After 20 years of tax credits, the production tax credit (PTC) was scheduled to expire at the end of 2012.
Neither the House nor the Senate saw fit to extend this overly generous corporate benefit when it was considered on its own merits and the PTC did, in fact, expire. Yet in the final hours of the fiscal cliff negotiations, a package of energy tax extenders was surreptitiously added to the bill which assured the PTC a $12 billion, 1-year extension.
This move was done behind closed doors, without debate or opportunity for amendment and no obligation of the Congress to find a way to pay for it.
The abuse of the Public Trust did not end there.
With this extension, a critical change to the PTC was introduced that relaxed the eligibility requirements for the credit. Renewable energy projects now need only 'commence construction' by January 1, 2014 to qualify for the credit, instead of projects being 'placed-in-service' by that date.
Since the law did not define what it means to 'commence construction', the Internal Revenue Service (IRS) must determine the intent of the Congress and develop clarifying guidance.
Not surprisingly, this is leading potential PTC beneficiaries and wind energy proponents to pressure the IRS to accelerate its rulemaking process. In February, 30 members of the House Sustainable Energy and Environment Coalition (SEEC) sent a letter to the Internal Revenue Service (IRS) and Department of the Treasury encouraging them to act swiftly in issuing guidance on the eligibility qualifications for the credit. The American Wind Energy Association supports the IRS moving quickly to provide guidance that generally adheres to relaxed criteria adopted under the Section 1603 cash grant program.
Since the law is silent on when a qualifying project must go into service, the incentives for gaming the 'commence construction' requirement are substantial -- especially given the potential value of the tax credits in scale and duration, and the anticipated expiry of the program itself at the end of this year. David Burton, partner at Akin Gump Strauss Hauer & Feld, has stated that developers who plan well and bank enough 2013 PTC-eligible component parts , "may be able to continue to construct PTC-eligible wind farms indefinitely." This particular form of regulatory 'gaming' would encumber taxpayers with subsidy obligations for projects that may not go into production for many years after the PTC provision has expired.
With the Treasury and the Department of Energy already under fire for their mishandling of the Section 1603 cash grants and Section 1705 loan guarantees, it is essential that Congress exercise its oversight responsibilities in this matter. Representative James Lankford, chair of the newly formed House Oversight Subcommittee on Energy Policy, Health Care and Entitlements has already stated that his Subcommittee will be watching the PTC and not leave the rule making in the hands of Government regulators.
Based on past actions by the wind industry, there are several criteria for defining "commence construction" that deserve consideration:
1. Institute an in-service date for projects.
- Current law only designates a start construction date.
2. Require project financing and permitting to be secured.
- Projects must demonstrate evidence that all local, state and federal permits are in place and project financing is secured.
3. Prohibit the safe harbor when determining start construction as used under the 1603 cash grant program.
- Prohibit the counting of monies expended for project components by the developer or by contacted vendors when determining start construction.
4. Require available transmission.
- Projects must demonstrate available transmission before starting construction.
5. Proof of meaningful construction.
- Require a minimum percentage of project completion to be achieved by January 1, 2014 which includes a physical metric that is measurable. Project construction applies to the entire proposed site; individual wind turbines within a larger project will not be treated as projects independent of development plans. Site preparation including land clearing is insufficient proof of 'commencing' project construction.
Time to Act
At the end of 2012, lobbyists for the wind industry teamed with the Senate and the Administration to push through this latest extension of the PTC with no debate or opportunity for amendment. They turned pressure to avoid the putative fiscal cliff to their advantage, while leaving American taxpayers to pay the price. Unless Congress intervenes, it appears likely that the problems associated with the extension of this subsidy may be compounded – not alleviated – in the IRS rulemaking process.
This week, over two thousand American Taxpayers sent letters from nine different states with members on Chairman Lankford's Subcommittee asking that they follow through on the Chairman's public statements to oversee the IRS rulemaking process for the PTC.
 American Taxpayer Relief Act (P.L. 112-240)
 Energy tax extenders were part of the Senate Finance Committee mark-up of S. 3521 (112th): Family and Business Tax Cut Certainty Act of 2012 which was reported by the Committee but died with no vote or debate by the full Senate.
