Windpower’s PTC: Secondary to State Mandates

Posted on December 27th, 2011 by
   

In recent weeks, wind developer Terra-Gen terminated plans to build its Horseshoe Wind Farm in Illinois, NextERA suspended the permitting process for a 150-megawatt project in South Dakota and Iberdrola announced its Desert Wind Energy Project in North Carolina was delayed and might be scrapped altogether. In each case, company officials blamed current market conditions and the inability to secure a long-term power contract with area utilities.

PTC in review

The American Wind Energy Association (AWEA) insists the industry is at risk of a slow-down if Congress does not act quickly to extend the production tax credit (PTC), the federal incentive most often credited for market growth in the wind sector. The PTC expires at the end of 2012.

But if the PTC were to expire, the damage would be less than what AWEA claims.

The industry has clearly grown addicted to the production tax credit but our findings suggest that attributing market activity to the PTC is overly simplistic and fails to consider other crucial factors driving development in the U.S.

The PTC was established by the Energy Policy Act of 1992 to stimulate the use of renewable power generation. The credit is adjusted annually for inflation and today stands at 2.2¢/kWh. When it was adopted, the House Ways and Means Committee insisted on an expiration date (June 30, 1999) in order to assess the effectiveness of the credit in meeting its goal.

State mandates key

In each of the five years following the PTC’s enactment, wind capacity declined. It wasn’t until 1998 and 1999 before the trend drifted upward.

The U.S. was awash in generation and oil prices were low and stable. The demand for renewable energy largely didn’t exist except in states with programs that encouraged the use of renewables. It’s no accident that the bulk of new wind projects built in 1998-99 occurred in four states with renewable programs — California, Iowa, Minnesota and Texas.

When the Asian Financial crisis hit in 1997, oil prices collapsed taking with them any incentive to build new renewable energy generators. The PTC expired in 1999, the same year oil prices bottomed out, and new wind installations went bust the following year.

AWEA has complained for ten years that expiration of the PTC in 1999 caused development to slow, yet given available data, it’s impossible to isolate what factors contributed to the decline. Clearly other macroeconomic issues played a crucial role.

After 2004, the PTC may have contributed to wind energy’s growth, but so did state policies mandating renewables. Wind energy benefited from rising natural gas prices as well (over $5 per million BTU) making wind power contracts an attractive way to displace higher-cost gas generation.

By the middle of 2008 the U.S. economy stumbled and energy prices dropped off quickly. With incomes falling, tax-based policy incentives lost much of their effectiveness. Section 1603 cash grants created under the stimulus were designed to fill the void by granting project owners payouts equal to 30 percent of a project’s qualifying cost. Consequently, wind capacity ballooned to nearly 45,000 megawatts with over 30,000 megawatts brought online in the last four years.

The PTC and wind’s future

Section 1603 is expected to expire this year and the wind industry has again turned its attention to extending the PTC. Ditlev Engel, chief executive officer of Vestas Wind Systems A/S complained that U.S. turbine sales may “fall off a cliff” unless lawmakers extend tax credits beyond 2012.

Sales may decline, Mr. Engel, but not because of the PTC.

The 2008 recession slowed economic growth causing demand for electricity to drop. Many states, including California, are now signaling their renewable mandates are being met which will weaken demand for wind energy. Recent discoveries of abundant shale gas reserves are expected to keep gas prices low and stable upto 2020. Since natural gas is among the important elements in determining the competitiveness of wind energy, low gas prices will generally reduce wind’s attractiveness as a ‘fuel saver’. These are the market conditions Terra-Gen, NextERA, Iberdrola and others are facing. In fact, the Energy Information Administration is now forecasting flat growth in the wind sector for the next ten years regardless of what happens with the PTC.

The PTC: overpriced and unneeded

The production tax credit largely benefits corporate investors and wind project owners. For investors like General Electric, the credit is an open-ended subsidy offered for each kilowatt-hour of electricity produced. Because the PTC directly reduces the amount of federal income taxes paid, it should be thought of as providing 2.2¢/kWh of after-tax income (in 2011 dollars).

This represents a pre-tax value of approximately 3.7¢/kWh (assumes a 40% marginal tax rate). When measured relative to the price of wholesale power, the PTC is exceptionally generous.

In New England, for example, where wholesale electricity prices are currently around 5.5¢/kWh, the subsidy equals nearly 75% percent of the power price. In areas where coal-fired power predominates, the subsidy on a pre-tax basis is approximately equal to the wholesale price of electricity. Bear this in mind the next time AWEA claims cost parity with non-renewable resources.

For consumers, the production tax credit disproportionately benefits ratepayers in states with renewable energy mandates by distributing the high cost of wind to taxpayers at large. And since the subsidy is uniform across the country it’s highly inefficient, supporting poorly sited projects as well as projects that would have been built regardless of the credit.

The production tax credit turns twenty years old next year. We recommend Congress act on the wishes of the House Ways and Means Committee and assess the effectiveness of the subsidy. AWEA’s myopic, superficial justification for extending the PTC is not supported by the facts.

Written by Lisa Linowes and Bill Short. Mr. Short is an independent consultant with a practice that specializes in renewable energy in the New England states.  Ms. Linowes is the Executive Director of the Industrial Wind Action Group, focused on the impacts and costs of deploying large-scale wind generation.

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1. House Bill (H.R. 3307) has been filed that extends the PTC for another four years.

2. The PTC expired three times in the period between 1999 and 2003 and each time it was extended retroactively. At the same time, oil and gas prices were less stable before rising steadily after 2004.

3. The Department of Energy reported in 2003 that of the fifteen States with renewable programs on the books, 86 percent of new renewable energy capacity was a result of mandates, and the majority (93 percent) of the new capacity consisted of wind power installations.

4. Includes the period from 2008 to 2011. Despite meteoric growth, wind still represents under 3% of U.S. generation.

 

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