Wind power has a history of boom and bust cycles which has created a significant challenge for investors that are seeking to deploy capital in this sector. Currently, wind is highly dependent on government subsidies that need to be renewed periodically. The most recent extension, which was passed in early January 2013, has created a significant opportunity over the next two years, but what happened at the end of 2012 was very telling.
In 2009 as part of the American Recovery and Reinvestment Act, tax and production credits were extended and cash grants were offered for work that was completed by the end of 2012. What this created was a boom in construction of new wind power. By all measures, 2012 was an excellent year for wind construction. New capacity representing 13.1 gigawatts (GW) was constructed in 2012 and wind was the number one source of new power generation built that year. Since there was no clarity on tax policy for 2013 and beyond, construction ground to a halt with most developers slowly planning new construction, but waiting for clarification on government policy. Now that the production tax credit (PTC) has been extended, construction of new wind farms is expected to pick up dramatically in the second half of 2013 with construction continuing into 2014 and potentially 2015. The long construction window is due to government policy that states that work needs to begin in 2013, but does not mandate an end date. The IRS has confirmed this view and has only mandated that continuous construction take place after 2013.
What does this all mean for companies that serve this sector? First, construction should be very strong over an extended period of time creating an upswing in revenues and profits for companies that serve the sector. This will create time for the industry to reduce costs and work towards the goal of an extension of the PTC with a gradual phase out. Critical to gaining passage of this legislation will be the composition of Congress after the mid-term elections in 2014. A majority of Democrats and pro-wind Republicans will be needed to pass this legislation in both houses. Second, with the ambiguity in the tax code about when projects need to finish, financing might be a challenge. This should be overcome by the opportunity and the government’s desire to support this market. As a result, companies that serve the wind sector should see strong performance over the coming years.
Investors will continue to cautiously approach the sector, but the upcoming growth does present opportunities to clean up balance sheets and evaluate near term opportunities for investment or sale. For owners that don’t want to sell, this upcoming period presents a strong opportunity to evaluate the current state of their finances and use this period of growth to limit risk if there is another downturn by reducing debt, evaluating their operations and investing in new end markets to limit the downside if extension of the PTC is unclear. For owners that are seeking to sell or bring on investors, the next year or so should create a window where investment and M&A can take place, although off historic highs. Thinking through the risks and potential strategy over the next two to two and a half years will be critical to achieving an owner’s ultimate goal. Business owners would be wise to use this extension to plan accordingly.