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It took a last minute change to a highly controversial bill and the last vote of the 112th Congress for Big Wind to eke out one more extension to the Production Tax Credit (PTC). With the dust now settling, it's worth examining what happened.
Following the November 6 presidential election, the wind industry anticipated a quick vote on the PTC that would provide a multi-year extension and remove the issue from the larger fiscal cliff negotiations. That did not happened and with 60+ tax provisions due to expire at the end of 2012 many parties are vying for the same dollars. With December 31 fast approaching, the likelihood of an extension was becoming more uncertain by the day.
On Thursday, December 21, just prior to Christmas and a full six weeks after the election, Speaker Boehner and House Republicans gave up trying to negotiate a fiscal cliff package with the White House and passed a bill that addressed spending cuts sufficient to avoid the sequester. Nothing in the House bill hinted at a PTC extension.
Harry Reid now had two bills on his desk -- the bill passed by the House on December 21 and the Senate finance committee tax-extender bill from August that was never scheduled for a floor vote. Reid knew he did not have the votes to pass either bill. He needed to come up with a compromise proposal that would also raise revenue and still pass both Chambers.
By this time, wind lobbyists had parked themselves in the Senate for one last push. And why not? The time and money spent to sway the outcome in the industry's favor would pay off in billions.
Crafting a New Bill
The White House and Harry Reid slow-walked the negotiations to the very end leading many to speculate that the Administration might prefer going over the cliff rather than concede ground to conservatives. Frustrated with Reid's inaction, Senate Minority leader Mitch McConnell reached out to Joe Biden and the closed-door negotiations began. No information was leaked but two things were clear: there were bigger issues facing the country -- bigger that the wind PTC, and no spending would be supported without a pay-for. Chances of a PTC extension were slim.
Since 'revenue acts' must originate in the House, McConnell and Biden gutted an existing tax bill previously passed by the House in August 8 (H.R. 8), and introduced the language that supported their agreement. At the White House's insistence, McConnell and Biden included the energy tax extenders found in the Senate Finance Committee bill, with no pay-fors.
It wasn't until late Monday, New Year's Eve, that we could even confirm the PTC was in the bill. By then, the vote was cooked in the Senate. Just before 2 A.M. New Year's Day, the Senate overwhelming voted aye (89-8).
The House was the best opportunity to make amendments but ultimately, other issues made garnering Republican support for an amended bill impossible. A crucial sticking point was the threshold on tax cuts being dropped to $450k from $1m. In a straight up-down vote, the bill passed the House with most Republican's voting no.
The 20-year old production tax credit received a $12 billion extension with no debate and no opportunity for amendment.
What we can expect from the wind industry
PTC is TOXIC: In the months leading up to the vote, the wind industry lost its shine and the wind PTC became a symbol of corporate cronyism and government waste. The public debate outside of Congress tagged the PTC as toxic. Discussion surrounding wind and the subsidy was not positive. By the end of 2012, investors were increasingly wary of the industry which rises and falls on votes by Congress.
Slower wind growth: We have long known that Section 1603 enacted under ARRA triggered a wind bubble in the years 2009-2012. As much as 90% of the wind installed in 2012 can be attributed to Section 1603, not the PTC. The PTC has never been able to drive wind development in the same way Section 1603 has -- especially with low natural gas prices. Also, the delays in getting the PTC extended will slow growth in 2013 and into 2014.
Reduced need for wind: As long as natural gas prices remain low, the wind industry will have a difficult time competing without costly above-market energy contracts. Since State RPS compliance is being met in many states, contracts will be harder to come by. Also, State RPS policies are under pressure in many parts of the country as legislators and utilities recognize that costly renewables are raising rates. Expect this to be a story in 2013. EIA's 2013 Annual Energy Outlook forecasts flat wind growth after 2012.
The PTC and Tax Reform
In this new Congress, the members will be taking a stab at Tax Reform. We anticipate an effort to see the PTC amended. For example, any project that's eligible for a State RPS should not receive the federal PTC. If a kwh of generation arrives at night during low-load conditions, it gets no PTC. There will also be debate over the change in eligibility where projects need only begin construction by the end of 2013 with no in-service date in the law. These changes in eligibility can be made as part of tax reform.
