WUEG January 2016 Newsletter

January 2016 

January 2016 Newsletter 

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El Niño and Energy 

Thomas Lee – Senior Member, Academic Committee 

This year, El Niño has produced a warmer than 

usual winter, significantly affecting energy 

markets. 

temperature anomaly, the current El Niño event is 

already the most severe through this decade. 

Normally, trade winds (the prevailing winds along 

the tropics) blow east to west, induced by the 

Coriolis Effect. Over the Pacific Ocean, this wind 

pattern pushes surface water to move east to west 

(from South America towards Southeast Asia). So 

warmer surface water is piled downwards near 

Asia and Australia, while colder deep water rises 

around America through a process called 

upwelling. 

However, during El Niño (a.k.a. El Niño-Southern 

Oscillation, or ENSO) these trade winds are 

weakened or sometimes even reversed, meaning 

the surface temperature in the eastern Pacific 

(South America) is warmer than usual and vice 

versa. This fundamentally changes atmospheric 

weather patterns due to humidity and pressure 

changes. As seen from National Oceanic and 

Atmospheric Administration (NOAA) data of 

Oceanic Niño Index (ONI) measuring sea surface 

There are two mechanisms whereby ENSO can 

affect energy markets. First, it causes a slight 

increase in overall global temperatures that 

contributes to a warmer winter; this effect 

contributed to last year being the second warmest 

year ever recorded. Specifically in the US, the 

2015-2016 winter is estimated to be 15% warmer 

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than the last (conversely in the western US 

temperatures are colder than last year). Second, 

there are extreme weather events that are typical 

during El Niño: floods in California and Texas, 

drought in Australia and Japan, and failure of 

monsoon rains in Indonesia and India. These may 

drive supply chain disruptions; for example floods 

in California have caused several power outages 

this winter. 

ENSO has a negative effect on natural gas prices. 

This is due to decreased demand: natural gas is 

primarily used for heating, and 49% of U.S. 

households use natural gas heating. In general, a 

common metric for measuring the effect of 

weather on heating demand, as well as hedging 

through weather derivatives, is the heating degree 

day (HDD). Historically, the HDD in an El Nino 

winter can be 12 to 20% lower than the preceding 

cold winter. For this winter, EIA estimates that 

residential natural gas consumption will decrease 

6% for this winter compared to the last. Combined 

with current supply and storage dynamics, the EIA 

forecasts the average Henry Hub spot prices will be 

13% lower than last winter. Due to utility purchase 

contracts and the fact that residential prices also 

contain a fixed component for operating and 

transport costs, delivered residential natural gas 

prices are expected to fall 4% on average. 

Similarly, ENSO also puts downward pressure on 

prices of heating oil (which is the second most 

common space heating source in the Northeast 

after natural gas). However, this winter the price of 

heating oil (which is refined from petroleum) is 

expected to decrease even more due to the fall in 

crude oil prices. EIA’s October Short Term Energy 

Outlook forecasted prices to decrease 15% from 

last winter, but the current forecast is a 29% 

decrease. 

It is noteworthy that regional effects may differ 

from the national pattern. For example, warmer 

temperatures decreased snowpack formation in 

the Pacific Northwest: by May 2015 Washington 

and Oregon’s snowpack decreased to less than a 

fifth of their 30-year average. This has decreased 

hydroelectric generation by about a third 

(compared to previous five years) in these two 

states; thus more generation from natural gas 

plants is required, in fact increasing about 50% 

from last year. This effect is compounded with 

decreased HDD in the western US. 

“…following an extreme ENSO 

event, such as this winter’s, there is 

an increased probability of further 

reversal to the opposite equatorial 

Pacific pattern, known as La Niña.” 

