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By Geoffrey Styles on Dec 5, 2013 with 8 responses

Is the Wind Energy Tax Credit About to Expire for Good?

If It’s December It Must Be PTC Time, Again

With the end of the year fast approaching, the US wind power industry faces yet another scheduled expiration of federal tax credits for new wind turbines. The wind Production Tax Credit, or PTC, was due to expire at the end of 2012 but was extended for an additional year as part of last December’s “fiscal cliff” deal. There are no signs yet of a similar reprieve this year.

With the PTC and other energy-related “tax expenditures” subject to Congressional negotiations on tax reform, this might truly be its last hurrah in its current form. It is high time for this overly generous subsidy to be “sunsetted”, and if it’s replaced with a smarter policy emphasizing innovation, the outcome could be beneficial for taxpayers, the environment, and even the US wind energy industry.

Too Big To Last

In its 20-year history, minus a few year-long expirations in the past, the PTC has promoted tremendous growth in the US wind industry, from under 2,000 MW of installed wind capacity in 1992 to over 60,000 MW as of today. For most of its tenure, the PTC did exactly what it was intended to do: reward developers for generating increasing amounts of renewable electricity for the grid at a rate tied to inflation.

However, unlike the federal investment tax credit for solar power and some other renewables, the amount of the subsidy didn’t automatically decrease as wind power technology improved, with wind turbines growing steadily larger, more efficient, and cheaper to build. Instead, the PTC’s subsidy for wind power increased from 1.5 ¢ per kilowatt-hour (kWh) to its present level of around 2.3 ¢. That’s roughly one-third of today’s average US retail electricity price for industrial customers and exceeds most estimates of typical operating and maintenance costs for wind power. The latter point has serious implications for the impact of wind farms on other generators in a regional power grid.

If wind turbine installations continued at their remarkably depressed rate of just 64 MW in the first three quarters of this year, the cost of extending the PTC for another year would be negligible. However, it’s evident from industry data that a major reason installations are so low in 2013 is that the uncertainty over last year’s scheduled expiration caused developers to accelerate projects into the record-setting fourth quarter of 2012. The American Wind Energy Association cites over 2,300 MW of new wind capacity under construction as of the end of September, while installations over the last three years averaged just under 8,400 MW annually.

At that rate, a one-year extension of the current PTC would add around $5 billion to the federal budget over the 10 years that new wind farms would receive benefits. Congress’s Joint Committee on Taxation apparently came up with a slightly higher estimate of $6.1 billion.

Less Bang for the Buck

Before reflexively supporting or opposing another PTC extension, depending on one’s politics, we should ask what we’d be getting for that $5 or $6 billion. One of the commonest rationales I encounter justifying the continuation of the PTC is that conventional energy continues to receive billions of dollars in subsidies each year. Without getting bogged down in arguments over the definition of a subsidy, or the real and imagined externalities associated with using fossil fuels, it is certainly true that the US oil and gas industry benefits from deductions and tax credits in the federal tax code to the tune of around $4.3 billion per year, based on figures in the latest White House budget.

If we compare these benefits on the basis of the energy production they yield, the PTC starts to look pretty expensive. For example, wind capacity additions in 2012 of over 13,100 MW increased wind generation by 20 billion kWh over the previous year. That’s the energy equivalent of about 140 billion cubic feet of natural gas in power generation, or 66,000 barrels per day of oil. (Although less than 1% of US oil consumption is used to generate electricity, oil is still an easily visualized common denominator.)

By comparison, US oil production expanded by 837,000 bbl/day, while natural gas production grew by the equivalent of another 606,000 bbl/day. So on this somewhat apples-to-oranges basis, oil and gas added more than 20 times as much new energy output to the US economy as wind power did, for roughly the same cost to the federal government.

Now, it’s true that domestic oil and gas both had banner years in 2012, in terms of growth, reversing longer-term decline trends in earlier years, but US wind had its biggest year ever last year. Another factor making this comparison more reasonable than it might otherwise seem is that these are all essentially mature technologies. Wind turbines are still improving, but these improvements are mainly incremental at this point. Nor do they or the billions in annual subsidies for wind address the single biggest obstacle to the wider adoption of wind energy, arising from its fundamental intermittency and disjunction with typical daily and seasonal electricity demand cycles.

Refocusing on Innovation

When the PTC was first implemented in 1992, by its very existence it fostered innovation in a technology that was still in its infancy as a commercial means of generating meaningful quantities of electricity. That’s no longer the case. I’ve seen various ideas for reforming the PTC to make it more innovation-focused, but while these might be preferable to the status quo, they strike me as overly narrow. We don’t just need wind innovation, but energy innovation, and in fact innovation across the whole US economy if we want to remain globally competitive, and if we want to make more than incremental reductions in our greenhouse gas emissions.

It’s ironic in that context that the federal 20% research and development tax credit is also due to expire at the end of the year. If it came down to a choice between extending the R&D tax credit and extending the PTC, I’d hope that even the wind industry would opt for the R&D credit. That’s not entirely a false choice, considering the scale of ongoing federal deficits and debt, and the need for the government to borrow around 20% of what it spends.

