A look at the U.S. wind energy industry’s growth chart shows an upward curve that
takes off at the close of the 1990s after a decade of dormancy.

Even now, a good year may be followed by a lull, which is then followed by
a great year. Consider this: 1999 was a record year for the wind energy industry,
with 732 megawatts of new capacity installed. Growth slowed during 2000, but
soared again in 2001, when newly installed capacity reached nearly 1,700 megawatts.
After another drop-off in 2002, the American Wind Energy Association (AWEA)
is forecasting a new record for 2003 with some 2,000 megawatts of generating
capacity coming online.

The years of rapid growth are easily explained. The efficiency of wind generating
systems continues to rise. A federal wind-energy production tax credit spurred
investment. And wind is a non-polluting energy source. Some 3 million tons of
carbon dioxide and 27,000 tons of noxious pollutants would be emitted into the
air every year if the electricity generated from the new wind farms installed
in 2001 were produced from the average U.S. electricity fuel mix. While still
only about 0.3 percent of the nation’s electricity supply comes from wind today,
the AWEA estimates that 6 percent of U.S. electricity will come from wind by
2020.

But why are there lulls in the growth pattern? In this paper, we’ll review
significant developments in the wind energy industry over the past few years.
As you’ll see, the industry’s variable pace of growth is also easy to understand
when looking at these factors.

On-Again, Off-Again Signals

A federal incentive, the wind energy production tax credit, helps bring down
wind energy’s already declining cost and is spurring development. Unfortunately,
the incentive has repeatedly been allowed to expire before being extended for
short periods, first in 1999 and again in 2001, causing the market to grow in
an on-again, off-again pattern. After its record year in 2001, the industry
lurched to a near-stop when Congress, immersed in a partisan battle over larger
economic issues, failed to extend the wind energy production tax credit before
it expired in December 2001. An extension was signed into law in March 2002.
In the interim, however, the costs of the boom-and-bust cycles caused by the
credit’s expiration were dramatically highlighted, as some $3 billion worth
of proposed projects were put on hold, and hundreds of workers were laid off
pending extension of the incentive.

This sequence of events illustrates how detrimental inconsistent policy can
be. Future policy decisions at the state, regional, and federal levels will
go a long way toward determining how quickly and to what extent the United States
begins to reap its enormous wind energy potential, even though the wind industry
is continuing to drive down the cost of wind-generated electricity, enhancing
the competitiveness and attractiveness of its product to electricity providers.

State Policies Can Make a Difference

More than half of 2001’s new capacity came in a single state, Texas, where
915 megawatts of capacity were installed. That’s more than had ever been installed
in the entire country in any prior year. The remarkable total resulted from
the successful combination of that state’s renewables portfolio standard (RPS)
with the federal tax credit. The Texas RPS was passed in 1999 after “deliberative
polling” by utilities revealed widespread support for renewable energy throughout
the state and from all consumer types (including commercial and industrial customers).
It requires the state’s utilities to acquire 2,000 megawatts of new renewable
generating capacity by Jan. 1, 2009.

The first stage of the law required 400 megawatts of renewable capacity by
Jan. 1, 2003. Instead, 915 megawatts of wind alone — more than double the
required amount for all renewable energy technologies — was in place a
year early. Bids received in response to utility procurement auctions required
by the RPS proved to be cost-competitive with other utility resource options,
and voluntary “overcompliance” resulted.

In 2001, Texas showed us what an effective RPS can do when it is combined with
a production tax credit. The result of those two policies was explosive growth
in wind, far surpassing anything this country has previously seen in the more
than 20 years since wind energy got its start. Clearly, we have found a policy
combination that works incredibly well and should be expanded to the national
level with a federal RPS.

What Happened in California?

Institutional challenges remain. One is in California, scene of a crisis that
saw rolling blackouts and stunningly high power prices. What first appeared
to be a favorable scenario for wind, an abundant resource in California and
neighboring states, quickly turned into a nightmare as electricity prices soared
and state agencies frantically began signing high-cost, long-term contracts
for new natural gas generation, while refusing to buy electricity from lower-cost
“non-firm” (variable) generators like wind plants.

