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Transforming Production Tax Credits

Three reasons to make them a permanent part of U.S. energy policy.

Fortnightly Magazine - July 2006

increase and move to capture the advantage. As new technologies are developed, carbon-free technologies move into the market.

Each of those links is weak and can be broken by market power and price discrimination. A cap is a necessary part of a carbon stabilization policy. However, it is not sufficient in itself. A direct, public return is both a complement to a cap and a more direct link between private initiative and the development of carbon-free technologies.

Closing the Circle

The common perception that PTC benefits simply serve to line the pockets of developers does not square either with economic theory or empirical evidence. A strong case can be made that a large share of the benefits is passed on to the purchasers of the renewable energy through lower prices. A PTC would close the circle because it would encourage the final purchasers—who ultimately provide the contract necessary for project development—to go after renewable projects.

Anecdotal and analytical evidence suggests that many of the benefits of the PTC are indeed passed on to the consumers in the states that promote development. In states that have called for large-scale development of wind, such as Texas, an RFP typically is issued for a stated amount of wind power. Developers have to compete for this limited number of contracts. According to one developer of projects in Texas, the competition among developers is intense, and most of the benefits of the PTC are passed on either to the local utility or the ultimate consumers of those utilities. Long-term contracts for West Texas projects have been accepted at between $.025/kWh and $.03/kWh.

Comparing the long-term contract prices for excellent wind regime projects developed in the European Union and the United States supports the argument that PTC benefits flow to utilities and consumers. West Texas projects typically have capacity factors ranging from 35 to 40 percent. In Northern Ireland several projects have capacity factors slightly better than the Texas projects. The projects use similar technologies and have similar sized individual turbines. The Irish projects tend to be smaller than the West Texas projects, which could make them slightly more expensive.

The Irish projects have been developed under competitive solicitations but without the benefit of a PTC. The long-term prices for these contracts have been roughly Euro 0.05/kWh. (The value of these contracts in U.S. dollars will depend on the exchange rate, but over the past five years that range would have been between $.045/kWh and $.06/kWh.) The difference in the delivered cost per kilowatt-hour from very similar developments provides additional evidence that a substantial portion of the PTC benefits actually flow through to the purchasers of the power.

This is an important attribute of the PTC because it makes it a federal policy that can enlist strong local responses to achieve what is a national, indeed international, goal. The PTC will bring a strong response from developers. Since the benefits flow to local consumers and utilities, the PTC will encourage states and local agencies to approach renewable development with enthusiasm. The PTC balances the interests of the major