Over the past few months, wind advocates have argued for the eighth extension of the federal wind Production Tax Credit (PTC), scheduled to expire at the end of the year. Contrary to popular rhetoric, the wind industry is no longer the infant industry it was when the federal wind PTC was first enacted in 1992, but one comprised of 50,000 megawatts (MWs) of nameplate capacity, representing close to a five-fold increase since 2006. The federal wind PTC no longer represents a subsidy needed to jump start a nascent, but promising industry, but instead, has devolved into a classic case of “rent seeking” by a well-established industry seeking to maintain profits through a generous tax subsidy.
Wind advocates often claim that recent gains in wind generation development will be compromised if the federal wind PTC is allowed to expire. The wind industry and its advocates cite thousands of jobs lost and paint a picture of permanently-shuttered green manufacturing in the wake of the tax subsidy’s sunset. What is not mentioned is that the Congressional Joint Committee on Taxation has found that a simple one year extension of the federal wind PTC will cost all U.S. taxpayers an additional $12.1 billion, or an amount equal to $300,000 for each active wind energy job in the industry at the end of 2011. While everyone in this economy wants to promote job growth, subsidizing green jobs at a rate of $300,000 per job seems a bit excessive.
Also missed is the fact that wind generation has a guaranteed opportunity for market growth afforded to no other type of traditional generation technology. Today some 30 states and the District of Columbia have renewable portfolio standard (RPS) mandates that require energy suppliers to provide renewable generation to their customers. These mandates increase to a level that by 2030 is almost three times the amount of wind capacity currently operational.
Wind advocates suggest the industry will simply fall apart should the federal wind PTC expire. Such a representation is melodramatic and entirely inconsistent with the facts. While some speculative wind generation development may contract, particularly the recent development stimulated by the sugar rush of the 1603 investment tax credits included as part of the Stimulus Plan, the longer term market growth opportunities for wind and other renewables is tremendous. Standards & Poor’s, for instance, recently estimated as much as $150 billion in new renewable energy investment opportunities over the next 10 years, even if the federal wind PTC is not renewed, driven in large part by opportunities in wind energy development.
The inherent inequities associated with the federal wind PTC also forces a large number of taxpayers in states without wind generation to support projects concentrated in a handful of states. About 50 percent of all active wind capacity is located in five states and over 75 percent is located in just 11 states. In fact, the federal wind PTC requires taxpayers in number of states without renewable energy mandates to pay approximately 24 percent of the PTC funding even though these states receive no direct benefit in terms of jobs or renewable energy credits.
Most importantly, the federal wind PTC is increasingly facilitating inefficiencies, hidden costs, and market distortions. Federal regulators have already approved over $15 billion in announced power transmission projects designed primarily to move wind generation from remote locations where wind is generated to load centers where business and households are located. Wind generation is also leading to the need for an increasing amount of back-up generation, primarily natural gas-fired, to “fill-in” during times when the wind does not blow. Perhaps the most egregious market distortion created by the federal wind PTC is the perverse “negative pricing” strategies it facilitates during off-peak, low-electricity load periods. When a generator offers a negative price in an electricity market, it means that the supplier is actually paying the market to take the power. The generous federal wind PTC encourages wind generators to offer “negative prices” paying the system to take their electricity just so wind generators can collect the federal tax subsidy and still make a profit.
The federal wind PTC should expire since it has morphed from an ill-designed temporary subsidy for a purportedly “infant industry,” into an inequitable tax hand-out for what is without a doubt a well-established industry. While the wind generation industry and its advocates argue that the federal PTC should be continued in order to maintain current wind generation development and jobs, these arguments overlook the fact the wind industry is already over-built with considerable excess capacity in many parts of the U.S. More importantly, this specific type of tax subsidy is facilitating, either directly or indirectly, a large number of market distortions and inefficiencies that preferences wind generators at taxpayers and ratepayers expense. This reason alone should be justification enough to let the federal wind PTC permanently expire.
To find out more about the wind PTC, read Dr. Dismuke’s recent study (PDF)
David E. Dismukes is a professor, associate executive direct, and director of Policy Analysis at the Center for Energy Studies, Louisiana State University. His research interests are related to the analysis of economic, statistical, and public policy issues in energy and regulated industries.