Wind Energy Without the PTC

The debate surrounding the Production Tax Credit (PTC) intensified last quarter following several high-profile attempts by Congress to extend the credit before it expires at year-end. Industry warnings of precipitous declines in clean-tech investment and imminent job losses have reached a fevered pitch. The New York Times, for example, reflexively accused budget-hawks in Congress of being preoccupied with safeguarding the dominance of the oil and gas industries.

The idea that wind, which represents less than 3% of total electricity generation in the country after huge taxpayer benefits and state mandates, could threaten the continued use of fossil fuels in electric generation is fantasy. It demonstrates a general ignorance about wind energy’s purpose and its limited contribution to our energy portfolio.

While we might forgive a newspaper editor’s misunderstanding of the complexities of renewable energy policy, it’s quite another thing to see the same level of ignorance on display on Capitol Hill by the very people tasked with understanding and voting on these policies.

Last month, the House Subcommittee on Select Revenue Measures invited fellow House members to speak on behalf of bills they introduced or co-sponsored that would extend more than sixty expiring tax provisions, including the PTC. Of the nearly thirty witnesses who testified, one-third pressed for immediate extension of the credit.

Representatives Bass and Welch from New England, Deutch of Florida, Reichert of Washington and others repeatedly echoed the same AWEA talking points about job creation, the need to reduce reliance on fossil fuel, risks of climate change and, my favorite, economic opportunity for their state.

Like the Times, they touted the importance of the U.S. remaining a strong global clean energy market.

And like the Times, not one of those advocating for the PTC had a clue the role of the subsidy in the power market or the likely outcome if the subsidy were to expire. Either that, or political expediency ruled the day and they didn’t care.

PTC and RPS Policy Links

In the early 1990′s following enactment of the PTC there was no demand for wind power. States did not have renewable mandates and by time the Asian Financial crisis hit, oil prices collapsed taking with them any financial incentive to install costly renewables. When energy prices recovered somewhat there was an uptick in wind development but it was concentrated in four states with renewable programs — California, Iowa, Minnesota and Texas.

In the years 2000, 2002 and 2004, the PTC expired and wind development stalled but in that same period, energy prices were fluctuating, the 9/11 terrorist attack shocked the US economy and we slipped into recession. Claims that expiration of the PTC alone caused wind development to stall are overly simplistic. In fact, given available data, it’s impossible to isolate the PTC’s affect. Some energy experts maintain the PTC was largely irrelevant in those years.

After 2004, the subsidy may have contributed to growth, but so did State policies mandating renewables.[1].

When states adopted Renewable Portfolio Standards (RPS) [2] as a means of addressing climate change wind installations showed marked growth. Legislators believed claims made by wind proponents that wind, with no fuel costs, would protect ratepayers from dramatic swings in fuel prices, and eventually stabilize and lower energy prices. In return, they envisioned a transition to more renewables, the decommissioning of older fossil plants and cleaner air.

But wind is an unpredictable, non-dispatchable resource that’s built long distances from load and largely delivers energy at a time of day and year when least needed. With high upfront costs and fewer hours to spread the cost over, wind cannot compete with reliable, lower-priced fossil and nuclear generation. It’s inherently a low-value resource, that demands above market prices.

The PTC subsidizes project capital costs by providing an outside revenue stream [3] for investors and project owners. The credit, in turn, artificially shields ratepayers from the true price of wind power.

Yet, federally subsidizing wind is not enough to incite utilities to buy.

RPS policies created demand for wind [4] by establishing non-competitive segments of the power market for qualifying renewables. Today, over half of the states have RPS policies which apply to more than 50-percent of total U.S. electricity load.

Life after the PTC: No Free Lunch

The PTC and RPS combined provide the wind industry a market for its energy and a means of shielding ratepayers from the true cost of their product. But the PTC disproportionately benefits ratepayers in States with renewable mandates by distributing the high cost of wind to taxpayers at large.

Some complain that Americans are double-paying for wind — once through above-market energy prices and again in their taxes, but this is not true. In fact, we are paying the true price of wind allocated in both the rate-base and the tax-base. If the PTC were to expire, people living in Georgia, Wyoming and other states with no RPS policies would rightfully be relieved of subsidizing policies enacted in other states. But what would happen in states with mandates?

Existing wind projects that are still collecting the PTC would not be impacted, but proposals for new wind would be under pressure to significantly lower their capital costs and improve their production numbers in order to account for the lost federal revenue. In addition, the value of the renewable energy credits would likely increase thus placing even more upward pressure on renewable energy prices. Legislatures will be forced to confront the real cost of wind power and evaluate whether the policy will ever deliver on goals originally envisioned.

The AWEA insists the PTC is an effective tool to keep electricity rates low. In fact, it is nothing more than a cost imposed on all taxpayers in order to accommodate development of a politically well-connected, high-priced, low-value resource that cannot meet our electric capacity needs.

[1]Wind also benefited from rising natural gas prices (over $5 per million BTU) making wind power contracts an attractive way to displace higher-cost natural gas generation.

[2]RPS policies mandate utilities supply a minimum percentage of their customer load with electricity from qualified renewable sources.

[3]The open-ended subsidy of 2.2¢/kWh in after-tax income represents a pre-tax value of approximately 3.7¢/kWh.. The PTC is tied to the Consumer Price Index (CPI) and therefore is scaled each year. Today, the PTC costs US taxpayers $1.5 billion per year.

[4] Wiser, R., Namovicz, C., Glelecki, M., Smith, R., Renewables Portfolio Standards: A Factual Introduction to Experience from the United States http://eetd.lbl.gov/ea/ems/reports/62569.pdf Some states allow out-of-state generation to count toward their RPS requirements. Renewable capacity built in a non-RPS state may be used to meet another state’s mandate.