The wind industry received a 1-year reprieve by a hamstrung Congress but their subsidy is in the cross-fire. What Congress gives, it can easily take away.
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“The sheer ridiculousness of the [six-year, front loaded PTC extension] outraged Congressional members and may well have changed the debate. It’s NO coincidence that within 24-hours of AWEA’s poorly received proposal, Denise Bode bailed. A move that sudden suggests the industry thinks it’s better off without her and probably without AWEA’s inflexible, out-of-touch campaign.”
The American Wind Energy Association's relentless, year-long lobbying campaign to secure extension of the wind production tax credit ("PTC") hit major headwinds last week which precipitated the abrupt resignation of its CEO, Denise Bode.
Branded the “Save USA Wind Jobs,” AWEA’s plan tried to stigmatize Congressional members from Red and windy states with the argument: oppose the PTC, and you oppose American jobs.
But rather than gaining support, resistance intensified to extending the PTC. With only two weeks remaining in 2012, it’s not certain what will happen with the subsidy, but one thing is clear: AWEA’s robotic jobs jab has chilled its effectiveness. Big Bucks cronyism does have its limits.
Changing Market; Inflexible Messaging
Prior to 2008, wind was still a niche resource. Under 15,000 megawatts of installed wind was eligible for the PTC and the price tag for the subsidy, in total for its first 15 years (1992-2007), was under $6 billion and less than $1 billion in any one year. Each time the PTC was up for renewal, Congress complied.
Since then, wind installations in the U.S. ballooned to over 50,000 megawatts and the carrying cost for a 1-year extension is now projected to be $12 billion .
In today's economic climate, AWEA's campaign messaging is withering under challenge.
The promise of wind jobs never materialized at the scale touted by AWEA calling into question the veracity of their models.
Claims that losing the PTC equated to a job-killing tax hike on the industry disregards the fact that the PTC, itself, is a tax borne by all Americans in an attempt to defray the high price of wind power where such capacity exists.
Assertions that the PTC "more than pays for itself in local, state and federal taxes over the life of the credits" ignores the fact that even after factoring in the PTC, localized economic benefits derived from operating wind projects are dwarfed by the significant above-market energy prices contracted for wind energy - particularly in this extended period of low natural gas prices.
The size of the subsidy relative to wholesale prices is also distorting competitive wholesale energy markets and harming the financial integrity of other, more reliable generation.
The Wind Industry Leaves AWEA
As the year wore on, AWEA and its surrogates added urgency to their message but never deviated from it. The public was hammered with warnings that the multi-billion dollar wind industry would face collapse if the production tax credit expired, leading some to question whether wind could ever stand on its own.
And where did that leave shareholders of Vestas, GE or any of the high-profiled turbine manufacturers? An industry built on government handouts exists at the political whim of those in office.
The market needed assurances, and in June, eight of the largest turbine manufacturers admitted they will adapt and grow, without the PTC. Even Vestas, which threatened to close shop in Colorado if the PTC expired, joined the other turbine makers in stating "they would not pull out even if Congress abandoned all renewable energy subsidies."
This story is much closer to the truth than AWEA's messages and is consistent with we are hearing in the market.
Unlike AWEA, companies in the wind industry have bottom-lines to worry about. Many, including Vestas and GE, are already preparing for a non-PTC business model. Layoffs have been scheduled, new markets in South American, Africa and elsewhere have been identified, and cash flow issues are being addressed through asset shedding and the possible partnering with other corporations.
Low natural gas prices and shrinking load demand will keep the industry focused on its bottom line for a while longer -- and that's a good thing.
We will also likely see the industry shift their business plans away from those based on tax avoidance to plans based on energy production - as they should be.
When Representative Pat Tiberi (R-OH), chairman of the House Select Revenue Measures Subcommittee asked AWEA in April to present a proposal for phasing-out the PTC, the trade group ignored the question. The idea of a phase-out fell outside the limits of their campaign messaging and thus, outside their ability to respond. Last week, the pressure for a proposal reached a peak and AWEA threw together a six-year, front-loaded extension with a price tag in the tens of billions.
