Solar and Wind Energy Firms Facing Shakeout
American Solar King is the nation’s largest maker of solar water heaters, but next year the Waco, Tex., firm expects to make a lot of money on a new product--natural gas water heaters.
Fafco, a major manufacturer of solar swimming pool heaters based in Menlo Park, Calif., predicts that a new product--plastic tubing--will provide one-third of next year’s sales.
Fayette Manufacturing isn’t giving up its $65-million windmill business, but the Tracy, Calif., company has an unusual new sideline--steam turbines.
These firms and others in the infant solar and wind industries are bracing for the end of generous federal energy tax credits that are more responsible for their growth than any worries about energy shortages. The loss of credits “will severely damage the market,” said Brian Pardo, the American Solar King chairman who expects “to do better than most” and lose only 30% to 40% of his solar business.
2 to 3 Times More Expensive
Without the credits, solar and wind machines are two to three times more expensive than conventional energy sources. Wind power, for example, costs between 11 cents and 15 cents a kilowatt hour, compared to an average of 5 cents per kilowatt hour on Southern California Edison’s system. Spokesmen for solar and wind manufacturers agree that, without the tax credits, 1986 sales should drop to $600 million from $1.8 billion this year, causing half of the 250 companies that make such equipment to fail.
“Only the strong will survive,” said Freeman A. Ford, chairman and founder of Fafco, which plans to sell plastic pipe for use in conventional steam boilers next year. Many firms are seeking strength in such diverse new business lines as conventional hot water heaters, satellite dishes and jewelry. “They are trying anything they think will work,” Pardo said. American Solar King, for example, expects to get 40% of its revenue next year from a natural gas water heater that is convertible to solar.
“We realize it would be very difficult to compete with gas,” Pardo said.
The credits, which are scheduled to expire Dec. 31, have become part of the emerging debate about the role of government in alternative energy. Buyers of wind or solar power equipment get to deduct a portion of the purchase price directly from their taxes for the year that the purchase is made. Last week, the House Ways and Means Committee--which is attempting to write an overall tax reform bill--voted to extend a version of credits through 1988, but the maximum amount would drop each year until the credits expire.
Some within the industry contend that the loss of credits will blunt America’s technological edge, allowing such countries as Denmark and Japan to take the lead in wind machines and in photovoltaic cells--silicon wafers that turn the sun’s energy into electricity. But others, including Stanford University energy researcher James L. Sweeney, contend that the credits supported equipment sales far more than technological breakthroughs. Efficient companies will survive, Sweeney says. “It’s the turkeys who will go under.”
Edward A. Myers Jr., the Southern California Edison vice president who oversees small power development, agrees that wind companies with competitive equipment and good locations “should continue to do well.”
There are only a few locations around the country where wind or solar energy makes sense. Experts say the sunbaked Southwest is a logical market for such solar devices as hot water heaters, pool heaters and complicated photovoltaic cells. Wind machines work effectively only in places where the wind blows fairly consistently and at greater than 7 miles per hour.
The largest development has occurred in the mountain passes of California, where hot desert air mixes with cool coastal air to create steady winds. Some so-called wind farms--giant clusters of wind machines--have recently been established in New England, but experts say the populous Northeast has little open space left for much large-scale wind development.
The amount of energy produced by wind and solar machines has increased exponentially since 1978, especially in California, where the industry received an additional boost from generous state tax credits. The state Energy Commission estimates that, by year-end, wind generating capacity will increase to 1,150 megawatts from only 7 megawatts in 1981. The commission estimates that solar equipment installed through 1985 will produce over the next 20 years enough energy to replace 33.4 million barrels of oil. Most solar equipment, such as a hot water heater, replaces another fuel but doesn’t produce electricity.
Despite that growth, wind and solar energy machines produce only 1% of the state’s power--and that is three times its contribution to the nation’s power base. Most experts expect more growth but at a slower pace. The California Energy Commission now says it doubts that wind machines will provide the state with 10% of its generating capacity by the year 2000--the goal set in 1977.
Some say that, even with the tax credits, wind energy development would have slowed. Those who live near wind farms are less and less tolerant of the machines’ spindly appearance and the whooshing sound made by turning blades. Palm Springs, the desert resort town, recently sued a wind farm developer in a effort to have dozens of windmills removed.
Those in the solar and wind industries argue that time may be on their side. Thomas O. Gray, executive director of the American Wind Energy Assn. in Washington, an industry group, says there are “a few rough years ahead” for wind and solar power. But he adds that oil will eventually cost more as supplies dwindle while “our costs are coming down.”
A state Energy Commission report showed recently that, someday, wind may be the cheapest form of power. The commission estimates that, by 1995, wind energy will cost between 3 cents and 5 cents for each kilowatt hour, about two-thirds less than power from a conventional steam boiler.
Solar energy is not far behind. The commission estimates that some solar technologies might eventually cost one-half to one-third less than steam power.
That represents a reversal from today’s solar and wind costs, which are double conventional power. The credits that are expiring significantly reduced those costs. They allow investors to reduce federal taxes by 15% of costs. They can take the 10% federal investment tax credit and, in California, the state credit, which has just been reduced to 15% from 25%.
The credits allow homeowners to reduce taxes by 40% of costs, up to a maximum of $4,000. California homeowners can also take the 10% state credit.
Homeowners apparently had little trouble recognizing a good deal. The Internal Revenue Service said taxpayers have taken about $3.4 billion in residential tax credits between 1978 and 1983. A similar figure isn’t available for businesses. California homeowners and businesses have taken state tax credits totaling $346.4 million between 1976 and 1983.
A 1978 law provides further incentives. The Public Utility Power Regulatory Act of 1978 requires utilities to buy electricity from power producers at prices that equal the utility’s power costs, thus guaranteeing the producers a market for their electricity. That amounts to about 5 cents per kilowatt hour on Southern California Edison’s system and 7 cents per kilowatt hour on Pacific Gas & Electric’s system.
But company executives say those incentives aren’t enough. Without the tax credits, wind farms will lose much of their appeal as a tax shelter for wealthy investors. This means that wind machine makers must turn to more conventional financing sources, such as banks, “who get scared away as soon as you mention wind energy,” says Lawrence T. Nally, Fayette Manufacturing marketing and finance director. As a result, Fayette is unlikely to develop new wind farms next year, he said.
CALIFORNIA RESIDENTIAL TAX CREDITS FOR SOLAR EQUIPMENT Applicants Total credits 1976 5,434 $634,000 1977 13,462 $7.7 million 1978 28,520 $16.3 million 1979 57,508 $33.7 million 1980 101,358 $46.0 million 1981 91,584 $45.2 million 1982 80,135 $56.0 million 1983 83,035 $73.9 million 1984 137,633 $124.9 million
Source: State Franchise Tax Board