Redefinition favored start-ups in 2013

The expiration of the federal production tax credit (PTC) for renewable energy projects—and most especially for wind energy projects—on December 31, 2013, has renewed a debate that began decades ago on whether and to what extent wind power should be subsidized by taxpayers. 

The PTC is a per-kilowatt-hour tax credit for electricity generated by qualified energy resources and sold to an unrelated person during the taxable year.  The current PTC allows a project owner to reduce the project’s tax bill by 2.3 cents for every kilowatt-hour of electricity produced over a 10-year period.

Supporters of the PTC and its continuation claim that the program has been environmentally beneficial and has reduced energy costs, helped diversify the nation’s energy portfolio, promoted domestic manufacturing, and created jobs.  Some opponents counter that wind energy does not generate cheaper energy and threatens the reliability of the grid because it is unpredictable.  Other opponents argue that tax credits should be available to developing technologies only and that wind energy is mature enough to stand on its own. 

Congress introduced the PTC in 1992 as part of the Energy Policy Act.  Since then, the provision has been extended five times and allowed to sunset on four occasions.  In general, extensions cause an upswing in wind energy projects, while expirations have the opposite effect.  The U.S. Energy Information Administration (EIA) reports that in the years following expiration, wind energy installations dropped between 73 percent and 93 percent.  Extensions have had exactly the opposite effect.  This was made vividly clear in 2012 as the PTC neared its December 31, 2012, expiration.  To qualify for the PTC, wind projects had to begin commercial operation by December 31, 2012.  According to the EIA, approximately 40 percent of the total 2012 wind capacity additions came online in December 2012, the largest-ever single-month capacity for U.S. wind energy.  

The PTC was extended for one year on January 1, 2013, in the American Taxpayer Relief Act (ATRA), which included a more- generous definition of a qualifying project.  Before ATRA, to qualify for the PTC, a project owner had to place the wind facility in service by the end of 2012.  This means the project had to be producing and selling electricity before the PTC could be claimed.  In reviewing the PTC, Congress recognized that project development can suffer because the PTC cannot be claimed during unavoidable delays caused by permitting and weather.  Accordingly, the ATRA redefined a qualifying project as one that commences construction before January 1, 2014. 

Construction of a ‘significant nature’

Given the range of opinions on when construction begins, in April 2013, the Treasury Department issued guidance on how a project qualifies for the PTC.  The guidance specified that a taxpayer could establish that construction has begun by two methods: (1) by demonstrating that construction of a significant nature has begun by January 1, 2014, and maintaining continuous construction, or (2) by meeting a 5 percent safe harbor based on costs, that is, the project owner pays or incurs 5 percent of the total cost of the facility by January 1, 2014, and thereafter makes continuous efforts to advance toward completion of the facility.   

Based on the new definition of a qualifying facility, the EIA predicted significant wind capacity additions over the next 3 years.  Still, uncertainty about the future of the PTC leads to uncertainty about the future of wind power.  The problem was described by the Union of Concerned Scientists (UCS).

“The cycle begins with the industry experiencing strong growth in development around the country while the PTC is firmly in place and in the years leading up to the PTC’s expiration,” says the UCS.  “Lapses in the PTC then cause a dramatic slowdown in the implementation of planned wind projects and layoffs at wind companies and manufacturing facilities.  Upon restoration, the wind power industry takes time to regain its footing, and then experiences strong growth until the tax credits expire.  And so on.”

Infant industry?

Critics of the PTC argue that its continuation perpetuates the notion that wind power is still in its infancy and endangered without government support.  This is erroneous, according to Rep. James Lankford, an Oklahoma Republican.  Lankford is in a peculiar position.  As a Republican, he tends to oppose federal subsidies to the private sector.  But Oklahoma is one of the nation’s top wind energy states and in 2012 was fourth among states leading the nation in newly installed wind capacity.  In a recent hearing of the House Subcommittee on Energy, Policy, Health Care and Entitlements, which Lankford chairs, the Congressman said he was “proud of our nation’s wind producers and their contributions to our all-of-the-above energy solution for North American energy independence.”  But the need for the PTC has changed over the years, he added.

“The wind [PTC] was first enacted in 1992, when wind was an upstart electric technology,” said Lankford.  “Since then, the wind industry has developed into a thriving, contributing energy producer.  However, the PTC was intended to be a short-term tax credit to help wind energy production grow.”

