One-Year Extension of Tax Credits for Renewable Energy in the U. S.

Summary.  The American Taxpayer Relief Act of 2012 included a one-year extension of tax credits favoring renewable energy growth in the U. S.  It liberalizes the credits, expanding their applicability to include projects whose construction will have begun during the present year, 2013.  A primary component within renewable energy that benefits from these tax credits is generation of power by wind.  It is projected that wind energy could provide 20% of U. S. energy by 2030.

Tax credits in the U. S. for renewable energy have a history of being allowed to expire, then being reinstated later, each active period enduring for only one or a few years.  This is highly disruptive for the industry, as it makes long-term planning with certainty largely impossible.  The U. S. needs to implement long term policies governing development of renewable energy in order to provide such certainty.

 

Introduction. Renewable energy is playing an increasingly significant role in the U. S. and around the world.  Wind energy provides a large fraction of this growth, as well as much of the total installed capacity, among the various renewable sources. In addition to wind, these include solar energy, hydroelectric power, biofuels, geothermal energy and ocean or tidal energy.

In the U. S., renewable energy has received subsidies in the form of an investment tax credit (a credit favoring investment in new facilities to promote construction) or a production tax credit (PTC; a credit based on the amount of energy delivered once a facility is operating).  Wind energy has received tax credits, much in the form of PTCs.  In the recent decade the U. S. Congress allowed credits to lapse, and then reinstated them, in an arresting pattern of fits and starts.  This is shown for wind energy in the following graphic:

 

 

History of ITCs and PTCs for wind energy in the U. S. The blue bars show annual wind generating capacity added each year, using the scale for gigawatts added shown on the left vertical axis.  The light blue section of the bar for 2012 shows planned capacity additions at the time this report was prepared late in 2012, presumably in anticipation of the expiration of the PTC at the end of 2012.  The green line shows the total wind capacity installed in the U. S., using the values on the right-hand vertical axis.  The 1603 Grant was a provision of the American Recovery and Reinvestment Act of 2009 (the “stimulus” combating the recession) that made a fractional direct cash payment for renewable energy projects.

Source: U. S. Energy Information Agency; http://www.eia.gov/todayinenergy/images/2012.11.21/windcaplarge.png.

 

It is quite clear from this graphic that periodic expiration of tax credits (see the years following expirations in 1999, 2001, 2003, and 2009) had drastic negative impacts on installation of new generating capacity during the following year.  In addition, as noted in the legend to the graphic, during 2012 wind industry planners were factoring in a scheduled termination of the PTC effective at the end of the year by accelerating new construction.

 

Extension of Renewable Energy Tax Credits.  The so-called “fiscal cliff” in the U. S. raised the possibility of sharply higher taxes and reduced spending as of Jan. 1, 2013.  At literally the last minute, in an effort to avoid this fiscal crisis, the U. S. Congress passed the American Taxpayer Relief Act of 2012 (the “Act”) on Jan. 1, 2013, and President Obama signed it into law on Jan. 3. 

 

In addition to provisions averting many facets of the looming fiscal disaster, the Act included provisions extending tax credits for renewable energy.

 

Renewable Energy Provisions of the Act.  The Act provides extensions of tax credits with slightly more favorable terms than in previous years.  Most of the provisions are summarized here.

 

a)     A production tax credit or an investment tax credit for wind energy is extended for one year ending Dec. 31, 2013, but the terms are liberalized by requiring only that construction must have begun by that date rather than, in earlier versions, been completed by then.  A total of $12 billion may benefit the wind industry over the next 10 years;

b)     a credit for energy efficiency in existing or new homes;

c)     a credit for vehicle refueling facilities providing alternative fuels;

d)     a credit for biodiesel and renewable diesel fuel mixtures, applied to fuels sold after Dec. 31, 2011 and by Dec. 31, 2013;

e)     for the four tax credits described above, the deadline is extended to Dec. 31, 2013, but the subject of the credit must have become available for use after Dec. 31, 2011.  Thus they are retroactive for about one year, and expire after one year;

f)      a credit for producing cellulosic biofuels after Dec. 31, 2008 and before Jan. 1, 2014, applicable to a wide range of newer cellulosic sources and to cultivated algae; thus this provision is retroactive for four years and remains effective for one year.  There is also a special allowance for facilities that produce the newer cellulosic or algal biofuels, placed in service after Dec. 31, 2012 and effective for one year; and

g)     a credit for geothermal facilities whose construction begins before Jan. 1, 2014.

 

The New York Times reports that electricity produced from other forms of renewable energy sources, including tides and ocean waves, landfill methane and hydroelectric facilities were also included in the tax credits.

 

Analysis

Extension of Tax Credits. The American Taxpayer Relief Act of 2012 included several provisions extending PTCs or ITCs for the relatively short period of 1 year, as itemized in this post.  This 1-year extension contributes, albeit only briefly, to helping wind energy and other renewable energy technologies to provide an increased share of America’s energy demand.  In a report issued in July 2008, The Office of Energy Efficiency and Renewable Energy of the U. S. Department of Energy modeled a scenario (EERE) in which wind energy would supply 20% of U. S. demand by 2030.  To achieve this objective, generating capacity would have to expand from about 46 gigawatts (GW) in 2011 (see graphic above) to 305 GW in 2030 (EERE).

