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Benchmarks

The federal production tax credit and renewable portfolio standards interact in interesting ways.
Fortnightly Magazine - July 15 2003

The federal production tax credit and renewable portfolio standards interact in interesting ways.

Renewables still cost more than conventional generation, but who pays? Platts Research & Consulting has just completed research and modeling for our first renewables forecast, the Renewable Power Outlook 2003. Among other things, we researched the major drivers for renewables in all states. In particular, the two major policy drivers for renewables in the United States-the federal production tax credit (PTC) for wind, and state renewables portfolio standards (RPS)-interact in interesting ways.

RPS laws, usually structured as a renewables percentage requirement on electricity sellers, take advantage of the current PTC fund structure. The PTC provides a 1.8 cents/kWh tax credit to wind generation projects for their first 10 years of operation.

Wind is the economic renewable of choice in many states today, so an RPS requirement will be met primarily with wind generation. In this scenario, the PTC incentive should cover a large fraction of the above-market costs of wind energy, providing the state's customers with the benefits of renewables while minimizing their costs.

A simple example helps to illustrate the benefits of the PTC: A 100-MW wind farm built in 2003 will receive about $5.5 million in production tax credits per year for 10 years. Implementing an RPS law steers the benefits of avoided federal taxes into a state. Of course, the PTC beneficiary and owner of the renewable plant may be based out-of-state, but at least the PTC should keep the costs of renewable energy low for a state's electric ratepayers.

From another perspective, note that federal taxpayers in a state without any significant wind development-37 states have less than a 10-MW wind capacity-are helping to pay for wind development in other states. The higher cost of a renewable project built under an RPS without PTC funds in place would be passed on to the state's ratepayers, rather than being assisted by all federal taxpayers through the PTC.

Some RPS programs, most notably California, rely on systems benefit charge funding (SBC, sometimes called public purpose funding) for support of the renewables required by the RPS. Other RPS states, such as Texas, do not support required renewables with SBC funds. In the end, the distinction may not matter much. In Texas, electric retailers and utilities pay the extra cost for a wholesale supply of renewables, and they pass it on to the state ratepayers. In California, state ratepayers pay the SBC line item on their monthly bill, which goes into a fund to pay for the extra cost of renewables. In either case, the results should be very similar: The state's electric consumers pay for the extra cost of renewables required by the RPS.

This is not to say that SBC funds have no effect. In a state with no RPS, they may be the main avenue for large-scale renewables to be built. Also, they provide unique opportunities to support emerging technologies like solar.

Our forecast assumes that the federal PTC program will be extended for three years to 2006, which is consistent with current national energy policy

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