Lankford points out that in 2003, wind accounted for about 0.12 quadrillion Btu in power consumed.  For 2013, EIA’s projected total for wind power consumed is 1.61 quadrillion Btu, rising to almost 1.7 quadrillion Btu for 2014.  From 2003 to 2012, wind power consumption increased over 1,000 percent.  As of 2012, wind power constitutes 3.46 percent of American electricity generation.  This is up from 0.29 percent in 2003, representing an almost twelvefold increase in wind’s share of electricity generation in a 10-year period.  “Now it is time to take a fair look at the cost and operation of the PTC to evaluate its role in America’s energy future,” Lankford concludes.

Large and stable market

Such a “fair look” will lead to the conclusion that “there are no discernible links between a continuing PTC and possible future technological improvements,” testified Dr. Robert J. Michaels, a professor of economics and senior fellow with the Institute for Energy Research at California State University, Fullerton.  Michaels supported his contention that the PTC should be ended with the following points.

• The emergence of renewable portfolio standards (RPS) in a majority of states has weakened any infant industry rationale for the PTC.  Utilities in RPS states represent a large and stable market for wind generation that will provide steady demand for it over a long horizon.
• The cost of wind turbines has and will be higher than that of gas-fired plants, inclusive of fuel costs.  Wind power is intermittent and can only be integrated into a regional grid if other generation is instantly available to compensate for wind’s variability.  Adding a controllable generator to an electric grid generally increases reliability.  By contrast, wind is a power source that can put reliability at risk as dependence on it increases. “Must-take” rules in many regional power grids shift the cost of maintaining wind power’s reliability away from wind generators to ratepayers.  Since 2008, the growth of wind generation in isolated areas has been responsible for approximately $22 billion in new transmission facilities. Many of them are financed by ratepayers and would have been unnecessary absent wind power.
• The zero emissions associated with a kilowatt-hour of wind power are generally far from zero.  They must be netted against the emissions from plants that must operate to maintain reliability in the face of wind’s intermittency.  On a life-cycle basis, production of the materials and services used to construct a wind generator also entails pollution and carbon emissions.
• There is no substance to claims that the PTC is desirable because wind power’s effects on employment in the economy make it part of an “industrial policy.” So-called “green jobs” are arbitrary classifications (one list includes bus drivers).  Jobs in renewable electricity are a small fraction of any assumed total, and those in wind power are a small fraction of that fraction.  Advocates often use computer models to substantiate claims that investment in wind, stimulated by the PTC, will generate extensive employment opportunities in other activities.  In reality, these benefits have yet to be demonstrated.

550 manufacturing facilities

The pro-PTC argument was made by Rob Gramlich, a senior vice president with the Wind Energy Association.  Gramlich cites EIA data indicating that the impending expiration of the PTC before it was extended in January 2013 had a “devastating impact” on the industry.  “Investment was put on hold and factories halted production and project installations came to a standstill,” testified Gramlich.  “Only 1.6 megawatts were installed in the first half of this year, which is the capacity of a single turbine.”  Gramlich makes the following additional points:

With the credit, the U.S. wind industry was the number one source of new generation capacity last year.  Wind turbines are now generally made domestically by approximately 550 manufacturing facilities in all regions of the country. Wind projects in the United States have brought economic growth to rural communities; roughly $400 million in annual property taxes or similar payments to communities; and annual lease payments to farmers and ranchers of approximately $120,000 per turbine over its lifetime. This tax credit, estimated by the Joint Committee on Taxation to cost less than $2 billion this year, drives over $20 billion of private investment annually and brings electricity to 15 million American homes.  Without the PTC, these economic benefits and this private investment in the United States would not have occurred.

Wind energy is saving money for consumers.  A May 2013 report by a private energy research firm found that doubling the use of wind energy in the Mid-Atlantic and Great Lake states would save consumers close to $7 billion per year.   EIA data show that from 2005 to 2010, electricity rates increased by twice as much in the 40 states with the least wind power compared to rates in the 10 states with the most wind generation.  Even in the Southeast, utilities have entered into power purchasing agreements with wind energy facilities because wind energy proved to be the least expensive option for their customers.  Furthermore, wind energy offers the stability of a long-term fixed energy price, which is available with very few other energy sources. This protects consumers from fluctuations in fuel prices much like a fixed rate mortgage protects homeowners from interest rate spikes.

Congressional observers believe the current PTC will not be renewed by January 1, 2014, but will probably be reinstated sometime next year.  However, the congressional redefinition of a “qualifying project” prompted companies to begin the construction of major wind facilities in 2013.  This should ensure growth in wind energy once these projects are online.

The Congressional testimony

William C. Schillaci