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Friday, October 19, 2012

Production Tax Credit for Wind Energy in the U. S.

Summary.  One way of reducing the rate of emission of carbon dioxide is to generate electric power from renewable sources, including wind energy.  In the U. S. renewable energy has been aided by a production tax credit since 1992, that Congress, in fits and starts, has repeatedly granted and taken away.  It is scheduled to expire again on Dec. 31, 2012.  In contrast, conventional fossil fuel energy sources have been steadily subsidized since the early 1900’s. 

Renewable energy, including wind energy, benefits the U. S. by relieving dependence on foreign energy sources, expanding economic activity, and lowering the annual rate of emission of carbon dioxide, the most prevalent greenhouse gas.  For these reasons the production tax credit should be renewed for an extended duration, in order to convey stability and predictability to the renewable energy industry.
 

Introduction.  The United States burns large amounts of fossil fuels in order to drive its economy, resulting in correspondingly large annual rates of emission of greenhouse gases such as carbon dioxide, CO2.  CO2 accumulates in the atmosphere because more is emitted than can be absorbed around the planet.  As a result long-term average global temperatures have been rising inexorably.  Increased temperatures are held responsible
for extreme weather events around the world, which lead to significant harms to our economic and societal wellbeing.

One way of reducing the rate of emission of CO2 is to generate electric power from renewable sources.  Wind generation has been growing rapidly around the world, including the U. S., yet its share of energy production is still relatively small.  The U. S. enacted a Production Tax Credit (PTC) as part of the Energy Policy Act of 1992 in order to promote wind energy.  It subsidizes the sale of electricity produced by wind power.

The PTC has been allowed to expire and been reinstated repeatedly in recent years.  The current legislation granting the PTC expires Dec. 31, 2012.  However, Congress has not passed any new appropriations bills covering the current fiscal year that began Oct. 1, including the PTC.  Other significant fiscal difficulties arise in the U. S. by law on Jan. 1, 2013, so considering an extension of the PTC is greatly complicated by these additional crises.

The PTC subsidizes wind power generation by US$0.022 per kWh.  This adds up to about US$1 billion per year at the current level of wind generation (see below).  According to Vice Admiral (Ret.) Denny McGinn, the President and CEO of the American Council on Renewable Energy, the PTC has been a major factor in creating and expanding the wind energy industry in the U. S. since its inception.  Currently its extension is a topic of great controversy, mostly along party lines, in the Congress.  Those opposed generally are against promoting renewable energy and to expanding tax credits as a form of increased government spending.   Those supporting extension favor the PTC as a way of fostering expansion of the renewable energy industry.

Over the past decade the PTC has been allowed to expire, and then been reinstated, in repeated cycles, leading to an “off-again-on-again” pattern of funding.  This has led to insecurity and unpredictability facing investors and energy industrialists seeking to develop new wind energy facilities.  It should be noted that these entrepreneurs are part of the private market economy.  They need stability in their understanding of the financial environment surrounding their plans; it is difficult to plan for investment and construction of new wind facilities when the PTC is given and taken away in fits and starts. 

The correlation between breaks in appropriations for the PTC and the annual newly installed wind generation capacity is shown in the graphic below.

Annual installation of new wind generation capacity correlated with breaks in appropriation for the PTC.  The total affected wind generation capacity can be obtained by adding the heights of each bar.  The generation capacity for 2012 and 2013 are estimates based on the present status of the PTC.
Sources: American Wind Energy Association; U. S. Department of Energy, Energy Information Administration, as presented in The Guardian Oct. 17, 2012; http://www.guardian.co.uk/environment/blog/2012/oct/17/us-wind-power-mitt-romney-subsidy?newsfeed=true

 

The PTC lapsed in the years 2000, 2002 and 2004.  The effect of the lost support is evident in this graphic.  In each of those years the installation of new wind energy facilities fell by 73% or more (light green bars).  When reinstated, the PTC was implemented only for one- or two-year periods, rather than permanently or at least for an extended time.  In addition, the graphic shows a projected drop to no new wind capacity to be constructed in 2013, although it is likely that vestigial new construction will persist into 2013.  Adm. McGinn believes the wind industry would need a 3-5 year horizon for planning, and understands that PTC subsidies will not be, and indeed should not be, a permanent fixture in their industry.
 

Economic potential of the wind energy industry.  The expansion of the wind energy industry as a component of renewable energy has led to a work force estimated to have reached 85,000 jobs nationwide in 2008-9, according to the American Wind Energy Association (AWEA) as reported in the New York Times.   It has since fallen by 10,000 because of competition from China, and the growth of inexpensive natural gas.  In July, for example, the U. S. Commerce Department imposed tariffs on turbine towers originating in China, responding to a finding that the towers were priced in the U. S. at less than the cost of production in China.  In recent months, facing the unresolved expiration of the PTC, it is estimated that 1,700 layoffs have already occurred.  The American wind industry is composed of several hundred manufacturers, from multinational companies to small firms making specialty items needed in wind turbine installations.
 