Retail electricity prices are less variable than these 

heating fuels, due to the regulated structure of 

power utility markets which utilizes power 

purchase agreements (as well as the split between 

generation, transmission, and distribution). EIA 

estimates residential electricity prices are 1% 

lower, along with 2% lower electricity 

consumption versus last winter. The effect of 

decreased heating on electricity markets is more 

pronounced in the South, which has 63% of 

households relying on electrical space heating. On 

the wholesale side, the lower natural gas demand 

pressure from the warmer winter means that 

wholesale electricity markets should see less 

volatility. In contrast, two winters ago saw extreme 

winter cold in New England (due to polar vortex 

effects) and natural gas pipeline constraints, 

leading to very volatile wholesale price spikes. 

In the energy industry, knowledge about ENSO’s 

characteristics is very valuable to risk managers as 

well as market participants. While the effects of 

this current El Niño should be almost over (since 

ENSO usually starts between March and June and 

20reaches peak intensity between November and 



February), understanding this meteorological 

phenomenon continues to be very important for 

energy markets. For instance, following an 

extreme ENSO event, such as this winter’s, there is 

an increased probability of further reversal to the 

opposite equatorial Pacific pattern, known as La 

Niña. For example, this reversal occurred from the 

strong El Niño of 1987-8 (which saw ONI of more 

than 1.5) to the strong La Niña of 1988-9 (which 

saw ONI of almost -2.5). Such reversal, with the 

possibility of a much colder winter with increased 

demand pressures, has ramifications ranging from 

energy trading to disaster planning. 

Moreover, according to a 2014 study by Cai et al in 

Nature Climate Change, global climate change 

may increase the frequency of extreme El Niño 

events in the future. Warm winters, and their 

possibly cold subsequent winters, are not going 

away soon. 

Bringing the US infrastructure into the 21st Century 

Sam Collins – Member, Academic Committee 

On January 12 th , President Obama dedicated a 

portion of his State of the Union address to the 

future of the U.S. transportation system focusing 

on “how we can make technology work for us.” 

Two days later, Secretary of Transportation 

Anthony Foxx unveiled the president’s plan which 

would include a 10 year, $4 billion initiative to 

accelerate vehicle safety adoption through 

autonomous vehicles as part of the FY17 budget. 

“We are on the cusp of a new era in automotive 

technology with enormous potential to save lives, 

reduce greenhouse emissions, and transform 

mobility for the American people,” said Secretary 

Foxx. Secretary Foxx also unveiled the updated 

policy guidelines that the National Highway Traffic 

Safety Administration (NHTSA) wrote up in 2013 

regarding autonomous vehicles. 

“…the president’s plan [would] 

include a 10 year, $4 billion initiative 

to accelerate vehicle safety adoption 

through autonomous vehicles…” 

The DOT and NHTSA will work with industry 

stakeholders, state partners, and other important 

parties to develop guidelines regarding the safe 

adoption of technology and process in which the 

government and companies interact. In essence, 

this is a four billion dollar plan to insure that 

autonomous vehicles are regulated and safe for 

consumers. 

Companies like Volvo, Mercedes, and others are 

committed to introducing an autonomous vehicle 

before 2020, so this seems like smart decision by 

the Obama administration, because the 

government very rarely gets out ahead of 

innovations. For example, companies like BMW 

and Audi introduced vehicles in Europe that utilize 

LED lasers headlights a few years prior which can 

increase a driver’s visible range, can reduce energy 

consumption, and can prevent other cars from 

being blinded, yet this technology cannot be 

brought into the US because of legislation from 

1968 that remains unchanged. 

The failure to adopt superior technology like LED 

headlights is one reason why the government 

continues to push for such initiatives like 

autonomous cars and the Smart City Challenge. 

The Smart City Challenge was introduced in late 

2015 “to show what is possible when communities 

use technology to connect transportation assets 

into an interactive network. Funding up to $40 

million in funding will go to one mid-size city that 

puts forward bold, data-driven ideas [to make] 



transportation safer, easier, and more 

reliable.” The US Government plans to spend 

hundreds of billions of dollars in infrastructure 

improvements over the next decade, and these 

initiatives signal a pivotal point for our 

transportation network. 