The sheer ridiculousness of the proposal outraged Congressional members and may well have changed the debate on the topic. It's NO coincidence that within 24-hours of AWEA's poorly received proposal, Denise Bode bailed. A move that sudden suggests the industry thinks it's better off without her and probably without AWEA's inflexible, out-of-touch campaign.
As evidence of the changed game, the Washington Post two days ago gave AWEA’s signature proposal a big thumbs down:
"Some of those who sympathize with the wind subsidy, known as the production tax credit (PTC), say that it represents a second-best approach to supporting green energy. In fact it is not even a third- or fourth-best alternative to a carbon tax. At a cost of $1 billion a year, it offers wind operators a flat tax credit for every kilowatt-hour of electricity they produce. No matter if the grid doesn’t need the electricity at any given moment or if the policy blunts the incentive to reduce costs."
Let the PTC Expire!
The letters, resolutions, and advocacy statements by Congressional members who are on record supporting an extension of the PTC all sound like they were written by AWEA. If congressional members like Senator Grassley and Representative Kevin McCarthy based their comments and support on AWEA's lobbying campaign, this would be a good time to rethink their position. AWEA's unyielding messages are dated, and clearly 'stuck on stupid'.
It's time for the 20-year old subsidy to end. American taxpayers and ratepayers, and the wind industry itself, will be best served by letting the PTC expire.
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We wish to thank William P. Short III* for his invaluable contribution to this editorial.
No one should be fooled by the American Wind Energy Association's laughable campaign depicting the multi-billion dollar wind industry on the verge of collapse without the production tax credit ("PTC"). Yes, we've seen some belt-tightening this year as the $23-billion infusion of Section 1603 grant money winds down. Low natural gas prices and shrinking load demand will keep the industry focused on its bottom line for a while longer -- and that's a good thing. Some industry players have already accounted for the PTC expiring while others are holding out for a last-minute reprieve.
This is exactly the right time for Congress to end the PTC.
Nonetheless, we recognize the political reality of divided government where self-interests might force compromise. In August, the Senate Finance Committee voted on a $12 billion, 1-year  extension but took no action to address the very harmful effects of the PTC on competitive wholesale energy markets. If House Republicans are compelled to find middle ground, it is essential the PTC be amended to correct for its flaws. Doing so will help relieve market distortions created by the PTC and ultimately lead to more reliable, least-cost renewable choices for taxpayers.
Market signals that work
Nearly two decades ago, electric energy markets in most of the U.S. were highly regulated. Wholesale electricity prices were determined based on a generator's cost of installation plus direct production cost, and not on customer demand. Under deregulation, plant ownership shifted to independent power producers which, in turn, brought about competitive wholesale energy markets aimed at meeting consumer energy needs with the most reliable, least cost generation.
Once fully implemented, fossil‐fired generators responded to market price signals. New power plants were built to meet peak demand requirements while discouraging construction of excess capacity. Competitive energy pricing dissuaded generators from building power plants long distances from load centers, thus limiting the deployment of costly transmission. Improved management increased power plant efficiencies, operator profits and grid reliability while keeping retail prices in check. This coupled with air, water and other environmental rules led to U.S. energy resources becoming progressively cheaper, cleaner, safer, and with a smaller footprint.
The correct policy led to the best economic results for consumers.
Building the wrong generation in the wrong places
But in just a few short years, energy policies in the United States, both at the federal and state levels, shifted in favor of building renewables, mainly wind. This has led to an explosion of expensive renewable resources that are variable, operating largely off-peak, off-season and located in rural and remote areas with limited transmission capacity .
Federal PTC and State RPS programs use what is called a "single price economic system" which pays renewable generators the same price for placing a megawatt-hour of energy on the grid. There is no adjustment to the subsidies based on time of day or seasonal demand requirements nor is there a meaningful adjustment for the location of the power facility.
The signals sent by the subsidies ($34/MWh on a pre‐tax basis for the federal PTC and as much as $60/MWh  for state RPS programs) dwarf energy pricing signals, and in many cases render the market price irrelevant. Consequently, we are incenting renewable generation built not where we need it and that operates when we need it the least.
