Wind PTC: Excessive Benefit Demands Repeal
By Lisa Linowes -- October 30, 2017“Market conditions back in 1992 no longer exist. Big wind no longer needs the Production Tax Credit, and certainly cannot justify the extraordinary benefits received [3.5¢/kWh pre-tax]. Retaining the subsidy in light of lower installation costs and increased production serves only to further distort the market and bestow a bounty on big wind that far exceeds what 1992 lawmakers could ever have envisioned.”
The American Wind Energy Association’s latest market report touts an industrial- wind-energy construction pipeline of 29,634 megawatts, that, if all built, will bring the US installed capacity to nearly 115,000 MW. Installed capacity stands at 85,000 MW today.
You can bet that all (or most) of the new megawatts will meet the Obama/IRS requirements for full-tax credit eligibility. As we’ve written before, the Production Tax Credit ‘phase-out’ was little more than a 5-year extension of the PTC after Congress looked the other way while the IRS implemented its own definition of the phase-out.
For U.S. taxpayers, another 30,000 MW of wind means adding another $25 billion in public handouts to what we’re already paying today for existing facilities.[1] This estimate does not account for the repowering of older turbine projects which are also PTC-eligible.
Since the tax credit is an open-ended subsidy we can only estimate the full cost, but on a kWh-basis, the scale of the PTC benefit is enormous. The 2.4¢/kWh in after-tax income represents a pre-tax value of approximately 3.5¢/kWh. For most regions of the country this equals, or exceeds, the wholesale price of electricity. But the distortion does not end there.
PTC Subsidy Magnified
The PTC was established by the Energy Policy Act of 1992 to stimulate use of renewable technologies for power generation by providing a production-based credit for the first 10 years of project operations. Initially set at 1.5¢/kWh, the credit is adjusted annually for inflation and today stands at 2.4¢/kWh.
The cost of living adjustments might have been justified back in 1992 when wind development was still in its early stages and project costs were likely to increase rapidly with inflation. But in the last 25 years, wind energy costs have dropped and capacity factors have increased dramatically. As such, the effect of the adjusted PTC is staggering.
Consider a 1000 kW project built in 1992 at an assumed installed cost of $2000 per kilowatt and a 22% capacity factor. Over ten years, the project would produce 19,272,000 kWh of electricity and receive production tax credits valued at $289,080.[4] Since the PTC is spread over 10 years, we assumed a net-present value, discounted at 10% of $177,627. The value of the tax credit as a percent of project cost comes to 14%. Applying the discount, the PTC represents just 9%.[2]
That same 1000 kW facility in 2017 would have a project cost of $1600 per kilowatt and an average capacity factor of 42.5%, earning $893,520 in tax credits on 37,230,000 kWhs produced. The net present value would be $549,029. In this scenario, the 2017 PTC represents 56% of project cost. Had the PTC remained a flat 1.5¢/kWh since 1992, it would still represent 35% of project costs. (Click to exapnd.)
Repeal the PTC!
In the last two weeks, EPA Secretary Pruitt and Senator Grassley traded public statements on the issue of tax credits. Pruitt called for ending the subsidies for wind and solar while the Iowa Senator asserted the PTC will remain until the bogus phase-out ends in 2020. Pruitt is right. The PTC has to go and the sooner the better. The tax reform debate on Capitol Hill is the right forum to correct this issue.
Market conditions back in 1992 no longer exist. Big wind no longer needs the PTC, and certainly cannot justify the extraordinary benefits it receives. Retaining the subsidy in light of lower installation costs and increased production serves only to further distort the market and bestow a bounty on big wind that far exceeds what 1992 lawmakers could ever have envisioned.[3]
———————
[1] Since its adoption in 1992, the production tax credit (PTC) for wind energy has ballooned from roughly $5 million a year in 1998 to $4.2 billion today.
[2] Estimated capacity factors and project installation costs are taken from Department of Energy annual Wind Technologies Market Reports 2006-2016.
[3] This same analysis would apply to the solar industry following precipitous reductions in project cost.
[4] kWh = 1000 kW * 8760 hours/year * Capacity Factor * 10 years.
With all due respect, whether or not the subsidies remain, are reduce, or are eliminated, industrial wind turbines are not a sensible alternative source of energy. As just a tip of the iceberg: ONE 3.5 mw Industrial Wind Turbine requires: 335 tons of steel, 4.7 tons of copper, 1,200 tons of concret, 2 tons of aluminum, 2 tons of rare earth elements, etc. The public conversation that needs to happen would best be focused on conservation, significant reduction of the military, banning of factory farming, retrofitting of all existing buildings, relocalization, etc. To support Industrial Wind Turbine manufacture/installation is an illusion that diverts the public from the real work that we must do: examination and redesign of our form of governance, the return of glass steagal, legislation capping CEO pay as a 12:1 ratio to that of lowest paid worker, etc.
Nameplate MWs (such as cited in this editorial) for low capacity value resources is a meaningless metric (unless you are a transmission constraint planner). I have pressed EIA on this for several years, along with their negligent lack of a sound capacity metric that fairly represents firm capacity across both dispatchable and intermittent technologies. EIA claims it is too hard to develop and publish a sound capacity value metric because there are so many different standards in place at RTOs and ISOs and because the same metric varies based on wind and daylight regimes. Well too bad, EIA. It is time to man up and offer a metric that makes financial sense to ratepayers, generation investors, regulators and lawmakers. People need to know the comparison not of $/MW of nameplate capacity, but instead $/MW of FIRM capacity. The lack of such a metric is one reason we have so much misplaced investment into low-capacity-value technologies. If Congress and states and regulators don’t have a solid comparison of value between technologies, they can’t make good decisions.
I agree on the issue of the federal government not granting tax subsidies to wind development. But what about for coal, oil & gas, mining?
These industries are all subsidized with tax-payer dollars. The companies make a killing on profits; the rate-payers pay high rates – and we pay to subsidize the industries too! All of these industries should pay their fair share of the cost of doing business. And if they can’t make it without federal tax subsidies then they should go out of business. That’s free enterprise. We all know these industries can survive paying their own way – they just receive less profit.
If we are going to go after wind subsidies then we need to go after coal, oil, gas, and mining subsidies as well. I will not be a hypocrite and say subsidies for wind are wrong but for coal, oil, gas, and mining they are ok – because they aren’t. Free enterprise demands that industry pay its way. Can anyone argue that big oil can’t afford it – with a straight face? Foot note 3 could also be said of coal, oil, gas and mining. Energy is energy – they all need to pay their way.
Yes, it would be best and fair to get rid of all the special tax provisions at the same time. There is really not much for oil, gas, and coal versus the politically correct renewable energies.
[…] Wind PTC: Excessive Benefit Demands Repeal […]
[…] discussed in last week’s post, these inflation adjustments might have made sense back in 1992 when wind development was still in […]
[…] Wind PTC: Excessive Benefit Demands Repeal […]
[…] Do not think that the wind power industry has market viability. Without the federal Production Tax Credit (PTC), wind would be all but dead. And without socialized transmission blessed by state and federal regulators, wind-power growth would be checked even with the hyper-generous PTC, now standing at $0.024/kWh ($0.035 pre-tax). […]