by Lutz Weischer, WRI
Recently there have been some questions in the media (see Green Inc. and Washington Post articles) and in the U.S. Senate about stimulus grants for wind energy projects going to foreign countries. On March 3rd, a group of Senators called for the suspension of the renewables grant program until "Buy American" rules had been passed that made sure projects used American components and labor.
But there is more to that story than meets the eye.
Empirical evidence demonstrates that predictable support for wind power improves local manufacturing capacity and creates local jobs. Consistent support in the form of the stimulus and long term programs such as a Renewable Energy Standard will give investors the certainty they need to plan and create jobs in the United States.
In the United States, wind energy has received policy support in the form of federal tax credits and a number of state-level programs. As the state-level programs have grown more numerous and ambitious and the federal support has stabilized (the production tax credit has not been allowed to expire since 2005), the wind industry has experienced a period of rapid growth. In 2008 alone, 55 new facilities producing wind turbines and components opened and there are now a total of 85,000 jobs in the American wind industry, up from 50,000 in 2007, according to the American Wind Energy Association.
Of the 15 leading global wind turbine manufacturers, 11 operate production facilities in the US or plan to begin operating this year, as my colleagues and I have found in a working paper recently published by the World Resources Institute and the Peterson Institute for International Economics. As part of the Recovery Act, wind park developers can now apply for a cash grant instead of the tax credit. This grant program has funneled more than $2.2 billion and has attracted $10billion in foreign investment as well.
The growth of the US wind industry confirms a global trend analyzed in our paper: every country that has put in place sufficiently large and predictable mechanisms to create demand for wind power has seen the increase of its domestic manufacturing capacity – and thus domestic jobs. That is mainly because regional production hubs close to installations sites are the most efficient way for the wind industry to organize its supply chain.
One of the reasons why the wind industry tends to produce locally is that towers and blades are very heavy and expensive to transport. Of course, given supply constraints and tight deadlines, companies will occasionally import any component if they cannot source it locally. But the larger industry trend is a different one; my colleagues and I calculated that the domestic content of turbines installed in the U.S. has risen from an average of less than 20 percent in the period 2001-06 to over 50 percent in 2008.
However, it takes time to develop local manufacturing. The United States does not yet have the capacity to produce every part for every wind project, but it can develop this in the coming years if the government continues its support policies. In West Texas, for example, American and Chinese companies are jointly developing a 600 megawatt wind farm with some parts supplied by a Chinese company. But 70 percent of the turbines used in the Texas project, including the blades and towers, will be manufactured in the U.S. Furthermore, they plan to build a new turbine plant in the U.S., creating 1,000 American manufacturing jobs. While their long term objective is a 100 percent American turbine, it will take time to ramp up manufacturing. Suspending the Renewable Grant Program could pull the rug out from under projects like this.
The Texas project follows the trends for the industry in general. While some components are sourced globally, companies have an interest in building local supply chains and the share of local content will increase over time. What is unique about the Texas project is the origin of the foreign components. It is the only project announced so far that sources turbines from a Chinese company. Contrary to the concerns voiced in the recent controversy, China is not an important exporter of wind turbines. In 2008, Denmark, Spain, Japan and Germany accounted for almost 85 percent of U.S. wind turbine imports. The Chinese share was 0.5 percent.
Global Market, Local Jobs
In considering the future of the grant program, policy makers should not assume that a foreign-owned company does not create jobs in the United States. First of all, grants go to domestic project developers, not turbine manufacturers. The developer will use part of that money—our working paper estimates around three quarters of it—to buy the equipment, including the turbine. But the rest of it is spent on other up-front costs: paying the project developer's own staff, construction workers and engineers. In other words, at least 25 percent of a typical grant goes to directly creating American jobs. The other 75 percent may support some manufacturing abroad, but very likely will support U.S. manufacturing as well, especially as domestic capacity increases.
Two examples illustrate that foreign ownership cannot simply be equated with production and jobs abroad. A wind turbine manufacturer in Pennsylvania has been able to rehire workers because of stimulus funding after it had to lay off some of them last year. This Pennsylvania plant produces in the U.S., but is actually owned by the Spanish company Gamesa. On the flip side, the controversial wind project in Texas sources its gearboxes from a Chinese manufacturer that is majority-owned by American wind giant GE.
A closer look reveals how the recent development of the U.S. wind market has been good for local job creation. The single most important factor in creating a domestic wind industry and the related jobs is ambitious and predictable support for wind power projects. Compared to the countries like Germany that have been most successful in developing a wind industry, support programs in the U.S., such as tax credits, have been more intermittent, inhibiting the development of the domestic manufacturing base. For example, in 1998 a federal production tax credit (PTC) had helped spur new investments in large scale U.S. wind energy. But new wind investments collapsed collapsed following 1999, 2001 and 2003, when Congress allowed the PTC to expire. Fits and starts do not make for a strong industry, but predictable, sustainable support will.
With the new grant program, the U.S. is beginning to catch up, attracting foreign investment and building domestic manufacturing capacity. To continue on this path, long-term programs, such as a Renewable Energy Standard, would provide investors the certainty they need to plan. However, because it takes time to build local manufacturing capacity, companies will continue to source components globally to overcome local supply constraints and meet deadlines. That's why the American Wind Energy Association and leading executives from the industry have come out with strong statements against Buy American provisions, saying they could slow down wind power deployment and job creation in the U.S.—which of course is the goal of the stimulus.
(Republished with permission from WRI. Lutz Weischer is a Research Analyst with the World Resources Institute's Climate and Energy Program.)