These policies have created artificial and unsustainable market pressures, compelling system planners to respond with more transmission and a fast-tracking of renewable projects that may be, not only not needed, but actually of poor quality from a grid reliability perspective.
Amend the PTC
It is well established that traditional power markets respond to energy and capacity price signals. It's time we applied the same rules to the renewables market.
If renewable subsidies discriminated in favor of those resources that produce close to load and during the time of day and year when the energy is most needed we would expect the response in the market to be almost immediate. (The media took notice when FERC Commissioner Philip Moeller floated this idea before the election.)
The need for expansive wind-related transmission would drop off and more renewables would be proposed for sites closer to population centers and that can service peak demand periods. Rather than proposals to install 125 megawatts of unpredictable wind we might get 25 megawatts of baseload biomass; rather than remotely-sited solar generation in the Mojave desert requiring 100+ miles of new transmission, we may see a greater effort to build customer-sited rooftop resources in urban areas. Reliable generation would mean less need for storage, less redundant generation and a better opportunity for replacing permanently fossil fuel with renewables rather than merely displacing some fuel.
While public policy has helped the emerging renewables market, it is time these policies were amended to better suit the public's needs.
Congress should not extend the PTC "As Is." Rather, it should work to adjust the value of the PTC to incent renewable generation that's built closer to load and able to operate on-peak and on-season while discouraging the opposite behavior. And there are many frameworks for getting this done. Adopting a consumer-centric, market-based policy will, once again, lead to the best economic results for consumers.
*Mr. Short is an independent consultant with a practice that specializes in renewable energy in the New England states. Among his clients are wind, solar, hydroelectric, co-generation and biomass generators.
 The Senate Finance Committee approved a $12 billion extension of the PTC. The provision was advertised as a 1-year extension however, the provision also modified Section 45 of the tax code to allow wind energy facilities that begin construction before the end of 2013 to claim the 10-year credit. This is a significant deviation from the PTC which requires eligible projects to be in-service before the date of expiration. In practice, this change represents a multi-year extension.
 Page 4 of this document prepared by the authors shows a slide produced by the New York ISO that demonstrates how effective price signals discouraged the remote siting of power plants. In the period between 2000-2009, New York State increased its in-state generation by 7,650 MW with 80% (6,127 MW) built in the southeast region near New York City. Of the generation built in northern and western NY and behind a congested interface, 1,275 MWs were remote-sited wind generation which was more responsive to the subsidies than to market price signals.
 REC prices vary by region depending on how the RPS program is structured and whether compliance has been met. Currently Massachusetts Class I RECs are trading above $60 per megawatt hour.
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The United States is in the midst of a fiscal crisis. If Congress and the White House are unable to reach agreement on spending by January 1, crushing tax increases and draconian budget cuts will go into effect sending the country's already weakened economy into another destructive recession.
Against this backdrop, the 23-member Governors' Wind Energy Coalition put aside their own states' $2+ trillion deficits to deliver a message to Congress - extend the wind production tax credit (PTC).
The staged media event on Capitol Hill was a modern-day equivalent of Nero fiddling while Rome burned.
In their letter, the governors acknowledge the wind industry is not yet competitive with other fuel sources but insist it will be "in the not-so-distant future."
They tout job claims, and potential losses, based on American Wind Energy Association employment models, and underscore the impact of losing the PTC by listing recent layoffs in Colorado (182 Vestas workers), Iowa (407 Siemens workers) and Pennsylvania (165 Gamesa workers).
The governors are convinced the wind subsidy should be a top priority for the country ahead of our military and other bread-and-butter issues but are unaware, or don't care, that American taxpayers are shouldering a large part of the cost.
Do they realize that by 2015, American taxpayers will have provided a cumulative $40 billion to the industrial wind energy industry in production tax credits and cash grants alone, the bulk of which will be distributed after 2010? Or that the open-ended subsidy of 2.2¢/kWh in after-tax income represents a pre-tax value (3.4¢/kWh) that's equal to, or more than the wholesale price of power in many regions of the country?
Why the SOS?
Why would the Governors demand billions more for an industry that, after over 20 years, has failed to establish itself as a self-sustaining contributor to meeting our energy needs?
