Friday, May 16, 2014

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.2260failed 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.

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