Energy in 2012

by Reihan Salam

In September, I noted the importance of the exploitation of the Utica Shale formation to Ohio’s economic future. In a column published late that month, I identified a potential political wedge

Once Republicans have a nominee, they’d be wise to press the energy issue to their advantage. In recent weeks, Obama has been firing up the base by promising to eliminate “tax loopholes for oil companies.” Among other things, the Obama administration’s new deficit plan proposes axing a tax code provision that allows energy companies to deduct the expenses of drilling new wells. This would dramatically raise the costs of developing new energy sources in Ohio.

Meanwhile, the president and his allies are touting his clean energy efforts in a new advertisement in an effort to shift the focus away from Solyndra to more politically attractive beneficiaries of subsidized loans. As Maria Galluci reports, there is an ongoing struggle over the expiration of a tax subsidy designed to benefit renewable electricity providers. 

The PTC, which was first enacted in 1992, pays wind farm owners 2.2 cents for every kilowatt-hour of electricity they produce during the first decade of operation. In short, its goal is to help wind compete with coal.

The tax credit has expired three times since it was introduced in 1999. And each time, the number of new wind installations plummeted by at least 70 percent compared with the previous year, resulting in major job losses, according to industry estimates.

U.S. wind advocates have lobbied hard over the past few months to extend the PTC, to no avail.

This week, at least, they found a new and powerful ally in President Obama’s Council on Jobs and Competitiveness, a nonpartisan group of nearly 30 business, labor and academic leaders created in 2009 to give Obama advice on how to grow the economy.

On Tuesday, the council presented Obama with its 2011 year-end Roadmap to Renewal report. In it, the leaders emphasized the need to extend production tax credits for energy projects, which they say will “promote the type of innovation and investment America needs to diversify its generation portfolio and prepare for rising levels of energy demand.”

If the PTC is not renewed, a Danish turbine manufacturer is threatening layoffs.

Vestas, the Danish wind turbine maker with a U.S. headquarters in Oregon, said on Jan. 12 that it might have to lay off 1,600 American employees if the PTC for wind power is left to expire on Dec. 31.

That’s on top of the 2,335 positions that Vestas is already cutting worldwide as it battles tough competition from Chinese manufacturers and a global glut of turbines that’s caused prices to drop dramatically. The first round of layoffs—which included 182 U.S. jobs—will help the company slash manufacturing and operating costs by nearly $200 million.

Vestas has spent more than $1 billion to build four wind turbine factories in Colorado, and it employs more than 3,000 people in America. The company doesn’t have any plans right now to shut down its U.S. factories.

However, company officials wouldn’t say how current and possible future job cuts would impact its brand-new, $16 million research facility in Marlborough, Mass. “We don’t know if or how the global restructuring and cost reduction plan will affect the R&D facility in Marlborough,” Andrew Longeteig, communications specialist for Vestas American Wind Technology, told GateHouse News Service.

In a healthy economic environment, one assumes that the shedding of 1,600 would attract relatively little notice. Now, however, decisions on this scale are taken quite seriously, and not just due to the symbolic resonance of green technology.

My sense, however, is that Galluci is understating the challenges to Vestas and firms like it when she attributes difficulties to the global glut of turbines. A deeper problem is, as Julie Johnsson and Marc Chediak have observed, the natural gas glut:

A shale-driven glut of natural gas has cut electricity prices for the U.S. power industry by 50 percent and reduced investment in costlier sources of energy.

With abundant new supplies of gas making it the cheapest option for new power generation, the largest U.S. wind-energy producer, NextEra Energy Inc. (NEE), has shelved plans for new U.S. wind projects next year and Exelon Corp. (EXC) called off plans to expand two nuclear plants. Michigan utility CMS Energy Corp. (CMS) canceled a $2 billion coal plant after deciding it wasn’t financially viable in a time of “low natural-gas prices linked to expanded shale-gas supplies,” according to a company statement.

Mirroring the gas market, wholesale electricity prices have dropped more than 50 percent on average since 2008, and about 10 percent during the fourth quarter of 2011, according to a Jan. 11 research report by Aneesh Prabhu, a New York-based credit analyst with Standard & Poor’s Financial Services LLC. Prices in the west hub of PJM Interconnection LLC, the largest wholesale market in the U.S., declined to about $39 per megawatt hour by December 2011 from $87 in the first quarter of 2008.

Power producers’ profits are deflated by cheap gas because electricity pricing historically has been linked to the gas market. As profit margins shrink from falling prices, more generators are expected to postpone or abandon coal, nuclear and wind projects, decisions that may slow the shift to cleaner forms of energy and shape the industry for decades to come, Mark Pruitt, a Chicago-based independent industry consultant, said in a telephone interview.

Essentially, we’re subsidizing wind turbines so that they can provide an alternative to abundant domestic natural gas. The premise is that wind power is more environmentally sound, yet that calculation might shift if we factor in the carbon-intensity of manufacturing turbines and the value of the land that is used by legacy turbines. (High-altitude wind, i.e., kite power, is a somewhat different story, and the case for subsidizing high-altitude wind is stronger than the case for subsidizing mature turbine technologies, though it’s certainly not rock-solid.)

To be sure, we want to have a diverse, resilient electricity supply. There is a danger in excessive reliance on natural gas: consumers will be more exposed to sharp increases in natural gas prices, most obviously. The question, however, is whether subsidizing traditional wind turbines is the right strategy, or if we’d be better served by investing in something else entirely. The dilemma facing nuclear power, including small and medium-sized reactors, is that it is so capital-intensive relative to the available alternatives. 

To return to the politics for a moment, it seems pretty clear that the center-right should emphasize the production of cheap and abundant domestic energy. It helps improve the balance of trade, it may generate some nontrivial number of “brown jobs,” and the gains will likely be concentrated in relatively depressed regions. Skepticism towards the oil and gas industry is deeply ingrained in America’s center-left coalition, in part because the political balance in the energy industry has tended to tilt right, with the exception of Henry Kaiser and a handful of others. Moreover, the environmental movement has tended to be antagonistic towards the interests of marginal energy producers, often in unwitting alliance with the inframarginal energy producers. So it seems likely that the president won’t suddenly about-face on expensing, etc. This will be a fruitful issue in the months to come.