It's no accident that all of the Governors who signed the letter hail from states with mandatory renewable portfolio standards (RPS) or from states adjacent to those with RPS policies.
State legislators who voted in favor of renewable mandates, did so after being convinced that adding alternative resources to the energy mix, particularly those with no fuel cost, would reduce fossil use, attract jobs and ultimately stabilize and lower energy prices. (Wind energy was seen by most as the dominant resource for meeting compliance.)
But they were wrong.
Researchers at the Lawrence Berkeley National Labs (LBNL) found that ‘Policy Impact' studies relied on by the states tended to underestimate the effect of adding high-cost renewables on retail rates and all of them failed to anticipate the persistent low natural gas prices we enjoy today.
Seventy-percent of the RPS cost studies that were examined forecasted minimal retail electricity rate increases - no more than 1% - while a number predicted electricity consumers would experience a cost savings.
In fact, the artificial no-compete power markets created by RPS policies drove up electricity prices and forced consumers to pay for energy they didn't need. In 2011 residential rates in states with mandates were 27% higher than those without mandates while industrial electricity prices were 23% higher.
The Governors know that the federal PTC disproportionately benefits States with renewable mandates by distributing the high cost of their policies to taxpayers at large. They also understand that eliminating the PTC will impose the full burden of costly renewable mandates squarely on the States who enacted them. If California, New York, and Minnesota mandate large wind development, it's appropriate they bear the full cost of their energy choices.
Iowa is an exception. Its capacity-based RPS was satisfied years ago with the installation of just 105 megawatts of wind capacity, leaving the state's two investor-owned utilities, including Warren Buffett's MidAmerican Energy, at liberty to sell most of their wind power to neighboring states -- which they do at prices significantly above market.
According to Mark Glaess, executive director of the Minnesota Rural Electric Association, which represents about 50 small utilities serving about 650,000 rural residents, its members lost more than $70 million in 2011 because of the high cost of wind power. "Right now we're paying for wind power we don't need, we can't use and can't sell," he said.
Expiration Is a Compromise
The production tax credit, which turns twenty years old this year, serves little purpose today other than to line the pockets of project owners and tax-advantaged investors and artificially mask the true price of wind power.
If the PTC were to expire, REC prices in states with RPS policies would likely go up for a while until the industry can implement necessary cost-cutting measures. States will respond by reexamining ways to rein-in RPS-related energy costs. We will also likely see the industry shift their business plans away from those based on tax avoidance to plans based on energy production - as they should be. American taxpayers and ratepayers would be best served by letting the PTC expire.
The Governors' self-serving pleas aside, there is no justification for wind projects eligible under any State RPS programs to receive the benefit of BOTH the State policies and the PTC wealth transfer from taxpayers. Congress has a responsibility to say NO.
 The 23-member Governors oversee states with a combined aggregate debt of more than $2 trillion for fiscal year 2011 including California and New York representing total debt of nearly $1 trillion.
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Last month, unity was shattered within the wind industry when energy-giant Exelon Corporation broke ranks with other renewable-energy developers and asked Congress to let the production tax credit (PTC) expire in December. Exelon rightfully argued that the subsidy was distorting competitive wholesale energy markets and causing financial harm to other, more reliable clean energy sources.
In a fit of fury, the American Wind Energy Association (AWEA) voted Exelon "off the island" for insubordination and dismissed their complaint as self-serving, aimed at protecting Exelon's fleet of Midwest nuclear power plants. AWEA insisted that wind was benefiting ratepayers by driving down consumer electricity prices in the face of "expensive, inflexible generation" like nuclear and coal.
As usual, AWEA position is easily rebutted. Yes, Exelon is concerned about (bizarre) wind pricing on the rates received by its nuclear power plants. But the impact of large quantities of wind generation on energy markets extends beyond nuclear power, and on the whole is placing upward pressure on electricity prices.
Zero, Negative Wholesale Prices
In a competitive wholesale energy market, generators ‘bid in' firm levels of production for each hour of the power day. Grid operators match available generation with hourly demand and schedule resources as needed. The most expensive generation dispatched in an hour sets the marginal price of supply. In turn, all generators receive the same price per megawatt hour of production.
