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 about 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 1990s, 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.
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With all of the subsidies for fossil fuels, how is renewable energy suppose to compete if you take away the ptc. Climate change is becoming very clear, fossil fuels are a clear violation of climate and need to be rapidly replaced.
The graffiti implied in Renewable guys question deserves a response. Wind and solar should supply all the electricity for his home, with fossil fuels withdrawn because they can’t compete against the juggernaut of such awesome 18th century power. Then he won’t need to worry about climate change as much as the weather. And his productivity.
Renewable guy,
Have you ever bothered to check what the “subsidies” for “fossil” fuels are worked out to cost per kWh? It is pennies on the dollar compared to “renewable” energy. Really, it is.
Wind and solar cannot compete because it is a sham.
I dont understand the author’s claim that the “subsidy of 2.2¢/kWh in after-tax income represents a pre-tax value of approximately 3.7¢/kWh.” Isn’t the after-tax value the value to to wind power?
Moreover, I dont understand the failure of the author to mention the value of accelerated depreciation.
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Mike Holly,
The tax-free subsidy of 2.2 c/kWh, at a theoretical 35% federal tax on corporate profits, is worth 2.2/0.65 = 3.38 c/kWh before federal tax.
If a STATE tax on corporate profits is factored in, then it could be worth 3.7c/kWh, depending on the state tax rate.
Annual average grid prices in the US are about 5.5 to 6 c/kWh, so a tax-free subsidy of 2.2c/kWh is a big percentage of the grid price, and its before tax value of 3.7c/kWh is even bigger.
Willem Post
My question pertained to the value wind developers get from the tax credits. Many can’t make use of the tax credits so they barter them to other investors in LLCs. Are they valued at the pretax or post tax during sales? Most importantly, how much do the tax credits allow wind developers to drop their sales price?
The pre-tax value is another way of representing the value of the credit in terms of revenue. To put in context, the wholesale value of electricity today is roughly 3 cents per kwh. So, if I own a gas plant, my pre-tax revenue is 3 cents per kwh wholesale. If I owned a wind generator, I am eligible for a tax credit of 2.2 cents per kwh which (assuming a marginal tax rate of 40% including both State and Federal obligations) equals 3.7 per kwh income.
So regardless my costs to construct and operate the plant, I receive a benefit from the federal government that EXCEEDS the price of wholesale electricity in the US today.
Determining the amount a project’s wholesale prices will have to rise in order to recoup costs and make a profit varies based on anticipated capacity factors, cost of construction, and O&M. Other revenue streams are a factor including RPS income, property tax relief etc. Since the PTC is uniform, there is no question we are paying more for some projects then necessary. And also enabling projects that would otherwise be uneconomical.
I do not mention accelerated depreciation mainly because of depreciation recapture. Hope this helps.
Lisa
There is no disputing we are paying above market prices for wind power, but I want to determine how much more. Your article and comment makes it appear we are paying 3.7 per kwh more just for the PTC alone. Assuming competitive bidding is competitive and profit margins are small, does the PTC allow wind developers to reduce their prices by 3.7 cents?
But even the 3.7 cents underestimates the subsidies. I have seen studies that indicate accelerated depreciation reduces costs almost as much the PTC or about 2 cents. When including state accelerated depreciation and other federal and state incentives, the subsidies amount to about 5 cents. But it is difficult to find good studies and I don’t want to raise the 2.2 cents subsidy to 3.7 cents (or total subsidies of 6.5 cents) without careful study.
Also, I should point out that the wholesale price of 3 cents is a short-term price caused by surplus capacity and depressed gas prices. Longer-term contracts are more like the 5-6 cents mentioned by Willem Post.
lISA, It really doesnt answer the question.
The NREL admits the tax credit is worth more than the 2.2 cents after tax, but wouldn’t say it was worth 3.7 cents pre tax either. For one thing there are transactional costs. They said it is even more complicated than that and you would have to go through their complicated models.
There are no subsidies for fossil fuels. A subsidy is when government gives money to encourage an activity. The government makes billions of dollars taxing the fossil fuel industry. So actually, fossil fuels is subsidizing the government.
Lisa’s good explanation on generalized value of wind PTC’s complement Mike Holly’s ruminations about them, as well as his take on the full spectrum of wind subsidies, which are vast and characteristically hard to pinpoint (like everything else about this daffy enterprise). Organic Fields is exactly right, however. Conventional generation is measured not just in kWh but also in income that cascades throughout society. As a coda to this, all should be reminded that the billions extended from the federal treasury for wind provide support for found energy, not modern power capacity–and for a whole lot of dumb and ugly.
[…] PTC is worth 2.2 cents after taxes or 3.7 cents before taxes at a 40 percent marginal tax rate (5). After compensating investors with a financing charge worth about 0.7 cents, the tax credit […]