An Expensive Subsidy, Twisting in the Wind

• The expired federal Production Tax Credit for wind energy has missed another opportunity for renewal in the US Senate.
• If renewed at the proposed level and extended repeatedly, its annual cost could eventually exceed US tax breaks for oil and gas by a factor of 9:1.

I see that the 2014 "tax extenders" bill, S.2260, failed to pass a cloture vote in the US Senate yesterday. That has spoiled for now the chances of reviving the Production Tax Credit (PTC) for wind and other (non-solar) renewables that expired at the end of last year. The bill might get another opportunity in revised form, but in coming up 7 votes short, it calls into question the Senate majority's preferred approach of tackling the entire package of dozens of tax breaks en masse.

I've written about the PTC at length, most recently just prior to the expiration of its latest version last December. Long-time readers know I am convinced that reform is overdue for this excessively generous subsidy for what amounts to a mature industry. Here's a different way to put both of those aspects of the PTC into context.

First, consider its cost if applied to all current and future wind power installations. As a benchmark, the highly controversial tax benefits received by the oil and gas industry amount to around $4 billion per year in the federal budget.

If all US wind-generated electricity received the PTC at the rate offered in the current extenders bill, the annual cost would approach the oil and gas "subsidy", at $3.9 B/yr based on last year's actual US wind generation of 168 billion kWh, which equates to less than 3% of US oil and gas production in 2013.

If wind and similar renewable sources reached 30% of US electricity generation, as many hope and the Department of Energy has concluded is feasible, then the annual subsidy would exceed $28 B/yr, based on 2013 US net generation. US electricity demand is expected to grow by as much as 29% between now and 2040. That would bring annual PTC outlays to $36 B.

This looks like a reductio ad absurdum argument, because it is. Simply put, is it reasonable, after twenty years of such support, for the wind industry to expect to continue to receive an extremely generous subsidy, compared to other forms of energy, until wind power reaches market saturation?

As for arguments that wind power is not yet mature, other mature industries have exhibited similarly impressive growth and cost reductions in recent years. Natural gas production comes readily to mind. The fact that wind developers assert they still need this subsidy at this level speaks more to the competitiveness of the technology than to its maturity.

Ultimately, the PTC must be seen as a proxy for the comprehensive carbon policy we don't have and may never have. If there's a consensus in the government to support low-emission energy technologies, in lieu of a carbon tax on all energy, shouldn't it at least reward technologies on the basis of their actual emissions reductions, rather than merely for deployment (the 30% solar Investment Tax Credit, which expires in a few years) or operation (the PTC)? At $0.023/kWh, the tax credit for wind power displacing gas-fired power from a combined cycle power plant results in an implicit cost of around $65 per metric ton of CO2 avoided. That's far higher than the price at which emissions credits trade in any of the regional US or international markets.

The perils of the PTC are a microcosm of the provisions included in this bill, which might still eventually be passed. It includes measures with nearly universal support, like the Research and Development tax credit, which has also expired, and a grab bag of narrower and in some cases bizarre tax breaks, such as providing three-year depreciation for race horses. PTC supporters are now left to hope that enough additional legislative favors can be squeezed into the next version of the bill to carry the whole bunch over the top.

Last Hurrah for the Wind Power Tax Credit?

Ahead of Thursday's meeting of the Senate Finance Committee, a bipartisan deal has apparently omitted the expiring production tax credit (PTC) for wind power from a package of "tax extenders"--various expiring federal tax provisions, including the annual "patch" for the Alternative Minimum Tax.  This development might surprise some of the industry's supporters, but the politics of wind have changed since I last examined this issue in February.  A measure that once enjoyed solid bi-partisan support is now caught between two presidential campaigns that hold diametrically opposed views on its fate. 

A quick review of the PTC seems in order.  This tax credit, which covers a variety of technologies but with wind as the main beneficiary, dates back to 1992--interrupted by several past expirations but then revived in essentially its present form. That's significant, because during the same 20 years in which the PTC has been escalating annually with inflation--from 1.5 ¢ per kilowatt-hour (kWh) to the present level of 2.2 ¢/kWh--the cost of wind turbines and their output has fallen significantly. In the same period, US installed wind capacity grew from 1,680 MW to nearly 49,000 MW as of the first quarter of 2012.  So in effect, we're subsidizing today's relatively mature onshore wind technology by a larger proportion than we did when it was in its infancy. That makes no sense, especially in the current environment.

The US wind industry has received substantial government support in recent years.  When the long-standing tax credit against corporate profits proved to be much less beneficial during the financial crisis, the administration gave wind developers a better option within the stimulus: a 30% investment tax credit that could be claimed as up-front cash grants, instead of having to wait until power was generated and sold over the normal 10 year period of the PTC.  From 2009-11 the wind industry received a cumulative $7.7 B, in addition to ongoing tax credits on older projects, manufacturing tax credits for new wind turbine factories, and loan guarantees for selected wind farms.  And even with new turbine installations in 2012 running well below their record rate of 10,000 MW in 2009, the wind projects that qualify for the PTC this year could receive a total of $4.5 B over the next decade. 

Many people seem to want to equate the tax breaks that wind and other renewable energy technologies receive with the controversial tax benefits for the oil and gas industry, without realizing how unfavorable that comparison truly is for renewables.  Subsidies for technologies such as wind are much higher per unit of energy produced, consistent with their intended purpose of bridging the competitive gap vs. conventional energy.  Yet since the total output of new renewables is still relatively small, the disparity in total subsidies is much larger than it appears.  One way to illustrate that is that if the oil and natural gas produced in the US received tax credits at the same rate per equivalent kWh as wind power, then the annual oil and gas tax preferences that the Congress and President Obama have been sparring over for the last three years wouldn't be $4.8 B per year, but around $100 B per year. 

As the Reuters article makes clear, there will be other opportunities for the PTC to be reinserted in the extenders bill or other legislation.  However, by persistently arguing for extending the existing credit without modification, the wind industry and its supporters may be misreading the public's appetite for such generous subsidies in a period of protracted economic weakness, notwithstanding the recent Iowa poll.  Despite its rapid recent growth wind still contributes less than 4% of the nation's electricity and just 1% of our total energy consumption, and the green jobs angle is wearing thin. Last year's expiration of the ethanol blenders credit set a precedent for ending another large, generous subsidy before its beneficiaries agreed they were done with it. If congressional Republicans line up behind their party's standard bearer on this issue, the wind industry will have missed its opportunity for a graduated, multi-year phaseout of the PTC, instead of stepping off a cliff in 2013.