Extend Wind-Power Tax Credit Now, So It Can Eventually Die

Since U.S. President Barack Obama brought it up, repeatedly, last week during his campaign swing through Iowa, wind power has emerged as one of the most clear- cut issues of the political season.

Obama wants to renew the technology’s soon-to-expire federal production tax credit. Mitt Romney, his Republican opponent, wants to let the credit lapse.

Yet the best way to handle this is to find an option other than all or nothing. Yes, clean wind energy should receive continued federal support, as Obama says — especially at a time when the industry’s tens of thousands of jobs are helping the U.S. economy. But wind power should also be expected to make it in the marketplace on its own one day, as Romney would have it.

Onshore wind power has improved to the point where it is now the most competitive of all renewable energy sources except hydropower. According to recent estimates from Bloomberg New Energy Finance, it is on a path to reach “grid parity” — the point where its cost is equal to the baseline price of power on the grid — starting in 2016. In the long run, in other words, wind can be expected to thrive without the tax credit.

A clear plan to phase out the credit over the coming four years could actually be a gift to the wind industry, which has suffered from the federal program’s unpredictability, even as it has benefited from its support. The 2.2-cent tax credit, paid to wind-energy companies for every kilowatt-hour of power they produce, has brought the industry more than $1 billion a year, according to the Joint Committee on Taxation. Yet over the two decades it has existed, Congress has allowed the credit to expire three times, and each time progress in building wind capacity has fallen precipitously.

With companies rushing to finish before another expiration on Dec. 31, building this year has reached a record high. About 11,800 megawatts worth of projects are expected to be completed this year, according to Bloomberg New Energy Finance. Next year, construction is expected to plummet to 1,500 megawatts if the tax credit is not renewed. Even if Congress decides after the presidential election to extend it a year, the amount of building would be well under half what is anticipated for 2012, as it would take some time for the industry to ramp up its plans.

Renewing the tax credit would at least enable the wind industry to return to growth, adding 54,000 jobs over the next four years, according to the American Wind Energy Association, an industry trade group. Letting the credit expire, on the other hand, would mean losing 37,000 jobs in the sector.

The job market is not the main reason wind power is worth supporting. It’s a clean energy source, with a promising economic future as the cost per turbine continues to fall. Its prospects will become even brighter if natural gas prices, now extraordinarily low, rise in the coming years with increasing demand.

If Congress takes the easy route and simply extends the credits for a year or two, it would only perpetuate the wind industry’s boom-and-bust cycle. A smarter solution is to apply the longer-term planning that is critical to good energy policy.

Let the wind industry know the production tax credit will eventually die out, but over four years — so companies are able to plan their operations without the need to guess what tax support they will have.

Even smarter would be to ultimately replace the tax credit with market-based support for wind as well as other forms of clean energy. Many states now have so-called renewable portfolio standards, which require utilities to use a certain percentage of electricity generated by wind and other kinds of renewable power. These states set a target, in other words, and the market figures out the most efficient way to reach it.

One very good suggestion for a federal program along these lines has been proposed by Senator Jeff Bingaman, a Democrat from New Mexico. This year, he introduced a bill that would establish a “clean energy standard,” requiring large U.S. utilities to derive an increasing share of their energy from cleaner energy sources — not only renewables such as wind and solar but also natural gas and even coal with carbon capture and storage. No federal expenditure would be required.

Politicians in both parties should find that a virtue. Republicans from the Great Plains and other areas where the wind industry is growing substantially already seem disposed to extend the production tax credit. They could do far more for the U.S.’s energy future if they considered longer-lasting ways to help the wind business succeed.

Copyright 2012 Bloomberg.

Lead image: Wind turbines via Shutterstock

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