According to AWEA 2.9% of the U. S. electricity demand was provided by wind energy in 2011. In Iowa and South Dakota, which have high potenetial wind energy resources, around 20% of the electricity demand is provided by wind. Nationally, the U.S. could provide 20%  of its electricity from wind power by 2030; this achievement is expected to provide 500,000 jobs to American workers.  In addition, currently 65% of the components in wind turbines are manufactured in the U. S., compared with only 25% before 2005; there are almost 500 companies distributed across 44 states engaged in manufacturing for the wind energy industry.  These data show that wind energy can make a significant impact on the American economy. 
 
Historical role of subsidies in the U. S. energy economy.  One group opposing extension of the PTC is the American Energy Alliance .  Its president, Thomas Pyle, concurred in calling the PTC a “boondoggle”, which it has been receiving for 20 years.  This opinion, however, is in flagrant disregard of the findings of recent studies of energy subsidies.  In the U. S., sources of energy have been recipients of federal subsidies since the 1800’s.  This includes the coal industry, the oil industry, and nuclear power.  Timelines for incentives from the federal government for energy sources over the past century are shown in the graphic below.  


Duration of U. S. government incentive support for fossil fuels, nuclear energy and renewable energy (includes wind, solar, hydropower, geothermal and biomass) from 1900.
Source: American Wind Energy Association using data from the U. S. Energy Information Agency, 2008.  http://awea.org/learnabout/publications/upload/Subsidies-Factsheet-May-2011.pdf
 
These subsidies have been especially instrumental during the early years in the development of each industry; yet after a century of growth in the oil and gas industry, it is still receiving federal subsidies (second gray bar; see the graphic above), and it benefits from a depletion tax credit as well (top gray bar).  The coal industry likewise has benefited from favorable tax treatment since about 1950 (third gray bar).  It is hard to argue that industries that are among the largest and most profitable in the American economy still require subsidies for their survival and growth.  Subsidies to the oil and gas industry are as much as 5 times larger than those for the entire renewable energy sector.  In 2007 the fossil fuel sector received US$ 5.450 billion in subsidies, whereas all renewable energy sources received only US$ 1.147 billion.
 
Analysis
 
Conventional energy sources, namely the various fossil fuels, continue to receive significant subsidies from the federal government, in spite of the fact that they are clearly mature industries.  The companies in question are massively large, and garner extremely large profits from their operations.  It is difficult to justify continuation of any subsidy or support in their favor.  The nuclear industry likewise continues to receive significant subsidy support after several decades of operation.  In this case, operations are usually regulated at the level of the states that the various nuclear-powered electric utilities serve.
 
Development of renewable energy is viewed as having several favorable effects on the American economy.  First, it would contribute to increasing the independence of the U. S. from relying on foreign sources of energy, and from having to use dollar resources to buy fossil fuels from abroad.  Second, it would relieve dependence on fossil fuels overall.  Third, development of all forms of renewable energy would contribute to the U. S. economy by providing new job opportunities in various skilled vocations, thus expanding our economic activity.  Fourth, expansion of renewable energy leads to economies of scale that would make electricity from these sources be fully competitive with conventional, fossil fuel-powered, electricity.  This effect is in fact already operating; wind energy generation is considered to be comparable in cost to conventional electricity.  Finally, widespread adoption of renewable energy would contribute to reducing the annual rate of emission of greenhouse gases.
 
For all these reasons it is important that the renewable energy production tax credit be reinstated for an extended period.  The historical persistence of subsidy support for the conventional fossil fuel industries provides an excellent precedent for the PTC.  Since fossil fuels have long been profoundly successful industries, their subsidies are no longer needed.  The PTC could readily be funded by reducing or eliminating these historical subsidies.  The availability of the PTC would promote expansion of renewable energy, with all its advantages.  Implementing the PTC for a multi-year interval would convey stability and predictability to entrepreneurs and industrialists who seek to develop renewable energy resources.  
 
© 2012 Henry Auer

7 comments:

  1. thanks for sharing.

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  2. Hi! Keep it up! This is a good read. I will be looking forward to visit your page again and for your other posts as well. Thank you for sharing your thoughts about wind energy tax credits. I am glad to stop by your site and know more about wind energy tax credits.
    Opponents declare that by using RECs a customer can claim energy “reduction” even if they do not actually reduce their end-use at all - or even increase it. Proponents counter that more REC purchases drive increased production of renewable power which can replace conventional production.
    Despite this growing demand and support for renewable energy, a fragile economy, volatile commodity pricing, and the lack of national energy policy have combined to pave a challenging road for renewable energy advocates and stakeholders. Economies of scale and new manufacturing processes are making alternative energy production more competitive, but until it achieves parity through innovation or regulatory policy, the success of green energy companies may largely depend on their ability to optimize Green Energy and Cleantech tax incentives to attract investors and maintain sustainable balance sheets.

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  3. Hi there! great stuff here, I'm glad that I drop by your page and found this very interesting. Thanks for posting about renewable energy tax credits. Hoping to read something like this in the future! Keep it up!

    The Investment Tax Credit (ITC) was originally part of the Revenue Act of 1962. In subsequent legislation the ITC was modified to include incentives for renewable energy property. Currently, taxpayers can choose to use the ITC in lieu of the PTC for eligible property. To be considered eligible, most renewable source property must be placed in service by December 31, 2013. However, solar and geothermal property can be eligible if placed in service by December 31, 2016.

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