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The Battle to Extend Wind Incentives

With the end of the year approaching, the annual Congressional debate over extending a variety of expiring federal tax credits and other benefits is gearing up again. Few of these measures are as high-profile as the payroll tax cut, but each has a vocal constituency, including renewable energy. The American Wind Energy Association (AWEA) has launched a major effort seeking inclusion of the Production Tax Credit (PTC) for wind power in this year’s “tax extenders” package. That might seem premature, since the PTC won’t expire until the end of 2012, until you realize that eligibility for the stimulus-funded Treasury renewable energy grants for which many wind project developers have opted over the PTC ends in a few weeks with little chance of a further extension. However, before simply tacking another year (or four!) onto a tax credit that began nearly 20 years ago, Congress should answer two basic questions: Is this still the most effective way to promote renewables like wind, and does wind power now require subsidies at all?

I don’t blame AWEA for tackling this issue early, since the US wind industry has experienced significant volatility when previous PTC expirations went down to the wire, and in several cases lapsed for up to a year. At the same time, taxpayers deserve a more compelling rationale for continuing to subsidize wind power than the one now being offered. The “green jobs” argument is wearing thin, post-Solyndra, and it has become increasingly evident that helping to create a market for renewable energy technologies is a necessary but not sufficient condition to establishing a sustainable, globally competitive renewable energy manufacturing industry. Although more of the wind power value chain is now produced in the US than previously, too much of each wind subsidy dollar still goes offshore for this to be deemed an efficient way to boost to US jobs and manufacturing without reform.

In order to address the first question I posed, concerning the continued suitability of the PTC, it’s important to understand how it works and how it compares to other renewable energy incentives. The current PTC provides wind project owners (or the parties to whom the tax benefit has been sold via a “tax equity swap”) with an income tax credit of 2.2 cents per kilowatt-hour (kWh) of electricity actually generated and sold from the completed facility. Based on recent estimates of the levelized cost of electricity from unsubsidized wind power, that’s over 20% of a typical wind farm’s production cost. It’s also equivalent to more than half of this year’s average wellhead price of natural gas–a far larger subsidy per BTU than the controversial tax benefits currently provided to oil & gas firms.

The best thing about the PTC is that it is entirely outcome-based. You only receive the benefit when your project is completed, brought online, and as power is sold to customers. Mess up any of those steps and you get zilch. Put your project in a location with poor wind resource or limited access to transmission, and you won’t get nearly as much tax benefit. So from that standpoint–ignoring the green jobs angle that arose mainly from expediency when the financial crisis and recession hit–we are getting what we pay for: actual low-emission energy. The structure of the PTC has cash-flow implications that are viewed as a problem by many wind developers but might be regarded as a useful feature by taxpayers. Smaller developers, in particular, have greater difficulty financing projects when the incentive must be deferred until after start-up, or they may lack sufficient taxable income to take full advantage of the credit. They complain about the need to transact swaps with bankers and other investors to realize the subsidy sooner, at a cost. But perhaps it’s not such a bad thing for companies that small to have to convince an experienced third party that their project is really viable.

There are many alternatives to the PTC, including the 30% Investment Tax Credit (ITC), the same one received by solar and other technologies. The stimulus bill extended the ITC as an option for wind and allowed the Treasury Department to pay it as a cash grant, rather than waiting for subsequent tax filings. This certainly put money in the hands of wind developers much quicker–$7.6 billion since 2009 including $3.3 billion so far this year–and it has the added benefit of automatically scaling down as the cost of the technology falls. The solar feed-in tariffs favored in Europe didn’t have such a feature, with the result that countries have had to cut them numerous times, but only after the fat tariffs gave birth to a huge export-oriented solar manufacturing industry in Asia. Similar competition is now emerging in the wind industry.

The main problem with the ITC is that when viewed from an outcomes perspective, which really gets to the question of effectiveness, the outcome being promoted is construction, rather than energy production. You would get the same tax credit for a project with the best wind resource as for one with the worst. (This has also led to a lot of solar installations in places that would never otherwise have been considered.) So of the two main policy tools the federal government has used to subsidize renewable electricity, the PTC is probably more cost-effective in delivering the result we should really want, which is more renewable energy. As it is, even with rapid growth over the last decade, wind accounted for just 2.8% of our power generation this year through August.

That brings us to the bigger question of whether wind should be subsidized at all after the current PTC term expires. I get emails practically every day from folks who have serious concerns about the health and environmental impacts of power, as well as its cost- and emissions-reduction effectiveness. Even if we ascribed all of these concerns to NIMBYism, it doesn’t change the fact that the wind PTC, complete with annual inflation adjustment, is providing the same level of incentive as it did when the technology was much less mature and cost many times what it does today; AWEA cites wind costs having fallen by 90% since 1980. Other factors have also changed in the last twenty years. A majority of US states–and most of those with attractive wind resources–now have in place Renewable Portfolio Standards requiring utilities to include increasing proportions of renewable power in their supply. These mandates create a similar redundancy as the one between the ethanol blenders credit, which is also due to expire 12/31/11, and the biofuel mandates of the federal Renewable Fuels Standard. In the absence of the PTC, the state RPS system should provide a safety net–and more–for the industry.

