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June 11, 2014

Energy Experts and Power Producers Don’t Support AWEA’s Subsidies

June 11, 2014
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In a recent interview with E&E TV’s Monica Trauzzi, the American Wind Energy Association’s (AWEA) Rob Gramlich discussed the effects that EPA’s new regulations on carbon dioxide emissions from existing power plants would have on wind energy. Quickly the discussion turned to AWEA’s favorite subsidy, the wind Production Tax Credit (PTC), the wind industry’s 2.3 cents per kWh handout from the American taxpayer. The PTC expired at the end of 2013, but AWEA is making an all-out effort to convince Congress to renew the wind PTC.

Trauzzi brought up the fact that the nuclear industry has taken a hit from the PTC and asked Gramlich if he saw the conflict escalating? Gramlich responded:

“There’s a conflict between Exelon and the production tax credit. We know their views on that. They don’t see it the same way we do. I wouldn’t say the nuclear industry broadly opposes wind or the PTC. In fact, I see a lot more voices both in the renewable sector and in the nuclear sector saying we really need ways to value carbon-free electricity. So I actually see more of a convergence over time.” [Emphasis added]

Gramlich’s assessment is wrong. While AWEA’s spin machine would have people believe that supporters of the wind PTC are mainstream and detractors are a fringe minority, the truth is there is widespread concern over the negative impacts of the wind PTC.

A variety of energy industry leaders and prominent public figures have made public statements that expose the PTC for its many flaws, which include threatening grid reliability, distorting power markets, and redistributing federal tax dollars to a minority of U.S. states. The following quotes illustrate the growing chorus building in opposition to this disruptive federal handout and illustrate just how damaging an extension of the wind PTC would be.

On the Wind PTC Generally

Wind energy investor and Berkshire Hathaway CEO Warren Buffett:

“I will do anything that is basically covered by the law to reduce Berkshire’s tax rate. For example, on wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit.” (US News, 5/12/2014,)

President and CEO of Southern Company, Thomas Fanning:

“This is an industry [wind and solar] that exists almost entirely based on tax credits.  By the Energy Information Administration’s own measurement—on a per barrel of oil of energy basis—wind and solar will get about 100 times the tax preference treatment when compared with coal, natural gas and oil and about 35 times that of nuclear.  This is a market that is reasonably mature now.  Why should the United States continue to support it by tax credits at the exclusion of others?  It’s a big policy question.”  (Thomas Fanning, Chairman, President & CEO, Southern Company, The CEO Forum, Vol. III, Number 4, 2013/14)

President of Entergy Wholesale Commodities, William Mohl in Greenwire:

“Regulators, policymakers really don’t understand the consequences of some of their focus, which are well-intended; they want to do the right thing, move to renewable resources, reduce carbon output,” said William Mohl, president of Entergy Wholesale Commodities.  “[But] we’re really headed off a cliff if we don’t see some changes in overall market design.”  Mohl said nuclear plants are competing with wind and solar using production and investment tax credits, which he said created unfair footing for Entergy’s 5,000 MW of merchant nuclear power.  (Greenwire: 2/6/2014)

On Grid Reliability

Chairman, Public Utility Commission of Texas, Donna L. Nelson:

“The Federal Production Tax Credit distorts wholesale electric markets, including the ERCOT market. With wholesale rates that hover around $40 per MWh in ERCOT, a federal program that pays wind generators $23 per MWh ultimately destroys the economic underpinnings of the wholesale competitive electric market. As wind installations continue and wind capacity in our market becomes a larger percentage of ERCOT capacity, not because it makes sense from an economic standpoint but because investment is driven by a federal government subsidy, our market faces the very real possibility of losing base load generation.” (Public Utility Commission of Texas – Memorandum, 5/29/2014,)

CEO of Calpine, Thad Hill:

“One issue policymakers must deal with sooner rather than later is that non-market interventions, such as the wind Production Tax Credit (PTC), may be leading to premature retirements of certain baseload resources, potentially impacting the reliability of the future resource mix.  The current structure of the PTC subsidizes wind resources in the energy market to the point where wind generators will pay others to take power that is otherwise unneeded in order to maximize their benefit from the PTC.  So, while the wind resources cannot generally be counted on to provide energy during extreme winter or peak summer conditions, the effect of the PTC is to take revenues from resources that can supply the market.  The PTC interferes with market forces and is no longer necessary.”  (Thad Hill, Calpine CEO, Testimony  U.S. Senate Committee on Energy and Natural Resources, 4/10/2014)

CEO of First Energy, Anthony Alexander:

“Subsidies such as the Production Tax Credit encourage developers to build whether or not the generation output is needed.  This unneeded, excess capacity is not only uneconomic, but it puts additional pressure on baseload coal and nuclear assets that are essential to grid stability and affordable energy prices.”  (Anthony Alexander, First Energy CEO, 4/8/2014)

On Negative Pricing

As IER has noted, the wind industry actually profits from negative wholesale prices because the PTC is such a large subsidy. Wind producers receive PTC payments even when the power has no value whatsoever to the grid, so they flood the grid with uneconomic power and ignore the distress signal sent by negative prices. Specifically, wind producers are paid the after-tax equivalent of $35 per megawatt-hour in PTC subsidies, so a wind producer taking the PTC can still profit while paying the grid to take its electricity. Wind’s inflexibility in the face of negative prices is a problem, and the people who know the electricity industry best are taking note.

U.S. Energy Information Administration:

“Eligible generators can take a 2.2 ¢/kWh or $22/MWh production tax credit (PTC) on electricity sold. This means that some generators may be willing to sell their output for as low as -$22/MWh to continue producing power. Typically, wind generators are the largest such group in any region.” (Today in Energy, EIA, 2/23/2012)

Executive Vice President and COO of NRG, Mauricio Gutierrez:

“Given some of the economic challenges and the higher penetration of wind and negative pricing, we believe that there is probably—we are entering a transition period where additional retirements from base load resources that can’t cycle will happen.” (NRG Q12014 Earnings call, 5/6/2014)

Commissioner, Federal Electricity Regulatory Commission, Philip Moeller:

“I don’t think negative pricing is a distraction, but an important part of the debate,” Moeller said. “Just a production incentive, whether it’s good for society or not, does have impacts on competitive markets. I would hope that’s still part of this discussion.” (Platts Article, 5/15/2014)

Chairman, Public Utility Commission of Texas, Donna L. Nelson:

“Federal incentives for renewable energy… have distorted the competitive wholesale market in ERCOT. Wind has been supported by a federal production tax credit that provides $22 per MWH of energy generated by a wind resource. With this substantial incentive, wind resources can actually bid negative prices into the market and still make a profit. We’ve seen a number of days with a negative clearing price in the west zone of ERCOT where most of the wind resources are installed….The market distortions caused by renewable energy incentives are one of the primary causes I believe of our current resource adequacy issue… [T]his distortion makes it difficult for other generation types to recover their cost and discourages investment in new generation.” (Policy Perspective, November 2012)

Conclusion

AWEA CEO Tom Kiernan has said that that wind is an “American success story that deserves to be continued.” We agree that the wind industry deserves to continue, but it should continue on its own merits. For 22 years and counting, the wind industry has leaned on taxpayers to prop up its business through the PTC. Now is the time for the wind industry to stop looking for handouts from overburdened taxpayers and start looking for ways to make wind power valuable in electricity markets. If the wind PTC is renewed, it will continue to line the pockets of politically connected wind producers while raising household tax burdens and jeopardizing reliable sources of energy for years to come. The PTC should have gone away long ago. It is time to let the PTC fade away and let the electricity industry–wind included–focus on producing real, valuable energy for American families and businesses.

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