State government may have done more for wind power than PTC ever did.

Supporters of wind power in the United States are rejoicing over a two-year extension of the federal wind energy Production Tax Credit (PTC) included in the economic stimulus package signed into law on March 9. The industry lobbied hard for the extension, arguing the tax credit has been critical to the growth of wind power in the United States, and projecting stagnation and possible demise of the industry if Congress did not re-enact the PTC. Although federal regulators have been working to establish conditions that will foster more open markets for electricity, including greater use of renewable energy, there are many other factors stimulating growth in U.S. wind power development that have not made the news and are, in fact, more important than the PTC.

So far, restructuring of the electric industry has occurred primarily through actions taken by individual states. Because attributes of wind energy provide significant social benefits-such as zero emissions and renewable energy supply that are not fully reflected in the market price-state governments have used public funds for a variety of programs promoting renewable energy resources and technologies. These include tax incentives, direct payments, low-cost capital programs, distributed power policies, consumer choice programs, environmental regulation, Renewable Portfolio Standards (RPS), and deregulation of wholesale, transmission, and retail markets. Our analysis of state policies and incentives for wind power indicates that the PTC has not provided as much stimulus to the market as green power programs, state renewable portfolio standards, investment tax credits, and low-cost loans.

The PTC was first enacted in 1992 as part of the Environmental Policy Act. It was originally scheduled to expire in 1999, but was extended to Dec. 31, 2001. The law provides a 1.5 cent/kWh tax credit for electricity generated from wind turbines, adjusted for inflation. When it expired last year, it provided 1.7 cents/kWh. In view of the trends in new wind power additions and the scheduled expiration of the PTC-first in 1999 and then again at the end of 2001-it is easy to see why the surge in new wind power projects across the country is widely attributed to the PTC ().

A Closer Look at the Data

The effect of the PTC is not apparent when the relationship between policy and growth in wind power is analyzed at the state level rather than the national level. We collected state level data on annual additions of new wind power capacity from 1990 to 2001, along with state wind energy potential (MW), policy incentives for utility-scale wind power including RPSs, green power programs, investment tax exemptions, low-cost loans, and state production incentives. There were 26 states with at least 0.5 MW of wind power capacity installed sometime during this period.1 Our analysis included annual data from these states.

Table 1 presents a summary of the policies across the 26 states with installed wind capacity that had such policies in force each year from 1990 through 2001. Several important incentives have become more popular recently. In particular, many more states have adopted RPSs, green power programs, investment tax credits, and low interest loans over the last five years.

Regression analysis was used to estimate the effect enactment of these policies and incentives had on the amount of new large-scale wind power installed in each state. Each year, the amount of new installed wind capacity was recorded along with the status of policies and incentives. A value of one was assigned to the policy variable being tracked if it was active in that state, and zero if not. The analysis estimates the effect adoption of a particular policy or incentive has on wind power growth in that state.

Results from the Analysis

A number of interesting results emerge from the analysis. First, although the availability of wind resources is an important factor in the decision to invest in wind power, it has been only marginally significant in determining where investments are made. North Dakota, Kansas, South Dakota, and Montana are ranked 1st, 3rd, 4th, and 5th in wind energy potential, but have very little installed wind power capacity. On the other hand, California is ranked 17th in wind energy potential, but has the greatest amount of installed turbine capacity. Texas, which is ranked 2nd in wind energy potential, has experienced tremendous investment in wind power, however, this may be due more to policies and incentives in that state than to the availability of wind resources.

Enactment of the PTC was found to have no significant effect on growth in wind power. The policy took effect in 1993 and yet there was very little growth in wind power for six years. The increase in new wind power, beginning in 1998, had more to do with passage of state RPSs, adoption of green power programs, investment tax credits, and low-cost loans than to the PTC. Availability of green power programs, in particular, accounted for over 10 times as much growth in wind power than the PTC. Investment tax credits accounted for seven times as much growth, the enactment of a state RPS stimulated three times as much, and low-cost loans accounted for about twice as much growth in wind power as the PTC.