There are two other key factors missing from AWEA’s arguments for extending the PTC. The first is the economy, which is the main reason that US electricity demand has not been growing at a rate that would support large generating capacity expansions of any kind. New wind installations have been anemic for the last two years, in spite of last year’s extension of the Treasury grants. Moreover, wind must now compete with the explosion of domestic natural gas production from shale, which when used in combined cycle gas turbines produces cheaper electricity than wind, with low emissions of the air pollutants that are of the greatest concern to most Americans, while still beating coal-fired power hands down on greenhouse gases.

Where all this leaves us depends on your priorities. If your main focus is on reducing greenhouse gas emissions and you see renewable power as a key strategy, then in the absence of a price on carbon you might support extending the PTC for at least a little longer. If you are concerned about climate change but more worried in the short term about the deficit, then letting the PTC lapse next year and relying on state RPS quotas to put a floor under wind looks reasonable. If boosting US cleantech manufacturing is your aim, you should prefer a more direct incentive than the PTC. And if your main worry is oil imports, then the PTC is irrelevant, since the US gets less than 1% of its electricity from burning oil, and most of that in remote and back-up power roles that wind can’t easily fill. On balance, if after considering all the alternatives the Congress decides to extend the Production Tax Credit, it should be for an explicitly final period, at no more than the 1.1 cent/kWh rate that technologies like marine, hydropower and waste-to-energy now receive, and without the annual inflation adjustment that undermines the incentive to continue reducing costs.

Content Discussion

Geoffrey Styles's picture
Geoffrey Styles on December 10, 2011


A conscious omission, because I’m not sure much of that lost coal capacity could realistically be replaced by wind. 

Geoffrey Styles's picture
Geoffrey Styles on December 12, 2011


I agree with you on the benefits of energy efficiency, even if it also seems likely that something less than 100% of the expected benefits are actually realized on a net basis, after rebound.  Yet while I am convinced that the current incentives for wind power are overly generous, as described above, I don’t see renewables and efficiency as mutually exclusive.  In emissions terms, they make up separate and distinct “Socolow wedges”, and we could use both.

Geoffrey Styles's picture
Geoffrey Styles on December 12, 2011


Let’s assume that figure of 17,000 jobs depending on the PTC extension is right.  At an annual rate of 6,000 MW of news installations, that equates to around $3.5 billion in cumulative PTC payouts (over 10 years for next year’s projects).  $200,000 per US job “created or saved” isn’t as bad as some programs, but should we really be going deeper into debt for results like that?  As I indicated in the posting, the PTC is a very indirect manufacturing subsidy, if that’s the goal. 

Geoffrey Styles's picture
Geoffrey Styles on December 13, 2011


Apologies for the typos in my comment below.  The site’s “edit” feature seems to be on the fritz at the moment.

Bill Woods's picture
Bill Woods on December 13, 2011

The PTC is actually a great deal for taxpayers. … a four-year extension of the PTC would cost $13.6 billion, a four-year extension would result in $25.6 billion in investment and tax revenue from the wind sector alone.

On p. 31 of the report, it says that the increased tax revenue is $1.7B (of $28.2B spent), including state taxes. That doesn’t seem like a “great” return for the federal taxpayers’ $13.6B.


Geoffrey Styles's picture
Geoffrey Styles on December 13, 2011


I see that the $13.6 billion subsidy cost figure came from the Joint Committee on Taxation.  However, it doesn’t quite square with the MWh that one would expect the forecast MW of additions for the extra four years of PTC to generate at a capacity factor of 30%.  Either the average capacity factor is much lower, suggesting that many of the best wind sites have already been “creamed” off by earlier projects, or the cumulative subsidy cost (over the first 10 years of each project, undiscounted) could be as high as $19 billion.  Even with the lower figure, the implied cost of the incremental 170 million tons of CO2 projected to be saved works out to $80, or around 6x the forecast cap & trade clearing price projected by Waxman-Markey. (I realize this is just one benefit, but I don’t find the green jobs angle very compelling, as noted in the posting and my earlier comment.)

If the goal of policy is to support manufacturing, then why not do that directly, instead of with an indirect subsidy that provides nearly as much benefit for offshore manufacturers as those in the US?   When the US must borrow the money for this subsidy–that’s the current reality–we ought to invest it as wisely as possible to get what we really intend. 

Geoffrey Styles's picture
Geoffrey Styles on December 14, 2011


There’s another aspect of this that AWEA should be concerned about.  I didn’t see it in the referenced slide deck, but it would be interesting to know what Navigant assumed would follow the 4 additional years of PTC you’re asking for.  That’s because a new manufacturing facility is normally not paid out within a couple of years–if it is it shouldn’t need any subsidies at all.  Would investors be quite so keen to invest in new plant & equipment if they thought this 4-year bump were the very last reprieve for the PTC?  Particularly when there’s already surplus capacity in the global wind turbine industry?  (We know how that kind of story ends, because we’re seeing it right now in the US solar industry.) 

Instead of using all its chips to try to get the current PTC extended, perhaps AWEA should take the year remaining on the current PTC and work with Congress to devise a new incentive structure that could actually be sustained in a period of tight budgets, and that would phase itself out as the industry grows.  You might take a look at what Growth Energy has done to prepare for the end of the ethanol blenders credit.