Wind Energy Developments: Incentives In Selected Countries

February 1, 1999

Introduction

This paper discusses developments in wind energy for the countries with significant wind capacity. After a brief overview of world capacity, it examines development trends, beginning with the United States& the number one country in wind electric generation capacity until 1997.

World Capacity

The United States possessed 95 percent of the world’s installed wind capacity in the early 1980's.4 By 1990, however, Denmark, Germany, the Netherlands, and India had also developed significant capacity, and the U.S. share of the world capacity dropped to 75 percent. During the 1990's, European and Asian countries have continued to expand wind energy capacity. In contrast, development of U.S. capacity has been slow, with retirements since 1992 more than offsetting new additions through the end of 1997 (Table 1). By then, worldwide capacity amounted to 7,202 megawatts, up about 1,000 megawatts from 1996 and the U.S. share dropped to 22 percent (Table 2). This capacity was distributed as follows: Europe 4,453 megawatts, North America (including Canada and Mexico) 1,645 megawatts, Asia 1,044 megawatts, South and Central America 32 megawatts, Middle East and Africa 24 megawatts, and the Caribbean 4 megawatts. Growth between 1996 and 1997 was strongest in the European countries: Germany (394 megawatts), Denmark (204 megawatts) and Spain (157 megawatts).

United States

Early History

The U.S. central station wind industry had its start in the wake of the world oil crises of 1973-74 and 1978-79. Activities at both the Federal and State level helped launch the industry. The passage of the Public Utility Regulatory Policies Act (PURPA) in 1978 created a market for wind-generated power where none existed before.5 Other legislation put incentives in place such as lucrative investment tax credits. In the early 1980's, combined Federal and State investment tax credits amounted to 50-55 percent of the investment.6 These credits were important in helping establish the wind industry by reducing investor tax obligations to the government and effectively lowering the investor’s cost by the amount of the tax savings. Research sponsored by California’s Mello Act of 1978 portrayed wind energy as a clean, reliable, secure alternative to foreign oil and rising oil prices. So the industry was born.

Research in California identified the Altamont, Tehachapi, and San Gorgonio passes as having the best wind resources. Wind was seen as the ideal complement to California’s existing hydro power supply, providing peak power while allowing hydro to be reserved for low wind periods. Using its authority under PURPA, the California Public Utilities Commission decided in favor of relatively high full avoided costs to be paid to qualified facilities (generating electricity from wind and other renewable sources) in Standard Offer 4 contracts guaranteed for ten years. The subsequent boom in investments resulted in the development of 900 megawatts of capacity and lasted through 1985, when the Federal investment tax credits expired and California credits expired shortly thereafter.

The future upon which these incentives had been based, however, did not materialize. First, oil prices took a big slide in 1986 instead of continuing to increase. Second, natural gas prices rose less than projected and improvements in gas generating technology were greater than expected. These two factors meant that when 10- year contracts expired, the basis for future full avoided costs of electricity was much lower than initially anticipated.

Third, improvements in wind generating technology were less than anticipated; thus, the cost of developing wind power remained high. Fourth, the investment tax credits were more effective in getting capacity built rather than assuring the units would be productive. Because of technological problems, some capacity factors were as low as 5 or 10 percent.7 A number of projects were plagued with costs higher than expected and failed as a result. While investment tax credits were effective in getting capacity built, they did not guarantee reliability and performance. Fifth, environmental groups that were expected to be supportive were instead opposed to development because of problems with visual obstruction, bird kills, and noise pollution. While development continued through the end of the 1980's, these 5 factors greatly slowed the pace of wind energy development, with nearly all new projects being in California.

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