The California Energy Commission has been proceeding for some time on a track
of inviting proposals and awarding cash incentives for new wind and other renewable
projects, using funds collected from a charge on ratepayers. But because of
California utilities’ financial problems and the gridlock in new state procurements
while California swallows the long-term contracts bought at the peak of the
crisis, the vast majority of proposed wind projects — now totaling over
1,500 megawatts in capacity — have never been built, and there is no indication
when they will be. Only a few wind projects are moving forward in the state.

An RPS adopted this year by the state calling for 20 percent of electricity
to come from renewable sources may provide the market with a new impetus. But,
in contrast to the simple, market-friendly, and effective regulations put in
place in Texas to implement that state’s RPS, concerns cloud the implementation
of California’s convoluted RPS legislation. As Arthur O’Donnell, editor of “California
Energy Markets,” observed:

“The many changes in the [California] RPS bills nearly all served to defer
utility commitments and reduce the likelihood of a vibrant green market, as
cost-causing provisions collide against cost-limiting proscriptions. … For
the program to succeed will take a commitment to working together that has
been sorely lacking of late.”

Figure 1: The wind energy market is taking off in the United States.                                                 Source
AWEA

Transmission Is Major Challenge

In order to deliver large amounts of wind power from wind-rich regions such
as the Great Plains to electricity-hungry markets in other parts of the country,
additional transmission lines and upgrades will be needed. Lack of transmission
capacity is already impeding the development of significant amounts of wind
power in the Dakotas. By contrast, Texas, anticipating continued investments
in wind energy, is preparing to expand transmission capacity from western areas
of the state where the best wind resource lies, to load centers further east.
As regional transmission organizations and other relevant entities assess infrastructure
needs across the country, they must realize that expansion plans should include
“high wind” scenarios that could benefit electricity consumers, rural landowners
looking for economic development, and the environmental public interest. Failure
to take wind’s potential contribution into account in the planning process could
shut out development prospects in the windiest parts of the country.

The wind industry also faces a serious hurdle in gaining access to the utility
transmission system for wind-generated electricity at a reasonable price so
that it can be profitably sold in the wholesale electricity market. In the past,
most wind projects sold their output directly to the local utility. But as restructuring
“unbundles” the vertically integrated electric utility industry monopoly, utilities
are required to make their transmission facilities available to all generators
under “open access” fee structures, or “tariffs,” that presume generators will
precisely schedule their transmission usage in advance and precisely control
their output to match those schedules.

These open-access tariffs impose penalties of as much as 2.5 to 3.5 cents per
kilowatt-hour on wind generators for use of the transmission system in addition
to normal transmission access fees. Such a penalty can double the wholesale
cost of wind-generated electricity. The high penalties are exacted because of
wind’s variable operation and the fact that a wind plant cannot guarantee delivery
of a certain amount of electricity at a given scheduled time and date. The penalties
are not based on actual costs that a failure to deliver may impose on the system,
but are self-described punitive penalties to enforce “good behavior” on large
generators who can precisely control their output and have been known to do
so in ways designed to raise their own profits at the expense of others.

As control of the interstate transmission grid evolves toward transmission-specific
entities — independent system operators — and as the Federal Energy
Regulatory Commission works to update its early version of an industry standard
tariff, the impacts of these penalties is being reassessed. The New York ISO
and ERCOT in Texas have special rules for “as available” resources like wind
that exempt them from these penalties. The PJM ISO in the mid-Atlantic region
has a different market design that can accommodate the variable output of wind
projects without penalties.

