to more than double by 2012. The initial investment surge was led by established European and Australian companies. These first-to-market companies are now facing new competitors from Asia as a second wave of foreign companies begins to hit U.S. shores. Suzlon of India has risen to become the third-largest wind turbine manufacturer in the world, and China, a recent entrant in the renewable sweepstakes, has demonstrated a desire to be a major contender in the U.S. market by recently announcing a first-ever joint venture to construct a 600 MW wind farm in Texas, anticipated to be one of the largest U.S. wind farms upon completion. A number of factors have combined to make the U.S. one of the most attractive renewable energy markets in the world, including: (i) abundant renewable resources; (ii) the growing U.S. renewables market; (iii) changing economics inside and outside of the U.S.; and (iv) supportive U.S. political and regulatory regimes.
Abundant Renewable Resources
One huge advantage the U.S. enjoys is an abundance of renewable energy resources. The Midwest and Pacific Northwest have significant wind resources. According to the American Wind Energy Association®, North Dakota (often referred to as the Saudi Arabia of wind) is theoretically capable (if there were enough transmission capacity) of producing enough wind-generated power to meet more than one-fourth of total U.S. electricity demand. The lengthy coastlines along the Atlantic and Pacific Oceans also provide the U.S. with plentiful offshore wind and tidal resource development. Offshore winds are steadier and stronger than onshore wind, resulting in higher energy capacity factors, and offshore sites are geographically close to major load-serving centers along the coasts. The 28 U.S. states having coastlines consume roughly 78 percent of the nation’s electricity. According to the Department of Energy (“DOE”) report 20 Percent Wind Energy by 2030, offshore wind (utilizing current technology) could provide 54 GW of the nation’s electricity by 2030.
Sunlight is by far the largest renewable energy resource and as wind is to the Midwest and Pacific Northwest, solar energy is to the American Southwest. It has been argued that utilizing only 2 to 2.5 percent of the sun’s energy falling onto the 250,000 square miles in the Southwest suitable for constructing solar power plants could match the total power used in the U.S. in 2006.
Large portions of the U.S. are likewise rich in biomass resources (which includes all plant and plant-derived products including manure). Biomass is especially desirable as it is the only renewable replacement for liquid transportation fuel. A joint DOE and Department of Agriculture study as early as 2005 found that a 30 percent replacement of U.S. petroleum consumption from biomass was feasible in the relative short run (assuming advances in conversion technologies and favorable economic policy). Reviewing only forestland and agricultural land (the two largest biomass resources), the study found that more than 1.3 billion dry tons per year of biomass are available, well more than the projected 1 billion dry tons per year needed for a 30 percent reduction in U.S. petroleum consumption.
Strong U.S. Market
In recent years the U.S. has experienced strong renewable energy growth, which in turn attracts additional market players. According to leading analysts, the U.S. renewable energy sector has grown at an average annual rate in excess of 25 percent compared to low single-digit growth in the U.S. power sector over the same period. A recent notable industry study found that solar power growth in the U.S. has grown at an annual rate of 40 percent per year during the last decade. Such meteoric growth has allowed the U.S. renewable energy industry to catch up with European markets, the traditional leaders in renewable energy production and consumption.
A comparative look at newly installed wind energy over the last three years is illustrative of the growth of the U.S. renewable energy market. In Germany, long the world’s largest wind producer in megawatts, newly installed capacity has remained flat, with 1,625 MW in 2007 and 1,665 MW in 2008. Spain, traditionally the second-largest wind producer in MW, experienced a decline in newly installed capacity, with 3,515 MW in 2007 and only 1,595 MW in 2008. The United Kingdom, long a champion of renewable energy rhetoric if not policy, installed 426 MW in 2007 and 898 MW in 2008. By contrast, over the same period, the U.S. has seen significant growth in annual wind energy production. Newly installed capacity in the U.S. reached 5,244 MW in 2007 and 8,358 MW in 2008, an amount more than Germany, Spain and United Kingdom combined. In 2008 the U.S. surpassed Germany by having the largest installed wind capacity in MW in the world. Despite the worldwide economic downturn last year, the U.S. still installed 9,922 MW in 2009, a new record.
Several important economic drivers have lured European companies into the U.S. renewable energy market. First and foremost, renewable technologies have become increasingly cost competitive with traditional fossil fuel resources. According to a number of recent studies, wind is currently price-competitive with natural-gas-fired power. Other renewable resources such as landfill gas, biomass and geothermal are closing in on competitive pricing levels. There is also the need for international companies in established older (and potentially saturated) markets to seek revenue growth and increased profitability in the expanding and relatively less exploited U.S. market. Further, the reduction of feed-in-tariffs in Spain and proposals by several other European nations to follow suit have cooled those markets considerably, to the benefit of the U.S. market. In the solar arena specifically, such factors have marginalized Europe’s longstanding competitive advantage.
