海角大神

If It鈥檚 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聽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鈥檚聽鈥渇iscal cliff鈥� deal. There are聽no signs yet聽of a similar reprieve this year.

With the PTC and other energy-related 鈥渢ax expenditures鈥� 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 鈥渟unsetted鈥�, and if it鈥檚 replaced with a smarter policy emphasizing innovation, the outcome could be beneficial for taxpayers, the environment, and even the US wind聽energy聽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聽under 2,000聽MW聽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.聽

However, unlike the federal聽investment tax credit聽for solar power and some other renewables, the amount of the subsidy didn鈥檛 automatically decrease as wind power technology improved, with wind turbines growing steadily larger, more efficient, and cheaper to build. Instead, the PTC鈥檚聽subsidy for wind power increased from 1.5 垄 per kilowatt-hour (kWh) to its present level of around 2.3 垄. That鈥檚 roughly one-third of today鈥檚 average US聽retail electricity price聽for industrial customers and聽exceeds most聽estimates聽of typical operating and maintenance costs for wind power. The latter point has serious聽implications聽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聽the聽first three quarters聽of this year, the cost of extending the PTC for another year would be negligible. However, it鈥檚 evident from聽industry data聽that a major reason installations are so low in 2013 is that the uncertainty over last year鈥檚 scheduled expiration caused developers聽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鈥檚 Joint Committee on Taxation apparently came up with a slightly higher estimate of聽$6.1 billion.

Less Bang for the Buck

Before reflexively supporting or opposing another PTC extension, depending on one鈥檚 politics, we should ask what we鈥檇 be getting for that $5 or $6 billion. One of the commonest rationales I encounter justifying聽the continuation of the聽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聽$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聽20 billion kWh聽over the previous year. That鈥檚 the energy equivalent of about 140 billion cubic feet of natural gas in power generation, or 66,000 barrels per day of oil. (Although聽less than 1%聽of US oil consumption聽is used to generate electricity, oil is still an easily visualized common denominator.)

By comparison, US oil production expanded by聽837,000 bbl/day, while聽natural gas production聽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鈥檚 true that domestic oil and gas both had banner years in 2012, in terms of growth,聽reversing聽longer-term聽decline trends聽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鈥檚 no longer the case. I鈥檝e seen聽various ideas聽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鈥檛 just need wind innovation, but聽energy聽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鈥檚 ironic in that context that the federal 20% research and development tax credit is also聽due to expire聽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鈥檇 hope that even the wind industry would opt for the R&D credit. That鈥檚 not entirely a false choice, considering the scale of聽ongoing federal deficits聽and聽debt, and聽the need for the government to borrow around 20% of what it spends.

Conclusion 鈥� No Cliff for Wind, Even if the PTC Expires

Now is the ideal time to reconsider the thinking behind the Production Tax Credit. That鈥檚 not just because the Congress must shortly decide whether or not to extend it, but because its expiration now wouldn鈥檛 be as abrupt as was foreseen聽at the end of 2011 or 2012. Last year鈥檚 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聽for the current PTC in 2014. I have seen聽analysis聽suggesting a project begun now might even qualify聽after聽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聽federal stimulus聽were adopted in 2009. I鈥檇 be very surprised if the outcome of such a deliberation was to simply continue the same two-decade old structure into the future.