US Wind Power Industry Picks up Speed
The Wind Power industry is growing quickly, making it a very low risk level
By IBISWorld Senior Analyst Justin MolaviAs Seen in the ABA Journal
Favorable federal and state government incentives for the Wind Power industry have been vital to its overall performance. Without these incentives, the industry would have difficulty competing with established forms of energy generation. Fortunately, growing interest in environmentally friendly technologies and renewable energy has also benefited firms.
The Wind Power industry is growing quickly, with revenue expected to rise 18.9% annually to $3.7 billion in the five years to 2011. Because of favorable government assistance, this energy source is cost competitive with other types of electricity generation sources. As a result, the share of the total amount of electricity generated in the United States has risen from 0.4% in 2005 to about 2.0% in 2011. The Wind Power industry generates revenue from owning and operating wind farms and selling the energy to downstream customers. Firms have operations that are specific to locations because it is more cost efficient to operate wind farms in areas with a sufficient amount of wind. Most wind power generated in the United States comes from independent power producers (firms that do not have distribution operations) rather than major electricity utilities.
Industry risk methodology
The Wind Power industry has a very low risk level of 2.57 on a nine-point scale. The industry is in a growth cycle, making it less risky than comparable industries; it also has a lower risk rating than the overall Utilities sector and the US economy as a whole. Industry output is growing faster than the economy due to a high level of assistance and technological advances. Generous federal tax credits that are guaranteed until 2016 and renewable portfolio standards (RPSs) that will go into effect over the next 10 years have caused robust investment in this area. These targets have contributed to industry revenue as utilities diversify their energy inputs. Further, moves to improve US energy self-sufficiency and concerns regarding climate change will also likely spur growth in industry output and revenue. The industry is expected to grow as efforts to mitigate climate change increase. Government support has been leading the way as tax credits and utility mandates guarantee markets for the industry's products. Most states have mandatory or voluntary targets that relate to energy production from renewable resources.
High level of industry assistance
At the federal level, the American Recovery and Reinvestment Act of 2009 (ARRA), investment tax credits (ITC) and production tax credits (PTC) play a major role in the Wind Power industry’s health and expansion. The ARRA provided funding for energy-efficiency and renewable energy programs. This funding included $8.5 billion to subsidize loans for renewable energy projects, $2 billion for advanced battery systems and $13 billion in tax credits for renewable energy production.
The federal government provides ITCs for renewable energy. This credit is available for eligible renewable energy that is put in service before Dec. 31, 2016. Wind is included among the renewable energy technologies covered in the ITCs and receives a 30 percent tax credit. The ARRA amended the ITC to allow industry operators to receive a grant equal to the tax credit if the construction started in 2009 or 2010. Cash grants are more attractive because they cut down the cost of investment directly before the project has started, reducing the risk of the project. Additionally, the PTC provides a 10-year, 1.5-cents-per-kilowatt-hour, inflation-adjusted production credit for wind projects. However, this incentive is reduced for projects that receive other federal tax credits, grants and tax-exempt financing. At the state level, the Wind Power industry receives additional aid, particularly RPS incentives. These standards, if passed by a state, require local utilities to generate a certain percentage of their total electricity from renewable energy. Twenty-nine states and Washington, D.C. have enacted RPS incentives to make renewable energy growth a priority. For example, California requires that 33 percent of its energy generation be renewable by 2020. The penalties for missing the requirement vary from state to state, but most are in the form of compliance payments. This regulatory trend has pushed renewable energy growth locally in states with RPS laws.
High technological change
As wind power becomes increasingly popular as a renewable energy source, companies and organizations are continually investing in the technology’s development and advancement. And because wind power is relatively unpredictable – the power source’s key drawback – research into weather conditions and optimum locations and turbine placement are important research areas. The greatest jump in technology has involved software that predicts electricity output, allowing players to better forecast revenue and profit
Wind power operators use large turbines that are typically mounted on towers 130 feet to 190 feet high (to expose the turbine blades to higher wind speeds). The turbines turn a generator to produce electricity. Although two types of wind turbines are used in the United States (horizontal-axis turbines and vertical-axis turbines), most wind turbines are horizontal-axis. They typically have three propeller-like blades and stand up to 20 stories high, with blades that span 200 feet across.
High but decreasing barriers to entry
Prospective firms that seek to enter the Wind Power industry must have significant capital and considerable expertise to enter the industry. Operators need large amounts of capital to purchase equipment to produce wind power. This equipment represents the largest cost for wind power generation firms. As such, new entrants need to secure a significant amount of capital to enter into the industry. The industry is benefiting from growing concern over greenhouse gas emissions associated with fossil fuel-fired power plants. However, production costs are higher than those associated with fossil fuels such as coal. Still, barriers to entry are modestly decreasing, as turbines become more affordable given the influx of new players in the industry (by creating more upstream price competition).
The relative remoteness of wind power facilities from major demand centers also poses a barrier to entry. Buying and leasing land in remote areas is a high risk for firms that have not previously generated wind power. Additionally, transmission costs might be too high for a firm to undertake the initial capital spending associated with wind projects. Also, at times, community resistance to the installation of wind turbines in more densely populated areas has created a barrier to entry.
Over the five years to 2016, stronger economic growth is expected, as the United States increasingly focuses on lifting energy self-sufficiency and reducing greenhouse gas emissions. These trends will contribute to ongoing and strong growth in wind power production. As consumers and businesses start spending more on electricity, greater demand for electricity is expected. Combined with favorable government assistance, the industry will ride the high winds as the economy kicks back in gear and electricity demand rises. However, some tax credits will only last until 2012, moderately limiting revenue growth over the next five years. Nonetheless, average annual revenue growth is expected to be strong, at about 11.2% over the five years to 2016 to $6.4 billion.
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Similar industries: Electric Power Transmission, Solar Power