Outlook

The future impact of the PTC and these other policies and incentives may be quite different than analysis of the data from 1990 to 2001 would indicate. For instance, there is always a lag between the enactment of a mandate, such as a RPS, and the timing of new investments, since most RPSs are phased in to allow for gradual investment adjustments. Renewable portfolio standards have been enacted in 13 states.² As several of these states have only recently enacted RPSs, we are likely to see additions of renewable energy, particularly wind power, due to these policies over the next few years.

Green power programs have become quite popular and are being offered now by many utilities and competitive energy providers across the country. Growth in green power programs is likely to be the most important factor driving new investment in wind and other renewable energy technologies, such as biomass, solar, and geothermal. According to the National Renewable Energy Laboratory (NREL), as of January 2002, a total of 650 MW of new renewable energy capacity has been installed as a result of utility and competitive green pricing programs, with another 440 MW likely to be installed within the next year. Of this total, 604 MW, or 93 percent is wind energy, 27.4 MW (4 percent) is biomass, 11.5 MW (1.7 percent) is small hydroelectric, 5 MW (0.7 percent) is geothermal, 4.2 MW (0.6 percent) is solar energy, and 1.6 MW (0.2 percent) is landfill gas.

Wind Related Terms: A Quick Reference

Green power programs provide market-based choices for electricity consumers to purchase power generated from renewable energy technologies (including wind, solar, geothermal, hydroelectric, and various forms of biomass) rather than conventional fossil fuel-based power generation. Green power programs are currently offered in both regulated and deregulated markets in 23 states, 18 that also have installed wind capacity. Renewable Portfolio Standards require that a certain percentage of a utility's overall or new generating capacity or energy sales must be derived from renewable resources. Currently, 13 states have enacted RPS mandates, 8 of which also have some level of installed wind capacity. State provided investment tax exemptions lower the cost of investment in wind and other forms of renewable energy by allowing the buyer to deduct a portion of the cost from their taxes. Currently, 19 states have some form of corporate investment tax exemption for renewable energy, ten of which actually have some wind power capacity installed. Low cost loans provide investors in wind or other renewable energy low interest or no interest loans with favorable repayment terms. Utilities often use low-cost loans for renewable energy as a demand-side management strategy. Low-cost loan programs for renewable energy are available in 15 states, 10 of which also have some wind capacity installed.

The premium consumers pay for purchasing green power varies from supplier to supplier, ranging from 0.6 to 5.0 cents per kWh. In terms of customer participation, Moorhead Public Service of Minnesota has the highest participation rate with 7 percent of its customers signed up. For total renewable power capacity, Austin Energy of Texas is first with 76.9 MW of wind and solar power installed, and other forms of renewable energy to be added to the program soon.

This is not to say that the PTC has not provided some positive stimulus to the industry, or that extending it will not contribute to continued growth in wind power in the United States. On the contrary, it is likely to be more effective now than it was in the 1990s. With more states opening electricity markets to retail and wholesale competition over the last five years, it has become much clearer that the demand of electric generating capacity is very elastic. Investors are very sensitive to the price of generating technologies. The reason the PTC was unable to stimulate significant growth in wind power investments early on may have been because the cost of investment was simply too high, even with the tax credit factored in. But the cost of wind power investment has come down considerably over the last 10 years and is now quite competitive with coal, nuclear, and natural gas fired generators. Cost reductions have come from volume discounts, and improvements in production efficiency gained through volume production and the application of improvements in technology from research and development.

With tighter controls on emissions, increased difficulty in gaining permits for conventional generation such as coal and nuclear facilities, and decreasing investment cost for wind power, the PTC is likely to provide greater incentive for many utilities and merchant power producers to choose wind power than it did in the 1990s. However, as our analysis indicates, the real boost to investment in wind power is likely to come from market driven demand from green power programs, state mandates, and reductions in purchase price provided by investment tax exemptions and low-cost loans.

1. Those states include Alaska, California, Colorado, Hawaii, Illinois, Iowa, Kansas, Maine, Massachusetts, Michigan, Minnesota, Montana, Nebraska, Nevada, New mexico, New York, North Dakota, Oregon, Pennsylvania, South Dakota, Tennessee, Texas, Vermont, Washington, Wisconsin, and Wyoming.
2. Those states include Arizona, Connecticut, Hawaii, Illinois, Iowa, Maine, Massachusetts, Minnesota, Nevada, New Jersey, Pennsylvania, Texas, and Wisconsin.

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