Table 1: Leading States in Wind Capacity (Through 2001)	Table 2: Largest Wind Farms Operating in the United States

An agreement has also been reached that will reduce penalties for wind plants
on the California ISO system. However, penalties are still a problem in important
and windy areas of the country such as the Pacific Northwest and the Midwest.
In the Northwest, for example, development of some 830 megawatts of projects
($800 million worth) sought by the Bonneville Power Administration has been
stalled by the penalty issue. Some of the most discriminatory penalties have
recently been removed in that region, and continued, if slow, progress is expected
on this issue.

Attracting Large Players

The wind energy market’s performance is catching the interest of some large
corporations. In February 2002, GE Power Systems acquired Enron Wind Corporation,
the largest remaining domestic manufacturer of commercial utility-scale wind
turbines.

“The acquisition of Enron Wind represents GE Power Systems’ initial investment
into renewable wind power, one of the fastest-growing energy sectors,” said
John Rice, president and CEO of GE Power Systems. The wind energy industry,
the firm said, is expected to grow at an annual rate of about 20 percent, with
principal markets in Europe, the United States, and Latin America. For the parent
company, General Electric, the move was a return to the wind business after
an absence of nearly 20 years. GE’s aerospace division was a major contractor
of research-oriented wind turbines for the U.S. Department of Energy in the
early 1980s.

Houston-based TXU, already one of the largest purchasers of wind power in the
United States, unveiled in October plans to purchase the power from a large
new wind farm to be built in western Texas. American Electric Power is positioning
itself as a major player in the market through AEP Energy Services, which has
developed a 150-megawatt wind farm and purchased another, both in Texas. FPL
Energy, a subsidiary of FPL Group and the largest wind energy developer and
operator in the United States, has emphasized the growth of wind energy.

Vibrant Market for Small Systems

Consumer interest in small wind systems for homes and small businesses surged
following concerns about high rates and brownouts during the California crisis
and resulted in healthy sales even as the crisis abated later in the year.

The market for small wind systems (less than 100-kilowatt capacity) is also
expanding as a result of policies adopted in a growing number of states. California
and Illinois run well-established rebate programs that help reduce the high
upfront cost of a wind system, and New York, New Jersey, Delaware, and Rhode
Island have followed suit. Also in California, the small wind turbine industry
welcomed a law enacted in 2001 providing relief from overly restrictive local
zoning ordinances on tower height and installations.

Net metering, a policy under which the owner of a small wind or other renewable
energy system is allowed to spin his or her electricity meter backwards if the
system is generating more power than is being consumed, has been adopted in
more than 30 states. Such policies, along with simplified, standard-ized interconnection
rules, reduce the expense and time required to install a small wind or photovoltaic
system for a home or business.

The industry recommends a federal tax incentive for small wind systems to help
reduce their high upfront cost, increase sales, help manufacturers to increase
volume, and thus lower costs even further.

Exports of small wind turbines — used in village power, off grid, water-pumping,
and other applications — have declined in recent years due to fluctuations
in the U.S. dollar, reductions in support from the U.S. Agency for International
Development for renewable energy project activity, and increased bilateral aid
by competing export countries.

Optimistic Long-Term Outlook

On balance, although the institutional issues noted above remain of concern,
there is strong optimism about the wind industry’s long-term future.

Some 10 billion kwh of electricity were generated from wind in 2002 in the
United States, enough to power about 1 million households without emissions
of carbon dioxide and other pollutants. The average electricity fuel mix would
produce about 7.5 million tons of carbon dioxide while producing that much power.
It would take a forest of 4,000 square miles to absorb that much carbon dioxide.

Federal estimates place the nation’s wind energy potential at 10.7 trillion
kwh annually — more than twice the electricity generated in the United
States today.

A single megawatt-scale wind turbine provides $2,000 a year or more for landowners
who lease their wind rights. Farmers can grow crops right up to the base of
the turbines. Wind energy’s stable and increasingly competitive cost is an attractive
factor for utilities seeking to diversify their energy portfolio.

Even while the level of new construction slowed during 2002, the AWEA remains
confident that wind power’s future prospects are strong. Our forecast for total
wind energy production by 2020 is 6 percent of U.S. electricity supply —
about 20 times the current level.