Sources: NHTSA.gov 

Natural Gas: Following Oil’s Lead or Acting on its Own? 

Max Isenberg – Senior Member, Academic Committee 

While the spotlight on commodity prices remains 

fixed to oil’s wild swings in the past year, natural 

gas has experienced its own turmoil behind the 

scenes. By the end of 2015, both supply and 

demand for natural gas has conspired to drive 

prices to a 15 year minimum to $2 per million 

BTUs. What has caused this historic drop and what 

could eventually cause price trends to reverse? 

New Year, Same Story: Oversupply 

Oil & Gas 

Natural gas prices have been on a downward 

trajectory ever since the proliferation of hydraulic 

fracturing that has made the production of the 

commodity far easier and more prevalent. With 

formerly uneconomical shale deposits now prime 

targets for production, supply has exploded, 

providing a steady downward on prices. While the 

realities of price have caused some cutback in what 

producers are providing, the high capital costs and 

investment put into production have not stopped, 

bringing more gas to an oversaturated market. 

Additionally, inventories remain 15-20% higher 

than last winter, suggesting the gas being 

produced isn’t being used as quickly. 

Demand: The Short and Long Term Story 

Natural gas prices have fallen as the mild winter 

has reduced demand in the US market. With many 

parts of the East Coast not experiencing below 

freezing temperatures until just this month, 

demand for gas heating stayed far below previous 

winters. Meteorologists anticipate a strong El Nino 

to persist, moderating the harsh cold in most of 

the United States that usually causes large spikes 

in demand. 

Longer term demand for natural gas remains 

difficult to predict. As has been the case since the 

rapid expansion of fracking, domestic natural gas 

prices have fallen far below that in other markets 

such as Asia and Europe. This has incentivized 



exportation of liquefied natural gas (LNG), which 

allows producers facing low domestic prices to 

take advantage of higher prices for gas overseas. 

On the one hand, new markets for American 

natural gas may create new competition for 

domestic purchasers, thus increasing prices here at 

home and closing the spread between foreign and 

domestic prices. However, hints of an economic 

slowdown in Eastern Asia (especially China, Japan, 

and South Korea), Europe, and elsewhere may kill 

the profitability of LNG before further export 

capacity is brought online. India’s renegotiation of 

a major LNG contract that resulted in a 50% drop 

in price is indicative of how exporting to 

developing economies is also becoming 

significantly less attractive. 

Rebound in sight? 

While supply has slowly started to retract, 

increases in price may not materialize. The mild 

weather and threats of global recession have put 

brakes on the quantity of gas needed around the 

world. Barring a dramatic supply pullback or a 

resurgence in key developing markets for natural 

gas, the story of natural gas prices may not change 

from the past few years: a slow, steady march 

lower. 

Sources: Marketwatch, NaturalGasIntel.com, 

Bloomberg, Forbes, Wall Street Journal 

Saudi Aramco’s Listing Is Exciting but Unlikely 

Jose del Solar – Member, Academic Committee 

Saudi Aramco is estimated to be worth over 13 

times more than the world’s second most valuable 

company. Aramco sits on about 261 billion barrels 

of oil, controlling one fifth of the world’s reserves. 

But the monopoly’s importance to the Saudi 

people is more than just economic. It has been at 

the center of Saudi Arabia’s history, politics, and 

foreign affairs since it was nationalized in 1980. So 

it came as a shock to many when Muhammad bin 

Salman, the country’s prince, discussed the 

possibility of floating Saudi Aramco shares amid 

extremely low oil prices and a growing budget 

deficit. 

Aramco is currently among the most secretive 

companies on earth and does not publish its 

accounts, revenues, or profits. There are also 

questions about why the company appears to own 

a fleet of jets, soccer stadiums, and hospitals. But 

the listing of Aramco would certainly make the 

company more transparent. The move would give 

investors a better understanding of the company’s 

operations and true value. Aramco’s Chairman, 

Khalid al-Falih, said that the decision would 

include upstream, which is the exploration and 

production sector of the oil and gas industry. This 

means that the listing would give investors access 

to both the country’s 261 billion barrels of oil 

reserves and 263 trillion cubic feet of gas. 