More recently, the worldwide economic downturn has resulted in an increase in the supply of “projects for sale” at reduced prices from recent market highs, and add to that the fact that a number of recent foreign market entrants have a lower cost of capital than some of their domestic competitors (especially those who are supported by government and quasi-government parent organizations) together with the U.S. dollar floundering against world currencies, has provided foreign firms with a “buyer’s discount.”
Additionally, for renewable technology manufacturers it makes economic sense to manufacture components near their customers and proposed installation sites. For instance, onshore and offshore wind turbines, towers and blades are truly massive and thus logistically complex and expensive to transport. Vestas, the leading Danish turbine manufacturer, recently closed its turbine manufacturing facility on the Isle of Wight and relocated those jobs to the U.S. According to a New York Times article, “all blades Vestas produced on the Isle of Wight used to be exported to the United States — at a transportation cost that exceeded the labor cost to make them.” Cost cutting to date has created more than 1,200 jobs in the U.S. and Vestas expects to have more than 4,000 by the end of 2010. In 2008 Vestas opened a blade manufacturing facility in Windsor, Colorado, and it plans to add another blade and nacelle manufacturing facility in Windsor and tower manufacturing facilities in Brighton and Pueblo, Colorado. It also intends to build research and development centers in Houston and Boston and to establish a broad network of local suppliers to support its U.S. facilities. Similarly, Siemens of Germany is expanding its manufacturing capacity in the U.S. According to the New York Times, Siemens plans to double the capacity of a current facility in Fort Madison, Iowa, and to open new facilities in Hutchinson, Kansas, and a research and development facility in Boulder, Colorado. Many leading U.S. developers and operators also caution that domestic political pressures will soon be mounting from U.S. law makers to favor projects that use U.S.-manufactured content in their projects, which will further drive foreign manufacturers to set up U.S.-based facilities to supply and source projects in this market.
Supportive Political and Regulatory Regimes
Although the above-discussed drivers (an abundance of renewable resources, a strong and growing domestic market, and changing economics) have each played a significant role in attracting entrants into the U.S. renewable market, the growth in foreign participation in the market would have been quite different if not for advantageous regulatory policies matched with strong political will. U.S. federal tax incentives and government grant funding provided through the American Recovery and Reinvestment Act (“ARRA”), combined with state renewable portfolio standards (“RPS”), have also been a leading contributor to this growth.
On the federal level, initial incentives came in the form of corporate tax credits — the production tax credit (“PTC”) and the investment tax credit (“ITC”). Section 45 of the Internal Revenue Code (“Code”) currently provides a production tax credit equal to 2.1 cents per kWh of electricity produced from for wind, solar, geothermal and closed-loop biomass facilities for the first 10 years of operations and 1.1 cent per kWh for other technologies, including landfill gas, municipal solid waste, incremental hydropower and open-loop biomass for the first 10 years of operation. Section 48 of the Code provides an investment tax credit equal to 30 percent of a project’s qualifying costs for certain renewable technologies, including solar, geothermal and others.
In response to the recent global recession, the U.S. Congress, led by President Obama, quickly and decisively supported the U.S. renewable energy market by passing the ARRA in February 2009, thereby opening the floodgates for foreign investors. In addition to extending the PTC deadline to December 31, 2012 for wind and through the end of 2013 for other qualifying renewable technologies and allowing PTC-qualified facilities the flexibility to elect the ITC in lieu of the PTC, the ARRA provides a 30 percent cash grant for qualified renewable energy projects that are placed in service in 2009–2010 or that commence construction during 2009–2010 and are placed in service prior to 2013 for wind, 2017 for solar and 2014 for other qualifying technologies. A recent report by the Investigative Reporting Workshop discovered that the U.S. subsidiaries of overseas firms have been awarded the vast majority of these cash grants — of the $1.05 billion in grants that have been issued since September 1, a total of $849 million, or 84 percent, has gone to the U.S. subsidiaries of foreign wind companies, with Iberdrola of Spain receiving the bulk of the funds. [NOTE: There have been $2.33 billion of grants issued to date]
And the U.S. may not be done tinkering with favorable long-term renewable energy legislation. The American Clean Energy and Security Act (referred to as the Waxman- Markey bill) is presently under consideration in the U.S. Congress and represents another financial commitment to future renewable energy development and investment on the national level. The draft bill currently includes a federal renewable energy target of 15 percent by 2020, as well as a recommended carbon cap-and-trade system. Additionally, while national tariffs are low and rarely employed in the U.S., talk of additional incentives such as adopting a feed-in tariff, while still a controversial subject among legislators and regulators, is gaining traction in some quarters.