Should Washington Extend Tax Credits for Wind Power?
- Nov 21, 2012 3:01 am GMT
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As the Jan. 1, 2013, “fiscal cliff” approaches, one of the most divisive issues in Congress is whether to extend tax credits for wind power that are scheduled to expire at the end of 2012. The political battle lines among legislators are largely set, with supporters enthusiastically discussing job creation and opponents demanding an end to wasteful subsidies. Stepping back from the immediate political fray, is continuing the policy a good idea?
The numbers do not look very good. Congress would be committing itself to an expensive program that likely would cost over $100,000 per job while only leading to small price declines for wind power of around 1 percent. Emission reductions seem more cost-effective at roughly $15-$40 per ton of carbon dioxide, but such an approach to climate policy is unsustainable.
Despite the lackluster benefits of the credits, wind supporters may still feel compelled to support it. Ideally, this credit would be phased out or eliminated, and some or all of the money that would have been spent would be redirected, preferably for alternative technology research and development. However, in the current political environment, the spending will likely be eliminated rather than shifted. People who want to see alternative energy development could find themselves without the tax credits and without any additional money for new technologies.
Taking a closer look at the details, there are currently two tax credit options available for wind developers, a production tax credit (PTC) or an investment tax credit (ITC). The PTC gives developers 2.2 cents/kWh of electricity produced for 10 years, while the ITC immediately gives the project owner 30 percent of the cost of the property. Just focusing on the PTC, it’s possible to estimate the cost of extending the policy: more than $600 million per GW of new installed capacity over 10 years, assuming the turbines produce electricity one-third of the time, which corresponds with 2006-2011 capacity factor averages.* Using estimates of wind installations from Navigant Consulting, whose report isfeatured on the American Wind Energy Association website, 10-year costs for the PTC should be a little under $5 billion for wind installed in 2013 and more than $20 billion if extended for four years. Navigant predicts installations with the PTC to be about 7.5 GW in 2013, which is on the high end of estimates.
The United States already has 51.6 GW of total capacity, nearly all of which was eligible for a tax credit. The federal government has likely spent or promised about $30 billion in subsidies on existing facilities, in 2012 dollars.
The primary motivation for any tax credits like these must be to develop the technology or the supply chain sufficiently so that wind power will be competitive with natural gas and coal as a means to generate electricity. A variety of estimates of wind “learning curves” (see here, here and here) indicate that each doubling of total cumulative installed capacity results in lower costs of between about 7-17 percent. Navigant expects that a four-year extension of the PTC would result in the installation of about 20 GW of new additional capacity beyond what would be expected in the absence of the PTC. Yet at the end of 2011, global installed wind capacity was 238 GW. The additional wind from the PTC, which does not come close to doubling global capacity, should thus only lead to price declines of 1-2 percent, at best.
The Navigant Consulting report also provides job estimates of maintaining the PTC. It estimates 38,000 jobs would be saved in 2013 if the PTC is extended. With 10-year costs of almost $5 billion, this equates to about $125,000/job. (The direct costs to the budget in 2013 of $12,500/job sound more acceptable — but this is quite misleading because the PTC must be paid for 10 years.) The actual government expenditures per job are probably a little lower because some additional maintenance personnel will be needed, but it is still an extremely expensive way to encourage jobs.
For those thinking about the future, one potential concern is that getting rid of the PTC could destroy the domestic wind manufacturing base and the know-how to install turbines, should wind eventually become more competitive. However, Navigant still projects wind installations of around 13 GW from 2013-16 without the PTC. Manufacturing is also becoming increasing domestic, with domestic manufacturers providing nearly 70 percent of equipment installed in at U.S. wind farms in 2011. Three huge companies at low risk of going bankrupt (GE Wind, Vestas and Siemens) account for 75 percent of the domestic market for turbines. With capacity already built and stable market participants — not to mention the difficulty of transporting huge turbine equipment — it seems that domestic manufacturers should be in a competitive position if wind installations rise again.
The only figures that seem reasonable are the costs of emission reductions. Assuming a 20-year lifetime of the turbines, as well as the Navigant figures for installations with and without the PTC, the cost to the government of displacing coal-fired electricity is about $15/ton of CO2.** It rises to about $40/ton for natural gas combined-cycle plants. (This is not to say that a carbon tax at these levels would necessarily make wind competitive; these figures are calculations based on Navigant’s estimate of what would be installed with and without a PTC.) While these prices are generally in line with those discussed for cap-and-trade programs, it is impossible to maintain such a policy of subsidizing emission reductions indefinitely.
Given all these numbers, supporters of the wind tax credit should not be enthusiastic about extending it. Still, supporters may want to fight for anything they can get in the current environment. The money would be better spent fostering R&D for advanced technologies, but the current toxic political environment makes it very difficult to shift the money from the wind PTC to other more promising endeavors.
*1 GW running 1/3 of the time will produce 2,920 GWh/year. At 2.2 cents/kWh (or $22,000/GWh), this is $64.2 million/year. Over 10 years, the cost increases to $642 million. (No discounting is assumed, and the PTC rises with inflation.)
Image: Wind Turbine via Shutterstock