 

The legislative wrangling over whether, and how, the fiscal cliff could be averted was itself a cliffhanger.  It was not until the last days before the fiscal cliff deadline of Jan. 1, 2013 that the outlines of the law were assembled, and final passage required a late night session of the lower chamber, the House of Representatives, on New Year’s Eve extending into the early hours of the new year.  Most of the renewable energy credits were extended for only one year.  Thus the Act guarantees yet another period of uncertainty promising yet another contentious legislative struggle over further extensions in one year’s time.  Nevertheless the Act liberalized the credits by extending them to projects whose construction will have begun before the expiration date, replacing the earlier requirement that projects must have been completed by the deadline date.

 

Policymaking by fits and starts is highly disruptive.  Governing in this way, by awarding and withdrawing tax benefits literally at the last minute on a schedule of once a year to once every few years, is extremely disruptive for business activity (see the graphic above).  Corporations and entrepreneurs seeking to develop renewable energy need multi-year periods for planning, funding, and installing renewable energy facilities.  Depending on the particular technology and location, this can include factors such as gaining zoning and siting approval, undergoing environmental impact analysis, assembling financing, garnering purchase contracts for the energy ultimately produced by the renewable source, and construction.  For example, according to the American Wind Energy Association, developing a new wind farm requires 18-24 months.  Many of these factors are interdependent.  Singly or in conjunction with one another, settling these arrangements requires extended periods of time.  It is highly counterproductive for developers to have to contend with short-term provision and expiration of tax credits.  Effective energy policy must create long-term stability in order to enable the justified expansion of renewable energy technologies.

 

It would be far more reasonable and effective to develop policies on subsidizing the development of renewable energy on a long-term schedule. In this way corporations and entrepreneurs could plan the development and implementation of projects secure that subsidy policies were intact, available as scheduled, and could be used as appropriate throughout the lifetime of the project.

This view conforms with the history of the use of subsidies in the

U. S. for newly emerging energy technologies throughout this country’s history, beginning in the nineteenth century. Federal and/or state subsidies were consistently applied, and have been found to be most effective when a new technology was in the  early years of its development.  Unfortunately, at least in the case of crude oil, subsidies continue to be granted even now, more than 100 years after the birth of the industry. Clearly, subsidies are no longer warranted for this industry, given the enormous revenues and profits among the major crude oil producers.  Those expenditures could more justifiably be applied to the current group of nascent technologies encompassed within renewable energy.

 

Advantages of renewable energy.  Construction and development of renewable energy projects have many positive policy features. The new facilities will operate within the U. S., rather than abroad.  In contrast, much new petroleum exploration and development  occurs in more and more remote locations and environments.  Commonly these require deep drilling and frequently involve deep sea operations including development in the extreme conditions of Arctic oceans.  These conditions are fraught with environmental hazards that can come to fruition with disastrous consequences. Furthermore, as drilling operations take place under increasingly challenging technical conditions, their costs increase correspondingly.  In contrast, the costs for renewable energy are well-understood and easily budgeted.

 

Developing renewable energy preserves and/or creates jobs.  The American Wind Energy Association states that currently 75,000 workers are engaged in wind energy.  It expects that the policies in the Act could save as many as 37,000 of those jobs and create many more in later years.  There are almost 500 manufacturing facilities in the U. S. related to wind energy, located in all 50 states.  A thorough summary of job economics related to renewable energy is presented in this post.

 

Renewable energy sources have the very important feature of not emitting greenhouse gases into the atmosphere.  Global warming due to manmade greenhouse gases is already a very serious problem and is destined to get worse as humanity's demand for more energy grows. New fossil fuel-based energy- facilities put into service now, such as oil and gas pipelines, electric generating plants, oil refineries, and the like, will continue operating for a useful lifetime of, say, 40-50 years.  These new facilities will continue spewing greenhouse gases into the atmosphere throughout their service lifetime, adding to those already accumulated and worsening global warming.  In contrast, renewable energy facilities, once placed in service, have close to zero lifetime emissions of greenhouse gases, yet have the potential capacity to provide a significant portion of America’s energy demand.

The American Taxpayer Relief Act of 2012 laudably includes a one-year extension of tax credits for wind energy and other forms of renewable energy.  It is lamented that the extension is for only one year.  This prevents entrepreneurs and businesses from making plans for further development of renewable energy with the certainty of having a long-term policy in place.  The expanding renewable energy industry provides jobs for American workers, contributes to freedom from reliance on foreign sources of energy, and relieves the burden of accumulating greenhouse gas emissions in proportion to its installed generating capacity.  All efforts should be undertaken to implement a long-term energy policy in the U. S. that includes appropriate support for the expansion of renewable energy.



 

© 2012 Henry Auer

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