“…the listing would give investors 

access to both the country’s 261 

billion barrels of oil reserves and 263 

trillion cubic feet of gas.” 

Not everyone is happy about this decision. Saudi 

Arabia is already taking heat for its recent oil 

reforms. Last year the country forced OPEC to 

maintain oil production amid plummeting prices, 

causing oil to fall to its current levels. Most oil 

producing countries are losing money on every 

barrel of oil they produce, and Saudi Arabia is not 

generating enough revenue to sustain its 

expenditures. The idea was to neutralize the threat 

from higher-cost producers, particularly the U.S. 



shale industry, but the move appears to have 

failed, only harming oil producing countries. 

But there is certainly logic to privatizing Aramco, 

and it fits the recent trend of denationalization. 

For one, it would serve as a way for Saudi Arabia to 

‘ride out’ this period of low revenues. Furthermore, 

due to the pressure renewables have recently 

placed of Saudi Arabia’s oil industry, some say the 

listing could also serve as a way for the country to 

cash before the world moves away from fossil 

fuels. 

The company’s valuation has taken a hit under 

current low oil prices, so floating the shares would 

not be a good way to maximize returns. It would 

also not be beneficial to the ruling family. 

International investors would have a say in the 

country’s ‘crown jewel’ industry, diminishing the 

royal family’s power. But perhaps more 

importantly, the unprecedented level of 

transparency required for a successful flotation 

would hinder bribery, random purchases, and 

funding the royal family’s extravagant lifestyle. All 

in all, a listing seems unlikely. 

Sources: The Economist, Forbes, The Guardian 

Oil Woes in Kazakhstan Highlight a Regime’s Illegitimacy 

Mark Rinder – Member, Academic Committee 

The city of Astana rises from the flat, deserted 

Kazakh Steppe as if a mirage, displaying futuristic 

architecture and imposing monuments. 

Designated the capital of Kazakhstan in 1997, 

Astana was intended to symbolize a new era of 

modernity for the country through its excessively 

luxurious planning. During Kazakhstan’s years of 

oil-driven prosperity, a contented population 

condoned its leader’s financial excesses and 

autocratic ways, but as global commodity prices 

continue to plummet, President Nursultan 

Nazarbayev will have to not only slow construction 

in his showcase metropolis, but also face new 

questions about his right to rule. 

Kazakhstan’s declining oil revenue has placed a 

strain on the nation’s economy, triggering 45 

percent depreciation in the national currency. 

Furthermore, the oil-backed National Fund is 

being rapidly drained as the government fails to 

curb spending despite decreased earnings. In the 

past eighteen months, the fund has fallen from $77 

billion to $64 billion, yet the government continues 

to draw $9.5 billion annually to finance its 

expenditure. With yearly returns of only 1.96 

percent, compared with 9.6 percent average 

returns for other sovereign-wealth funds, the 

Kazakh National Fund is on its way to complete 

exhaustion. 

Berik Otemurat, leader of the Kazakh central 

bank’s National Investment Corporation, pointed 

out this very fact in a recent Wall Street Journal 

interview, calling for reduced spending, increased 

tax collection, and more investment in higher-yield 

assets. Five days after predicting complete 

depletion of the National Fund within the next 



seven years, Otemurat was dismissed from his 

post. 

With Otemurat removed, Nazarbayev’s regime has 

silenced one source of embarrassing criticism, but 

still cannot rest assured of its continued 

dominance. Due to concerns regarding growing 

discontent over the country’s worsening economic 

situation, Nazarbayev’s ruling party has requested 

to reschedule early 2017’s parliamentary elections 

to a date prior to the end of this winter. The move 

is a clear attempt to harness Nazarbayev’s 

overwhelming support base before it grows 

increasingly frustrated with the government’s 

neglect of the economic situation. 

