This article comes from Philip Totaro, Principal, Totaro & Associates, www.totaro-associates.com.
What if renewable energy technology existed that negated the need for the Production Tax Credit (PTC)? And what if this technology wasn’t being introduced to the market?
Undoubtedly, the most talked about story in renewable energy in the U.S. thus-far in 2012 has been the fight to extend the PTC. It provides a 2.2¢/kWh tax incentive to producers of renewable energy, such as wind. Proponents argue that the PTC is a necessary incentive to help the wind industry produce a greater percentage of U.S. electricity.
The U.S. Department of Energy has stated in its published goals as well as throughout its funding announcements that it would like to see technology improve to the point where tax incentives are unnecessary. Current natural-gas prices make it difficult to hit that goal. However, if many of the technologies already prototyped were introduced to wind-turbine market, the production cost of energy could drop to a point where it would be cost competitive with gas at almost any price.
Over the past 18 months, our extensive research of the wind industry’s patent landscape has led us to identify more than 5,000 U.S. patents and applications for horizontal axis, utility-scale wind turbines covering today’s technology and dating all the way back to 1919. Sifting through more than 8.1 million US patents and millions more pending applications to find the relevant results, which were then analyzed and classified, has been at the heart of identifying the technology trends in the industry. From these we have identified many technologies which are languishing, yet would be useful on a commercially available wind turbine.
The analysis of the patent landscape revealed the rate for new technology introduction. The analysis included understanding the historical pace of innovation and comparing patent-protected innovations to the known deployment of various technologies on wind turbines. The accompanying chart shows that the issued patents in an industrial equipment industry sector like wind turbines describe a historical trend of innovation.
Even though pending patent applications typically do not publish until 18 months after filing, they still provide an indication of newer technologies which have not yet been commercialized. Therefore, we see a tremendous pendency of new technologies looking for a commercial home. These technologies have found their way into the innovation and patent-prosecution process, but are not yet making their way into commercial industry.
One reason for the discrepancy is that turbine OEMs are often not incentivized to introduce new technologies unless they face particular technical challenges, such as noise mitigation, O&M cost reduction, enhanced low voltage ride-through capability, or a production or availability improvement. If they can sell their turbines to a developer or owner-operator who has a power-purchase agreement (PPA) for a project which is high enough for the turbine OEM to achieve its margin, then they will bid their existing fleet – machines already in production.
It’s when PPA prices trend downwards – as we have seen in the U.S. market – that the margins of turbine OEMs get squeezed. Then they look to develop new turbine technologies and product offerings to make a step change in the production cost of energy (COE) and restore the manufacturer’s profits.
Of course, the risk premium associated with the introduction of a new turbine product or platform, and the R&D associated with development, testing, as well as risk reduction is often prohibitive to introducing the new technology. This is particularly true in a cost competitive and margin-sensitive market where financing of new turbines has been expensive.
Furthermore, the industry has matured over the past 15 years to an extent that it currently faces a point of diminishing returns on R&D investment. There is incrementally less cost-of-energy benefit for every R&D dollar spent on new technology.
But while it takes more investment to get continued benefits, the pace of innovation in wind is actually increasing. Patent issuances and application filings are up, with approximately 30 new applications publishing each week. This trend continues, even as the industry continues to consolidate and more industrial conglomerates such as GE, Siemens, Samsung and Alstom, compete to gain Tier 1 status in the wind sector and build their patent portfolios to match.
In the immediate term, the extension of the PTC is a fundamental necessity for the stability of the industry. Policy uncertainty does not provide the industry confidence to invest in workers, factories, or new technology. However, if the currently proposed PTC phase-out becomes part of the final language of the tax-credit-extension legislation, we would hope the industry hears the call to arms for the development and commercialization of new technologies which can further reduce the cost of energy and eliminate the need for a PTC.
About the author
Philip Totaro is the Principal at Totaro & Associates, a consulting firm focused on innovation strategy, risk mitigation, market research and product development for the wind industry.
Filed Under: News, Policy, Turbines