Growth Blows into US Small Wind Market

21 September 2009 (Last Updated September 21st, 2009 18:30)

A new tax credit for small wind installations is making it a much more viable power option for homes across the US. GlobalData looks at how it is becoming an increasingly attractive investment option.

Growth Blows into US Small Wind Market

The US small wind market is expected to take off with the introduction of a federal investment tax credit in 2009. Small wind, traditionally forming a very limited part of the US wind market, is expected to grow with a sharp increase in installation.

This is expected to boost private sector investments in small wind and increase revenues for equipment manufacturers. Small wind is being looked on as an attractive option to achieve energy security especially in regions far from the grid. The opening up of the US small wind market is expected to boost the installed base to 1,536MW in 2013, up from 72.2MW in 2008.

In credit

The US small wind power market, consisting of wind-powered electric generators with rated capacities of 100KW or less, is expected to surge exponentially in the near future following the introduction of the federal investment tax credit (ITC), implemented for a period of eight years.

A combination of state and federal policies and financial incentives, combined with an increase in private sector investments have been the key drivers for the growth of small wind power so far. Although the future for small wind looks promising, the market faces some challenges in the form of the economic crises, zoning and permitting issues, low public awareness, a lack of federal net metering programme and certification issues.

"The US small wind market is expected to take off with the introduction of a federal investment tax credit in 2009."

The small wind power market grew from 22.3MW in 2001 to 72.2MW in 2008 at a CAGR of 18.27%. The introduction of the Federal ITC is expected to provide a big boost to the market and the cumulative capacity is expected to reach 1,536MW in 2013 with a forecast CAGR of 83%.

End-users of small wind turbines are predominantly residential homes, farms, schools, small communities and small factories. The market is witnessing a shift from off-grid micro turbines used for battery charging to grid-connected larger turbines capable of providing power to community homes and small businesses.

State and federal policies supporting small wind power, combined with financial incentives and the availability of capital due to private equity investments, will be the key drivers for small wind power development. The growth in the residential segment (1kW-10kW) can be attributed to heightened consumer awareness and rising residential electricity prices, whereas the growth in the commercial segment (21kW-100kW) is down to private equity investments increasing the manufacturing capacity to meet the rising demands.

According to the American Wind Energy Association (AWEA), $160m has been invested in the top 18 small wind turbine manufacturers over the past three years. The increase in investments has allowed manufacturers to catch up with the demand for small wind. The increase in production enables economies of scale to be achieved resulting in lower costs and a further increase in installations.

The Federal ITC introduced in October 2008 for small wind will help by reducing installation costs by 30%, resulting in a huge uptake for small wind installations as the high upfront cost has been the major concern among small wind power users.

People in the US own a house for an average of five to six years and so the payback period desired for small wind turbines is a maximum of five years. But the current payback period for a small wind system currently ranges between six and 20 years.

Policies targeted at reducing the investment costs will, therefore, be effective in increasing small wind installations. Net metering introduced by some US states has led to an increase in grid-connected small wind turbines in the region. The increase in commercial power purchase agreements (PPA) has also been beneficial for commercial sector customers, enabling them to consume renewable electricity and at the same time avoid the costs and risks associated with owning the generating equipment.

On-grid installations on the rise

Historically, the share of off-grid installations has been high owing to lower investment costs. But with more states in the US introducing net-metering policies for small wind, many communities and small businesses are connecting their wind turbines to the grid to garner the benefits of net metering.

"Small wind is being looked on as an attractive option to achieve energy security especially in regions far from the grid."

In 2006, there were 7,876 off-grid units installed, contributing to 94.56% of small wind installations. The number of off-grid installations has gradually decreased over the last three years. In 2008, 7,402 off-grid units were installed contributing to 71.27% of small wind installations. The share of on-grid installations is expected to continue with more states considering the introduction of a net-metering policy to enhance small wind uptake.

Although the number of off-grid units installed has been greater than on-grid installations, the majority of these installations have been in the micro-wind category used for battery charging. On the other hand, the majority of on-grid units installed are used for providing power to residential homes and small enterprises.

As a result, the total installed capacity of on-grid installations is greater than that of off-grid systems. The share of on-grid installations has continuously increased over the last three years and it reached 78.34% of the installed capacity with annual installations reaching 13,610kW in 2008.

Off-grid installations mainly consist of micro-wind turbines in the 0kW-0.9kW category and residential systems of 1kW-10kW range. Small wind installations in higher power ranges have been completely dominated by on-grid systems. So although the number of units of off-grid installations has historically been higher, the total power installed by off-grid wind was lower compared to on-grid installations.

With the introduction of the Federal ITC, the upfront costs for small wind turbines in the 20kW-100kW range is expected to decrease further, resulting in further uptake of higher power on-grid installations.

Challenges to tackle

Complicated zoning requirements, unsatisfactory product performance, supply chain issues and a lack of a universal federal net metering policy will be the key challenges restricting small wind power growth in the future. The presence of poor permitting practices and unnecessarily restrictive regulations are the major market barriers discouraging customer interests and investments. Streamlining the permitting process will be extremely crucial to ensure that growth of small wind installations is not hampered due to administrative issues.

"The small wind power market grew from 22.3MW in 2001 to 72.2MW in 2008 at a CAGR of 18.27%."

Small wind turbine manufacturers have often been criticised for making performance claims which do not match with reality. This has led to distrust among customers leading to damage in reputation for the industry as well as restricted growth prospects for the future. The enactment of the Small Wind Certification Council (SWCC), an independent council to certify small wind systems for performance safety, reliability and sound pressure levels, will be extremely beneficial in increasing customer and manufacturer awareness as well as providing assurance to customers about the product quality.

Despite the small wind power market being expected to reach 1,536MW, it is not yet robust enough to meet the huge increase in demand. More investment will be needed to further increase capacity to meet demand. Lack of investment could, conversely, result in long lead times and poor services hampering small wind power uptake. With the introduction of the federal ITC, the upfront investment costs are expected to decrease by 30%, resulting in a surge in demand.

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