During times of prosperity, the dictators of lowprofile 

nations like Kazakhstan’s Nazarbayev face 

few threats to their power; when the population is 

fed, it is more willing to turn a blind eye to 

illegitimate democracy and human rights 

violations. However, as the financial security of 

Kazakhstan’s people hangs in the balance, it is 

likely that Nazarbayev will grow more desperate 

and have to work harder to maintain absolute 

control. Nazarbayev is not too threatened at the 

moment, but if Kazakhstan continues to exhaust 

its declining oil revenue, the country may be 

headed towards widespread unrest in the near 

future. 

Sources: The Wall Street Journal, Financial Times, 

The New York Times 

Norway’s Oil Fund and Macroeconomic Stabilization 

Frank Geng – Member, Academic Committee 

In early January, Norwegian’s Government Pension 

Fund Global (aka the Oil Fund) began considering 

increasing its portfolio’s exposure to global equity 

markets. This comes in a time when fund managers 

feel returns are steadily slowing down. Norway’s 

sovereign wealth fund is different from other pension 

funds of other countries in that it’s funded by profits 

from Norway’s petroleum sector. Statoil, for 

example, the national oil company, has seen 10% of 

its work force laid off in the recent oil price plunge. 

Bente Nyland, director general of the Norwegian 

Petroleum Directorate told Bloomberg that, 

Norway’s oil industry is “in a crisis now, we can’t deny 

that”. 

“Since 1971…oil revenue has 

increased GDP-per-capita more than 

30 times.” 

So why is this all important? Well, the Oil Fund’s 

move should prove to be a good example of a 

macroeconomic solution to the boom-bust cycle of 

something like the oil sector. In the current economic 

environment, oil and gas make up roughly a quarter 

of Norway’s GDP and half of its total exports. 

Countries facing similar crises in this depressed oil 

price climate and rising shale production should note 

the viability of a sovereign wealth fund. 

The decision to increase the fund’s stake in equity 

markets comes directly as a result of its slowing 

diversification process into real estate. In 2011, 

Norges Bank Investment Management (NBIM), 

which runs the fund alongside the Norwegian Central 

Bank, decided to commit $6 billion a year into real 

estate. For roughly two years, the fund’s strategy 

seemed to be working, with real estate returns 

hitting an average 7% annual returns. After 2013, the 

real-estate rush triggered by new massive investors, 

including the fund, caused a sharp increase in 

property prices and seemed to have overheated the 

market. And now, as real estate returns are almost 

half of what they had been in 2013 and as low longterm 

interest rates are hitting the fund’s large stake 

in bonds, the fund is considering shifting its 

investment focus into equities. Under its current 



rules, the fund’s portfolio consists of 60% in shares, 

35% in bonds, and 5% in real estate. 

On the one hand, the decision shows prudent 

thinking on the part of NBIM to attempt to life 

returns by taking on more risk. On the other, it points 

to a broader question of how to best use surplus 

derived from a country’s natural resources. And 

Norway is indeed an example of oil surplus. Since 

1971, when Norway first started extracting oil from 

the continental shelf, oil revenue has increased GDP 

per-capita more than 30 times. This kind of story is 

not atypical of countries with an abundance of oil 

and the necessary extractive capacity. Unlike many 

countries, however, it does not squander its oil 

profits. The concept of a sovereign in theory seems 

to have sound reasoning as an economic stabilizing 

mechanism. In downturns, it would counter-cyclically 

spend and in upturns, it would build-up its reserves. 

And especially in a scenario where oil prices probably 

will stay depressed as OPEC and new shale-oil 

producers continue to supply the glut, a sovereign 

wealth fund could easily fill the financial gap that oil 

firms are facing while at the same time stabilize 

government revenues. 

