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December 2012




The Wind Production Tax Credit: Corporate Welfare at its Worst

by Bonner R. Cohen, Ph.D.

 

Americans will soon learn whether the political class in Washington is serious about cleaning up the dirty acts of favoritism and cronyism that are business as usual in the nation's capital. From loan guarantees for the well-connected to subsidies for the non-competitive, Washington specializes in feathering the nests of those with special access to levers of power and taxpayer money.

Following the collapse of solar-panel-maker Solyndra and numerous other now-bankrupt energy companies that received federal funding, it should be clear that the U.S. government has no business placing bets with other people's money. Rooting out well-entrenched cronyism is an uphill task, but a good start can be made by ridding the nation of one of the most egregious corporate handouts Washington has to offer.

For 20 years, the wind-energy industry has been the beneficiary of a federal subsidy called the Production Tax Credit (PTC). Designed to promote wind power as part of an overall strategy to boost "renewable" energy, the PTC provides producers a tax credit of 2.2 cents per kilowatt-hour of electricity generated. What began as a temporary helping hand to enable wind power to compete with traditional sources of energy, has become a permanent fixture of the wind industry's business model. The PTC has faced expiration six times since it was enacted in 1992, only to be extended by Congress under pressure from the wind industry and advocates of renewable energy. Unless Congress once again intervenes during this year's lame-duck session, the subsidy is scheduled to expire at the end of 2012.

The 20-year-old subsidy to the wind industry should be allowed to expire, and here are the reasons why:

The wind industry does not need the PTC in order to survive.

As an industry, wind power is not in its infancy and thus not in the need of a helping hand. It is well established within the renewable-energy sector, where it has seen substantial growth in recent years. Wind power's 50,000 megawatts of capacity represent a five-fold increase since 2006 and a 1,300 percent increase in capacity over the past ten years.1 By the end of 2011, the U.S. Department of Energy reported that new wind projects containing an additional 219,000 megawatts of power capacity had requested transmission interconnection.2

By far the biggest contributor to the growth of wind power is not the PTC but rather the Renewable Portfolio Standard (RPS). Adopted by 29 states and the District of Columbia in recent years, an RPS mandates that a certain percentage of electricity generated in a state come from renewable sources by a date certain. RPS mandates have been a boon to the wind industry in wind-rich states. This is because they ensure a guaranteed increasing future market for wind energy. Over 50 percent of wind capacity is located in five states; over 75 percent is located in just 11 states.3 RPS requirements are expected to quadruple to nearly 200,000 megawatts by 2030. As David E. Dismukes of Louisiana State University's Center for Energy points out, if wind maintains the same 90 percent market share it holds in today's renewable energy generation mix, merely fulfilling future RPS requirements guarantees wind producers a market of almost 130,000 megawatts of additional capacity through 2030.4 This is a government-guaranteed market share that is not granted to other sources of energy such as coal, nuclear, and natural gas.

With the federal PTC in one hand and the mandated state renewable subsidies in the other, wind generators effectively double-dip at the troughs governments have created. In 2010 (latest figures available), wind companies received 42 percent of all government subsidies, but provided only 2.3 percent of the electricity generated.5

The PTC places an unacceptable burden on wind-poor states and states with no renewable-energy mandates.

The PTC essentially transfers taxpayer dollars from states without an RPS to states with mandates for renewable energy. Renewable energy mandates force utilities to buy politically-favored forms of energy such as wind and solar and punish states that have wisely chosen to rely on abundant and affordable forms of energy to meet the needs of their consumers and industries.

Wind-rich states are concentrated in thinly populated areas of the Great Plains and the West. By contrast, huge expanses of the country, including the Southeast and parts of the Midwest and Northeast, are climatologically ill-suited for wind energy. Roughly 80 percent of American taxpayers fund federal wind tax subsidies to promote wind power that is concentrated in the remaining 20 percent of the country.6 The federal wind PTC, however, requires residents of all states, even those with no RPS mandates and/or very little wind potential, to subsidize wind generation nationwide. And they must do so, even though they derive little if any economic benefit from the program.7

The PTC undermines and distorts price signals in the wholesale electricity market by giving wind producers an incentive to sell electricity at a loss to earn enormous tax subsidies.

Under the PTC, wind producers collect a tax credit, whether utilities need the electricity or not. A September 2012 report by the NorthBridge Group illuminates the perverse incentives of the PTC. "In some 'wind-rich' regions of the country, wind producers are paying grid operators to take their generation during periods of surplus supply," the report notes. "But wind producers more than make up the cost of the 'negative price' payment, because they receive a $22 MWH (megawatt hour) federal production tax credit for every MWH generated."8 Furthermore, because the PTC provides a tax benefit for new projects, it encourages wind developers to locate wind farms with little regard to consumer demand, as long as they can be placed on line and their power brought to market to collect the subsidy.

By distorting price signals in wholesale electricity markets, the PTC undermines the reliability of the nation's power grid. As the NorthBridge study puts it: "The PTC subsidy for wind generation artificially dilutes the incentives for conventional generation generation that is critical for reliability."9

Even with taxpayer subsidies, wind is, and always will be, an intermittent and unreliable source of energy.