During periods of low demand, particularly at night, the most efficient, least cost base load facilities are run, including nuclear power and coal. These facilities may bid in at zero- or near-zero to ensure they're dispatched regardless of market price.
Problems arise when wind, which generates largely at night, floods the system with energy well in excess of demand. When there is a surplus of electricity relative to demand and no opportunity to dump the excess energy, i.e. transmission that can channel the energy elsewhere, prices could go negative.
In instances of excess energy, negative prices are a powerful market signal for generators to voluntarily curtail operation if possible. Wind turbines are easily turned off; nuclear power plants are not. However, since wind project owners do not receive the PTC when they're not producing, they would rather produce at a loss than not produce at all. But the PTC tells only part of the story.
‘It's the Contracts, Stupid'
With natural gas selling at record lows and supplies expected to be abundant through this decade, wind developers are under pressure from investors to secure power purchase agreements (PPAs) with utilities. Most PPAs for onshore wind we've reviewed lock in purchases for 15+ years at roughly two-to-three times the wholesale price of fossil and nuclear resources within their respective regions.
In some cases the prices are fixed regardless the time of day the energy is delivered or number of years into the contract; others apply adjustments for on- and off-peak energy and may include annual escalators. In states where renewable portfolio standards have been adopted, utilities likely have no choice but to accept above market contract prices in order to ensure compliance with the mandates.
Within New England, wholesale pricing for onshore wind is between 9 and 11 cents per kilowatt hour. In the Midwest, contracts are around 6-7 cents per kilowatt hour and in regions with better wind regimes, gentler terrains and/or limited or no permit requirements the costs could run slightly lower. Wind agreements are negotiated after a project has taken full advantage of available federal incentives so the costs cited here would be even higher absent the PTC.
Adding large amounts of wind to a region can periodically reduce marginal electricity prices (even going negative) but the costs passed on to ratepayers are derived from the PPA's negotiated between utilities and wind plant owners. Regardless of when and at what price wind energy sells into the wholesale market, projects with power purchase agreements are assured a fixed price for their energy.
The wind industry insists long-term PPAs protect ratepayers from fuel price volatility. But the industry is ignoring our historical experience. The Public Utility Regulatory Policies Act (PURPA) proved decades ago that long-term fixed price contracts at above market prices do not lead to lower costs for ratepayers. In fact, with PPAs in place, it's wind developers that are shielded entirely from market price fluctuations.
Negative prices further aggravate the situation by threatening the financial viability of our lowest-cost, most reliable resources.
Purchase agreements shift all risk to the ratepayers who are on the hook to pay the delta between market price and contract price. There is no cost benefit to the ratepayer-nor will there be until the end of the PPA, which by that time the turbines will have reached the end of their useful life. Meanwhile, wind developers reap the benefit of the PTC in addition to their contract price at the expense of ratepayers and other reliable generation.
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This month, a coalition of brand name corporations sent Congressional leaders a letter urging extension of the wind production tax credit ('PTC'). It was the second such letter sent this year signed by many of the same companies and with the same message: Failure to extend the PTC will raise consumer electricity prices and harm the bottom lines of companies who purchase renewable energy.
The truth is that wind power -- with the PTC -- is already raising consumer prices and harming corporate bottom lines.
Wholesale contract prices for onshore wind are roughly two- to three times the price of more reliable generation making wind one of the most expensive power sources in the U.S. From 1992 to 2010, Americans were taxed approximately $7.9 billion to pay for the PTC. By 2015, the PTC will cost another $9.1 billion. Residential electricity rates in states with renewable mandates were 27% higher in 2011 than those without mandates, while industrial electricity prices were 23% higher. Wind energy is the primary fuel for meeting state mandates.
But it doesn't end there. In Vermont, government models show that above-market energy costs tied to renewables will increase the cost of production for Vermont businesses. Since the PTC supports poorly sited development in remote areas, ratepayers (and in some cases taxpayers) will also be saddled with costly new transmission lines needed to deliver the power.