In the end, oil seems to be on both ends of the 

revenue-expenditure equation. Norway needs to 

recognize the weaknesses of its industry model. The 

bureaucratization of the oil industry undermines the 

state capitalism approach that Norway takes to 

corporate culture and thereby efficiency—it will be 

difficult to rely on oil revenues if the industry refuses 

to adapt. On the other side, as the Norwegian 

government is clearly in a mood to reexamine its 

spending priorities, it might be helpful to look at its 

welfare policies. Understandably, Norway follows the 

Nordic model of welfare, though in a time when 

government revenue is getting squeezed, the NBIM 

and the Pension Fund might be better uses of state 

funds. For other countries, it will be important to 

notice that this oil crisis has at the very least provided 

an opportunity to observe over the next few years 

the efficacy of a sovereign fund’s investment 

flexibility in macroeconomic stabilization. 

Sources: WSJ, The Economist, Norskpetroleum.no 

Future or Fiction: Space-Based Solar Power 

Anika Ranginani – Member, Academic Committee 

A recurring column discussing new technologies in the context of “Future vs. Fiction”. 

If you Google “Space-Based Solar Power” you are 

sure to find images of large photovoltaic cells 

floating in space and light rays with an unrealistic 

illustration of Earth in the background—more 

science fiction than science. 

Space-Based Solar Power (SBSP) is a concept that 

scientists have considered from a theoretical 

perspective as early as the 1960’s. The idea is to 

shoot satellites that can self-assemble into space, 

then use mirrors and solar panels that convert the 

power into either a microwave or a laser to send 

back to Earth. Because the solar radiation does not 

have to go through the atmosphere before it 

reaches the panels, this method could theoretically 

reduce the typical 30% loss in energy. A page on 

the National Space Society website is dedicated to 

the possibilities associated with SBSP. 



If space-based solar power became a reality, it 

would literally open a new frontier in the energy 

industry. Unsurprisingly, however, there’s a catch. 

It costs approximately $4,600 to launch one 

kilogram of material into space, something that 

quickly adds up when trying to place a solar power 

station in space. Even aside from that, scientists 

would still need to resolve many technical 

challenges. 

Despite all the difficulties with creating spacebased 

solar power and sending it back to Earth, 

many researches are investing in the potential of 

the technology. Stanford Researches have found 

using a silica layer on the solar panels can help cool 

them and make them more efficient. Other 

researchers at the University of Arkansas are 

working to develop the technology with NASA for 

their devices. Elon Musk’s company SpaceX has 

spent significant amount of energy and resources 

working to develop reusable rockets that could 

greatly reduce the cost of sending the necessary 

machinery to space. 

Earlier this year, Chinese authorities even made 

long-term plans to create a functional solar power 

station in space by 2050. In fact, the science 

behind SBSP may be close to coming to fruition. 

Machines in space are already using solar power. 

NASA’s Juno, planned to make measurements 

above Jupiter, just became the farthest spacecraft 

from the sun to be successfully powered using 

solar energy. The technical difficulty increases 

when trying to send that power back to Earth on a 

larger scale. The largest hurdle will be making 

SBSP affordable compared to other energy 

alternatives. With all the challenges of launching 

heavy materials into space and sending the energy 

back to Earth, large-scale use of space-based solar 

power will probably be relegated to the 

undetermined future—but not, perhaps as distant 

as one might initially think. 

Sources: US Department of Energy, Forbes, 

Scientific American, National Space Society, 

Discover Magazine 

Renewables 

German Energy Operations Divide to Focus on Renewables 

Emma Dong – Member, Academics Committee 

Germany is one of the forerunners in transitioning 

to alternative energy, and two of its energy giants 

have decided to split operations of energy into two 

companies to allow for a greater focus on 

renewables. E. ON has decided it will now focus on 

renewables, energy networks and energy 

efficiency services, and a new company, Uniper, 

will control fossil fuel and hydro assets, so each 

company can focus on developing in its sector. In 

addition, E. ON’s competitor, RWE, has also 

announced that they will split operations between 

green energy and conventional energy. Germany 

believes that the division into these two 

companies would allow for each of them to 

become leaders in their spheres without being 

limited by the risks associated with the other 

company. 



