Today, tomorrow, forever?
Jonathan Lesser is President, Continental Economics, Inc. Contact him at email@example.com.
Today, tomorrow, forever?
In April 2014, the National Renewable Energy Laboratory (NREL) issued a report evaluating the impacts of extending the federal wind production tax credit (PTC), which expired at the end of 2013. 1 The NREL Report wrongly concludes that extending the PTC indefinitely is the preferred policy, stating that doing so could "provide the best opportunity to sustain the existing wind installation and manufacturing base at its current level." 2 Thus, despite decades of subsidies, NREL concedes that wind generation is still not competitive and recommends continued subsidies to sustain wind energy's manufacturing base and associated jobs.
The NREL Report's recommendation promotes a fundamental "free-lunch" economic fallacy: that artificial production subsidies somehow increase overall economic growth and employment. While basing an entire industry on government subsidies works wonders for the politically-connected beneficiaries of government largesse, the costs that must be borne by everyone else are always - always - far greater. 3
The PTC - A History
The PTC began in 1992 as an effort to subsidize wind generation development and jump-start the wind industry, offering a subsidy for each kilowatt-hour (kWh) of electricity produced for a plant's first 10 years of operation. Prior to the PTC, wind generation was subsidized under the auspices of the Public Utility Regulatory Policies Act of 1978. Thus, wind generation has been subsidized continually in one form or another for the last 36 years.
Starting at 1.5 cents/kWh ($15/MWh), the PTC increased each year with the inflation rate. Before its expiration at the end of 2013, the PTC stood at 2.4 cents/kWh ($24/MWh). On a pre-tax basis, that is equivalent to a subsidy of $35/MWh, greater than the average price of electricity in many wholesale markets in 2013.
Although the PTC was never intended to be permanent, it was repeatedly extended by Congress. Only in 2013 was the PTC finally allowed to expire, although wind generating facilities that had simply began construction by the end of 2013 will still be eligible. Moreover, the PTC is not the only subsidy wind generation receives. In addition, wind developers can take advantage of other federal tax incentives, such as accelerated depreciation. And, 30 states, plus the District of Columbia, have renewable portfolio standards (RPS) that force local electric utilities and other retail generation suppliers to purchase increasing percentages of total electricity supplies from wind power.
Whereas the PTC expired at the end of 2013, Congress provided a subsidized lifeline for the wind industry, allowing facilities that were under construction prior to expiration to qualify for the PTC. Moreover, under construction was interpreted quite broadly: facilities that placed orders for wind turbines before the end of the year, for example, would be deemed "under construction." And so, while only about 1,000 MW of new wind generation went on-line in 2013, another 13,000 MW was under construction at the end of that year. 4 Thus, the extension amounts to a multi-year phase out of the PTC, which the Congressional Budget Office estimated would cost