Phase-out of the Federal Wind Tax Credit a Good Thing?

John Farrell
August 21, 2012 | 7 Comments

Energy and Environment News has a very long story on a new angle for the federal wind tax credit debate: a phaseout. This article raises several issues, apart from that policy strategy, that are worth a quick discussion.

1. Why Would Wind Compete with Natural Gas?

The article waxes long about the trials of the wind industry in the face of low natural gas prices, implying that utilities choose new natural gas power plants over wind power on the basis of price. I’m a bit skeptical.

Wind power is inflexible, meaning utilities have to take the power whenever the wind blows. Natural gas power plants have typically been flexible, used to provide peaking power to meet rapid changes in electricity demand. From the perspective of adding new power supply, the two aren’t competitors.

Or am I mistaken? Are there are a lot of utilities choosing to add new natural gas power plants as baseload/inflexible power that would otherwise have chosen wind power?

2. Are We Really Basing 20- to 40-year Electricity Prices from Natural Gas on Today’s Gas Price?

The article notes that natural gas power plants have a current levelized cost of $45-55 per Megawatt-hour, compared to $60-90 for wind projects that do not receive the federal tax credit (based on the quality of the wind resource). Since this is much less than estimates made last year, when gas prices were higher, one can only assume that the estimators believe that gas prices will remain forever low.

I’ll take that bet.

3. Why Would the Tax Credit Matter?

Most wind power in the U.S. has been either installed in states or the environmental attributes (renewable energy credits) sold to states with renewable energy mandates. Thus, the wind tax credit isn’t really the market-driver, but instead is transfer payment from federal taxpayers to electricity ratepayers in those states. Utilities in Minnesota, with a mandate for 25% renewable energy by 2025, for example, will have to meet that goal whether or not the contract for wind power costs 11 cents (without any federal subsidies) or 7 cents (with the credit and accelerated depreciation). Utilities in Iowa get to buy wind power very cheap, because the low-cost wind projects in that state use the federal tax incentives and then sell their renewable credits in neighboring states (e.g. Illinois).

I can think of a few reasons that the tax credit still matters:

Utilities are buying more wind power than they are required to, because it is so cheap.
Developers have projects that are financed based on the tax credit, and they fall apart without it.
Merchant wind power projects (selling into a competitive wholesale market) are relying on it.

If it’s the first, then the tax credit is going to slow the wind industry. If it’s the second, it’s largely a short-term problem. If it’s the third, it won’t really affect new projects so much as it will punish developers who chose to gamble on the longevity of the credit.

4. Could an Expiring/Phasing Out Credit Be a Good Thing?

In the short term, it will be bad for the industry, as illustrated by history in the adjacent chart from AWEA. But in the long run wind power will get cheaper and natural gas – a finite resource – will not. And one of the big logjams for renewable energy projects right now is an inability to actually use the federal tax incentive.

That’s because a lot of developers don’t carry the tax liability necessary to offset their power generation, and the list of big corporations that do is relatively short, giving them a lot of market power. In fact, in exchange for partnerships with wind projects to access the federal tax credits, these companies routinely get rates of return from 10% up to 49%. (I discuss this issue in more detail here).

The short supply of tax equity partners lets them charge high prices, increasing the cost to wind power developers of using the tax credits and perversely increasing the cost of electricity from wind power.

The tax credit has also created an environment where community-based wind power, with its multiplier to jobs and economic benefits (and political benefits), has an uphill struggle to compete. (There’s a great counter-example of a wind farm in South Dakota with 600 local owners made possible by the cash grant in lieu of the tax credit. I’ve also discussed how low-cost financing could allow solar developers to opt out of the federal tax credit and still lower the cost of solar energy by 25%).

If there’s no tax credit, however, there’s no high-priced tax equity market or artificial barrier to local ownership. And both of these changes may benefit the industry in the long run.

This post originally appeared on ILSR’s Energy Self-Reliant States blog.

Lead image: Wind turbine via Shutterstock

The information and views expressed in this blog post are solely those of the author and not necessarily those of RenewableEnergyWorld.com or the companies that advertise on this Web site and other publications. This blog was posted directly by the author and was not reviewed for accuracy, spelling or grammar.

7 Comments

ANONYMOUS
September 13, 2012

We are seeing the amazing expansion of local gas fired generation as a partial consequence of the need for 'instant-on' backup for fluctuating wind output which never quite matches demand or is available when you need it. There are even wind farms paying to have the grid take its excess power. The downside of wind are the steep increases in the cost of distribution - 19%, because of the grid connections to distant wind farms; and the discovery that native rate payers are being charged to connect the wind farm to out of state customers for the profit of foreign owned wind farmers. The once potent argument of jobs being created has evaporated; and the costs of off shore wind farms boil one's blood in a stagnant economy where the only thing going up are daily living costs. Cheap abundant natural gas producing power locally is sweeping over my State and making wind farming a quaint tourist attraction, esp. for environmentalists who now point out the degraded landscape around the wind farm, access roads, and transmission line and loudly proclaim they were never bribed. All of which indicates that the subsidies are dying off or voted down in favor of health, education and needed infrastructure. Even support for residential wind has been tempered with complicated local ordinances and restrictions. Get it while you can; because it is not going to be there much longer. ......oh, and that work crew out front is drilling a gas line to your front door and perhaps your garage so plan your conversion to a gas fired household and perhaps a CNG car.

ANONYMOUS
August 24, 2012

sherry-hellmuth,

What the energy markets need are stable government policies. I agree that the federal PTC should be phased out, as well as all other energy subsidies. Once the corrupting influence of politics is removed, the energy market will sort itself out.

However, I would disagree with your proposition that wind energy has no "strength". If you look at the recent history of commercial wind LCOE you'll note that it has been dropping at a very rapid rate. Within a decade, unsubsidized on-shore commercial wind LCOE will likely be below NG in most areas of the US.

Sherry Hellmuth
August 23, 2012

good think PTC doesn't go to public utilities because that would be an even great rip off the American taxpayer. END the PTC, let all the energy sources compete on their own strengths (wind has no strengths when objectively analyzed).

Ron Peterson
August 23, 2012

The State of Washington requires utilities to have a certain percentage of power generated by alternative energy. The problem is that water power was left off the list of alternative energy sources forcing utilities to go to more expensive wind power.
The PTC can't be used by publicly owned utilities depriving them of an incentive to go to wind power.
Wind power would be economical if the price of capital was as low as that given to treasury bonds.

Sherry Hellmuth
August 23, 2012

Quit counting on the PTC. Let private investment fund this failure called wind power and see how far it goes. I am sick and tired of BIG WIND CORPS getting my taxpayer dollars through a tax credit that only results in my taxes going up; not to mention because wind is so inefficient my electric rates have gone up ridiculously and because of increased rates many businesses are finding their profits lower and therefore don't hire. Let wind survive on it's own--oh wait--in no rational investor will put money into a losing venture.

John Chase
August 23, 2012

We read a lot about "mandates" for renewable electricity production by certain dates. I don't see how it can be called a mandate unless there is an enforcement mechanism, and I've read nothing about that.

Instead of 'mandate', should it be called "good faith attempt"or "best effort"?

ANONYMOUS
August 21, 2012

I'd point out that it is presumptuous to plot a value for 2012 wind installs in the included graphic, but given that the plotted value for 2011 is about 4500 MW and the correct value is 6816 MW that might seem like nitpicking.
Steven

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John Farrell

John Farrell directs the Energy Self-Reliant States and Communities program at ILSR and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. His latest paper,...