Germany plans on having renewable energy 

supplying 45% of power by 2025, and 80% by 

2050. However, as Germany is transitioning to 

green energy, they are also eradicating all nuclear 

power plants. After the Fukushima disaster in 

2011, they moved to dissolve all nuclear energy by 

2022. The German government is focusing on the 

“…investors and analysts are 

skeptical that Germany will be able 

to develop their renewable energy 

networks to compensate for fossil 

fuels and nuclear.” 

social impact of renewables, but there are major 

economic and logistical costs associated with 

eradicating nuclear and concentrating on 

renewables. 

Currently, Germany doesn’t have the technology 

or infrastructure to fully depend on renewables, so 

during the transition away from nuclear, fossil 

fuels such as oil and coal would have to be used to 

fill the quota that was produced from nuclear 

power plants. In the short run, Germany would be 

releasing more greenhouse gases, and investors 

and analysts are skeptical that Germany will be 

able to develop their renewable energy networks 

to compensate for fossil fuels and nuclear. 

Consumers already pay more for renewable energy 

in the grid, and the costs associated with the 

eradication of nuclear would also come from the 

pockets of the taxpayers. 

Although E. ON and RWE had the right intentions 

in transitioning to renewable energy, it did not 

consider all the externalities. The energy giants are 

now each other’s main competitors, and they have 

to cater their business operations around the new 

policies that the government is creating. In 2015, 

RWE’s shares dropped about 55% and E. ON’s 

dropped 39%. The companies did not plan for the 

repercussions associated with two companies 

competing for margins that are not large enough 

to cover the costs of nuclear energy and coal. 

As the two companies develop their infrastructure 

and improve the efficiency of the national grid, 

Germany may be able to meet its goals for 

renewable energy quotas, but they would need the 

financial support from investors who are willing to 

take large risks. 

Sources: The Guardian, The Wall Street Journal 

Extension of Tax Credits for Wind and Solar Projects Will Boost 

Investment 

Sheetal Akole – VP, Academic Committee 

In an unexpected move, U.S. lawmakers voted to 

extend tax credits for solar and wind projects for 

the next five years in mid-December as part of the 

$1.15 trillion federal spending bill that lifted the 

ban on exporting American crude oil. 

These tax credits for commercial and residential 

renewable energy projects have spurred increased 

investment in this field since 2005, when the 30% 

tax credits were first introduced. Since then, they 

have been extended several times. The wind 

subsidies technically expired in 2014, although 

many wind farm developers that had already 

begun construction were able to continue 

receiving it for the last year as well; the solar 

subsidy was set to expire for residential projects 

(and reduce to 10% for commercial projects) in 

December 2016. 



The renewable energy industry was expected to 

take a great hit as a result of the expiration of the 

tax credits – Bloomberg New Energy Finance 

(BNEF) created an independent report analyzing 

the possible effects if the ITCs were not extended. 

The report found that in such a case, installed solar 

capacity would fall by nearly 8GW from 2016-2017, 

plummeting from 11.2 GW in 2016 to 3.2 GW in 

2017. However, were the 30% tax credits to 

continue, solar power build-up across America 

between 2016 and 2022 was expected to be 22 

GW. 

from those presented in the hypothetical scenario 

in BNEF’s report. The current 30% tax credit for 

solar projects will be maintained through 2019, 

when it will drop to 26%. It will then be further 

reduced to 20% after 2020, after which the tax 

credit will expire entirely for residential projects 

and be reduced to 10% for commercial projects in 

2022. The current wind tax credit have been 

extended through the end of 2016, then fall each 

year until it expires in 2020. 