"Electricity," economist Jonathan Lesser reminds us, "is the ultimate 'just-in-time' resource."10 If power is not available when it is needed most, it is of little value. As an electricity source, wind is limited by the fickle nature of its fuel resource, moving air. "Simply put," Desert Power President and CEO Kimball Rasmussen points out, "the intermittent nature of wind makes it difficult to harness effectively on a power grid that is finely tuned to deliver electricity around the clock, matching demand second-by-second."11

Wind, however, blows most consistently and creates the best opportunities for power generation during off-peak hours, cooler days, and at night. On a seasonal basis, wind generates the least amount of power in the summer, when demand is at its greatest, and the most power during fall and spring, when demand is at its lowest.12 "From the standpoint of both electric system planners, who are charged with ensuring the lights stay on, and consumers who want uninterrupted access to electricity," Lesser notes, "it is critical to have generating capacity available when demand peaks."13 No combination of subsidies and mandates can make wind power something it is not, and never will be: a reliable source of electricity. As Sen. Lamar Alexander (R-Tenn.) and Rep. Mike Pompeo (R-Kan.) recently put it in the Wall Street Journal: "There is no way a country like this one which uses 20% to 25% of all the electricity in the world can operate with generators that turn only when the wind blows."14

The heat wave that plagued the Midwest and other parts of the country in the summer of 2012 is a case in point. At the height of the hot spell, when temperatures in Chicago reached 103 degrees, wind farms in Illinois operated at less than 5 percent of their capacity. On July 6, when demand for electricity in Chicago and northern Illinois averaged 22,000 megawatts, the average amount of wind power available during the day was a virtually nonexistent 4 megawatts.15

With a $16 trillion debt and rising, the United States cannot afford to continue propping up a non-competitive, unreliable source of energy.

Production of electricity should follow demand for power, not subsidies. Wind power is subsidized because it can't compete with more dependable, abundant, and affordable sources of electricity such as coal, natural gas, and hydro-power. The nation's mounting debt, and the burden it places on future generations of Americans, are sufficient reasons alone for terminating all forms of corporate welfare, including wind subsidies.

The PTC's tax credit of 2.2 cents per kilowatt hour lasts for ten years. Even if the PTC expires at the end of the year, a wind farm built in 2012 will continue to receive subsidies until 2022. The Senate has proposed extending the PTC for one more year. This means that wind farms coming on line in 2013 would continue receiving the handout through 2023 at a cost to taxpayers of an addition $12.2 billion, according to the nonpartisan Congressional Joint Committee on Taxation.16

Led by its trade association, the American Wind Energy Association (AWEA), the wind industry has unleashed hordes of lobbyists on Capitol Hill to browbeat lawmakers into voting to extend the PTC. Even though state renewable-energy mandates guarantee a market share for wind power for decades to come, the industry is in a panic over the possible loss of its subsidy. With its September 18 announcement that it was laying off 615 employees, or one-third of its U.S. labor force, Siemens AG joined a growing number of wind energy companies that are shedding workers in the face of low natural gas prices and mounting uncertainty over the future of the PTC. Even before the Siemens announcement, 11 wind energy firms reduced their workforce by 2,200 at facilities in more than a dozen states from Massachusetts to Oregon.17

These layoffs are a revealing and resounding vote of no confidence by the wind industry in its ability to remain viable without a federal subsidy. In fact, the two-decade old PTC is just the latest effort by Washington to prop up the industry. Before the PTC, Congress and the Carter administration included wind subsidies in the Public Utility Regulatory Policy Act (PURPA) and the Energy Tax Act (ETA), both enacted in 1978.18 When these two laws didn't do the trick, Congress added the PTC in 1992 and has extended it six times. Now, after 35 years of handouts, the wind industry wants another extension of the PTC. Taxpayers have been bludgeoned enough. Congress should just say no.

 

Bonner R. Cohen, Ph. D., is a senior fellow at the National Center for Public Policy Research.


 

Footnotes:

1 David E. Dismukes, "Removing Big Wind's Training Wheels: The Case for Ending the Federal Production Tax Credit," (American Energy Alliance, Washington, D.C., November 1, 2012) p. 1. http://www.americanenergyalliance.org/wp-content/uploads/2012/10/Dismukes-Removing-Big-Winds-Training-Wheels.pdf

2 Ibid.

3 Ibid. p. 3.

4 Ibid. p. 7-8.

5 Institute for Energy Research, "Renewable Energy Subsidies 6.4 Times Greater than Fossil Fuel Subsidies," May 31, 2012, http://www.instituteforenergyresearch.org/2012/05/31/12704/.

6 Dismukes, p. 4.

7 Ibid.

8 Frank Huntowski, Aaron Patterson, and Michael Scnitzer, "Negative Electricity Prices and the Production Tax Credit," The NorthBridge Group, September 10, 2012, p.3, http://graphics8.nytimes.com/news/business/exelon.pdf.

9 Ibid. p. 18.

10 Jonathan A. Lesser, "Wind Intermittency and the Production Tax Credit: A High-Cost Subsidy for Low-Value Power," Continental Economic, October 2012, p. 3, http://www.continentalecon.com/publications/cebp/Lesser_PTC_Report_Final_October-2012.pdf.

11 Kimball Rasmussen, "A Rational Look at Renewable Energy and the Implications of Intermittent Power," National Wind Watch, November 2010, Edition 2.0 p. 3, http://docs.wind-watch.org/Rational-Look-Renewables.pdf.

12 Rasmussen, p. 4; Lesser, p. 1.

13 Lesser, p. 5.

14 Lamar Alexander and Mike Pompeo, "Puff, the Magic Drag on the Economy," Wall Street Journal, Sept. 19, 2012, p. A13.

15 Lesser, p. 2.

16 Ibid. p. 1.

17 Bonner R. Cohen, "Wind Industry Sheds Jobs with Subsidies in Doubt," Environment & Climate News, November 2012, p. 5; Keith Johnson, "Wind-Turbine Jobs Cuts Tied to Expiration of Tax Credit," Wall Street Journal, Sept. 20, 2012, p. B6.

18 Lesser, p. 1.


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