Conclusion – No Cliff for Wind, Even if the PTC Expires

Now is the ideal time to reconsider the thinking behind the Production Tax Credit. That’s not just because the Congress must shortly decide whether or not to extend it, but because its expiration now wouldn’t be as abrupt as was foreseen at the end of 2011 or 2012. Last year’s extension redefined how projects qualify for the PTC, so any wind project that has either started significant work or spent 5% of its budget by year-end could still qualify for the current PTC in 2014. I have seen analysis suggesting a project begun now might even qualify after 2015, as long as work on it had been continuous.

This smoother transition gives both Congress and the wind industry time to reevaluate what role, if any, specific wind-energy subsidies have in a national energy economy that looks very different than the one in which the PTC was first conceived in the 1990s, or even when the larger renewable energy incentives of the federal stimulus were adopted in 2009. I’d be very surprised if the outcome of such a deliberation was to simply continue the same two-decade old structure into the future.

  1. By mtracy9 on December 5, 2013 at 11:42 am

    This article does not address the cost of global warming
    that the article’s author likes to pretend doesn’t exist.

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    • By Geoffrey Styles on December 5, 2013 at 2:54 pm

      Hardly. That’s one of the real externalities I alluded to. However, it’s also not as big a factor in the PTC debate as you might suppose. On the margin, wind competes more with gas than coal, and not at all with oil. A kWh generated from natural gas results in 0.7-1.2 lb of CO2 emissions, depending on the gas turbine configuration. Call it a pound. On that basis the cost of avoiding CO2 via the PTC works out to about $50 per metric ton.

      That’s really quite expensive, compared to alternative sources of CO2 reduction, or to traded emission allowances in Europe, which are going for under $6/ton. Closer to home, recent auctions by the Northeast Regional Greenhouse Gas Initiative set a price of $2.67/ton. The latest California cap & trade auction came in at $11.48/ton. In other words, while wind has environmental benefits, it’s not clear they’re worth the price the current PTC puts on them.

      see: http://www.rggi.org/docs/Auctions/21/Auction_21_Market_Monitor_Report.pdf

      http://www.arb.ca.gov/cc/capandtrade/auction/november-2013/results.pdf

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      • By mtracy9 on December 5, 2013 at 5:21 pm

        Except that the oil companies are using part of their profits (part of their production tax credit) to lobby Congress to not put a price on carbon and to not enact cap and trade. So far, expect in a few places like California, the oil companies’ lobbying has been effective.

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        • By Geoffrey Styles on December 6, 2013 at 10:25 am

          I don’t think oil companies are the only groups opposed to cap & trade or a carbon tax. If they were, it would be in place already.

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  2. By ben on December 6, 2013 at 10:38 am

    “There he goes again…..” Styles bothering us with the facts!
    Guess the inconvenient truth of quantifying costs proves a bit unsettling to folks who simply reject market-based policy and wish for a much more “enlightened” orientation on renewables from this government of ours. Perhaps, if enviros (I consider myself pretty much a Greener) keep beating the drum, we can prod changes that encourage truth-in-pricing to reflect full costing of sustainable resource management. I’ve scratched my head at things like an oil depletion allowance while allowing negligible royalty payment schedules on public lands. It would seem that revenue generated from modest increases might help leverage cleantech energy commercialization (via privately managed MLPs and other private-sector mechanisms) without the over-bearing hand of government bureaucracy.
    Thanks for the recitation of facts to support objective analysis. The next move down in fossil fuel prices, when combing with ongoing fiscal constraints, will not make for happy dialogue on energy policy between Left and Right. More reasonable
    heads–like your own– are needed to help steer a sensible middle course.
    Ben

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  3. By Robert Repetto on December 16, 2013 at 12:52 pm

    The obvious rationale for the PTC is that generation by fossil fuel plants impose significant externality costs not borne by the source. Recent economic studies at Yale have found that coal-fired plants actually have negative value at the margin. The PTC does actually foster innovation, much of which derives from “learning by doing” along the entire production and operational chain. Moreover, it stimulates R&D, the return to which is dependent on the scale at which successful innovation can be adopted. Mr. Styles doesn’t know what he’s talking about, so why is he a guest columnist at the CSM?

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    • By Geoffrey Styles on December 17, 2013 at 3:25 pm

      The focus of this post is the federal PTC and its cost to taxpayers, who are not responsible for monetizing every externality that a university or NGO can estimate. While you’re certainly correct that much innovation is connected to learning by doing, we’ve passed the stage at which turbine makers or project developers should reasonably expect incentives on the scale of the current PTC to extend those learnings, the value of which benefits their shareholders more than those who are funding it. Suggesting that after 20 years the PTC is due for reform and phaseout is hardly an extreme view, and it’s shared by many others, apparently including some in the wind industry who would prefer a smaller but more dependable benefit to one that is constantly at risk of disappearing.

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  4. By Geoffrey Styles on December 19, 2013 at 9:01 am

    Senator Baucus (D-MT) has released his draft tax reform proposal for energy incentives including the Production Tax Credit. While I applaud his desire to consolidate today’s confusing array of incentives down to a small number of consistent ones that apply more broadly, he would essentially extend the PTC for wind at the current rate in perpetuity. Considering that $0.023/kWh equates to up to $39 per oil-equivalent barrel, depending on the conversion rate you choose from kWh to BTUs, this looks extravagantly generous for a mature technology. If the oil and gas tax incentives that have received so much criticism were at that rate, the annual cost to the government would be over $250 billion, instead of $4 billion.

    see: http://www.politico.com/story/2013/12/max-baucus-clean-energy-tax-breaks-101284.html

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