So how are these extensions likely to affect wind 

and solar project build up in America over the next 

few years? While the costs of installing solar and 

wind power have fallen significantly over the last 

few years, conventional fossil fuel sources of 

energy such as coal and natural gas still remain 

cheaper than unsubsidized renewables. As the cost 

of solar and wind power falls over the next few 

years, these subsidies will continue to drive 

investment in renewable projects – the solar credit 

is expected to contribute at least another 20 GW 

over the next five years, while the wind credit is 

expected to contribute 19 GW. In the meanwhile, 

solar and wind costs are expected to continue 

falling; the theory is that solar panel costs drop 20 

percent for every doubling of capacity. 

According to BNEF and Bloomberg, these 

combined extensions are expected to spur over $73 

billion of investment and supply enough electricity 

to power 8 million U.S. homes. These combined 

tax credits are expected to cost tax payers $23.8 

billion. 

The extensions of solar and wind tax credits, in 

reality, will have a different effect on the industry, 

although still driving renewables increase across 

the nation. The actual terms of the extension vary 

Looking forward to the expiration of these 

renewed tax credits however, most analysts in the 

industry agree that another extension after the 

current one phases out is unlikely, especially for 

the wind tax credits. 

Sources: BloombergBusiness, The Wall Street 

Journal, Forbes, Bloomberg New Energy Finance 


United Wind and the Potential for Residential Wind Power 

Arnab Sarker – Member, Academic Committee 


Less than ten years ago, the term “wind power” 

referred almost exclusively to wind farms, and 

brought the image of dozens of giant, loud, white 

wind turbines to mind. Now, wind farms are only 

one of three major sources of wind energy, with 

offshore wind and residential wind becoming more 

popular each year. In fact, despite low oil prices, 

wind power has grown to surpass the milestone of 

producing 70 GW of generating capacity per year, 

which is the equivalent of being able to power 

about 19 million homes. 

The growth in the wind industry has primarily been 

due to both technological and financial innovation. 

Technologically, wind turbines have become 

smaller, quieter, and more efficient than ever 

before. Several years ago, it was popular belief 

that wind turbines were death traps for birds, but 

now that these turbines have become smaller, 

they are more marketable, and kill fewer birds 

than powerlines. Additionally, one of the public’s 

major concerns with wind power is that the 

turbines are too loud and will lead to noise 

pollution. However, technological advances have 

resulted in wind turbines that are quieter than a 

refrigerator. 

The efficiency of wind turbines has also risen 

significantly in the past decade, and a compact 

wind turbine can easily power a home in a windy 

area, typically reducing energy costs by 50-90% for 

homeowners that install residential wind turbines. 

This seems like a great alternative to traditional 

energy sources such as natural gas, but a 

residential wind turbine can cost between $48,000 

and $65,000 for the turbine itself, an additional 

$40,000 for other equipment, not including 

shipping and installation costs. 

That’s where United Wind comes in. Following 

SolarCity’s economic model, United Wind leases 

wind turbines at little cost to the homeowner, and 

then receives payments based on the savings of 

the homeowner. In a political environment that 

supports the growth of low-carbon alternatives for 

energy through rebates and low taxes, companies 

like United Wind are in a great place to thrive. In 

fact, especially after the Paris Climate Summit, 

investors are incredibly optimistic about United 

Wind’s future: United Wind just received $200 

million in funding from Forum Equity Partners. 

With this funding, United Wind is poised to drive 

down its costs and scale up its operation. 

Financially, residential wind power and residential 

solar are in very similar places, but technologically, 

they seem to occupy two different niches. 

Residential wind power is mainly viable in the 

Midwest, where homes have over an acre of land, 

and there is enough wind for the wind turbine to 



create a worthwhile amount of savings. Residential 

solar power is already fairly popular, can power 

suburban homes, and is ideal in the South. 

Residential wind power certainly isn’t the sole 

solution to get America to meet the carbon 

emission target of zero emissions in the second 

half of the 21 st century, as agreed upon at the Paris 

Climate Talks, but it does have the potential to 

play a large role in a low-carbon future. 

Sources: United Wind, New York Times, New York 

Business Journal, Green Tech Media

WUEG January 2016 Newsletter

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