Companies do NOT purchase renewable energy directly. They purchase low-cost renewable energy credits (REC), which are nothing more than paper 'attributes' representing renewable energy produced elsewhere. It doesn't matter where the project is located because the companies never consume the energy. Nor do they care if they buy from projects that slaughter thousands of bats and birds annually, destroy hundreds of acres of forest and important wildlife habitat, or harm those living nearby as long as their Senior VPs of Corporate Social Responsibility can claim 'green' in their product materials and annual reports.
But it matters to others.
Tens-of-thousands of people across the US are publicly objecting to an extension of the PTC because of the high cost and damaging impacts of wind energy development. Corporations who cloak themselves in the warmth of green energy through the purchase of RECs are fooling themselves if they believe consumers do not see through the silliness of their marketing tactics.
Of course, companies are free to play the green game, but it's hard to reconcile any corporate officer authorizing his company signing a letter filled with deceitful wind propaganda.
It turns out, the letters were NOT authored by any of the corporate signers, but by Ceres, an environmental group out of Boston, Massachusetts. Ceres boasts a board of directors that includes Carl Pope of the Sierra Club, Ashok Gupta of the Natural Resources Defense Council (NRDC), and Rev. William Somplatsky-Jarman, Coordinator for Social Witness Ministries of the Presbyterian Church (U.S.A.).
Knowing the real authors of the letter helps explain its content, but it doesn't explain the apparent willful ignorance on the part of its signers. Corporations should be wary of aligning with agenda-driven groups who rely on deceit and misrepresentation in order to achieve their mission. If companies can be so reckless with their endorsements, perhaps investors and consumers should think twice about the quality of their products and shop someplace else.
Letter 1 signers: Annie’s Homegrown, Anvil Knitwear, Aspen Skiing Company, Ben & Jerry’s, Campbell Soup, Clif Bar, Levi Strauss & Co., New Belgium Brewing, Nike, Seventh Generation, Staples, Starbucks, Stonyfield Farm, The North Face, Yahoo! Inc.
Letter 2 signers: Akamai Technologies, Annie’s, Inc., Aspen Skiing Company, Ben & Jerry’s, Clif Bar, Johnson & Johnson, Jones Lang LaSalle, Levi Strauss & Co, New Belgium Brewing, The North Face, Pitney Bowes, Portland Trail Blazers, Seventh Generation, Sprint, Starbucks, Stonyfield Farm, Symantec, Timberland, Yahoo!
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Wind proponents insist the industry is one of the fastest growing sectors of the American economy having doubled U.S. nameplate capacity since 2008.
But let's be clear: Recent growth in the industry is largely due to the massive infusion of public cash lavished on big wind under ARRA. Expiration of Section 1603 cash grants coupled with record-low natural gas prices, will likely collapse the stimulus-induced bubble and push installations back to mid-2000's levels. The production tax credit, if extended, will continue to offset above-market wholesale prices for wind power but the credit will not drive the same level of growth.
Wind and State RPS policies
In the last ten years, more than half of the states adopted renewable portfolio standards (RPS) that encouraged development of home-grown low-emission generation. State legislators voted in favor of the mandates after being convinced by proponents that more renewable resources in the energy mix, particularly those with no fuel cost, would replace fossil use, attract jobs and ultimately stabilize and reduce energy prices.
But the artificial no-compete power markets created by RPS policies for self-selected renewable resources drove up electricity prices and forced ratepayers to pay for energy they didn't need. In 2011 residential rates in states with mandates were 27% higher than those without mandates while industrial electricity prices were 23% higher.
Impediments to price parity with gas
The rapid run-up in installed wind since 2008, together with flat and declining energy demand, has resulted in state mandates being met and fewer utilities obligated to purchase wind at prices substantially above that of more reliable forms of generation. Factor in abundant supplies of low-cost natural gas, and it's unlikely wind energy will achieve price parity with coal or gas anytime soon, barring legislative actions that might raise the price of non-renewables.
The PTC offsets the high price of wind energy, giving the false impression that wind is competitive with other resources, but at 2.2¢/kWh, the subsidy's pre-tax value (3.5¢/kWh) equals, or exceeds the wholesale price of power in much of the country! Without the PTC, developers would need to substantially lower their capital costs and narrow the price gap with gas. However, cost reductions will carry the industry only so far.
The biggest impediment to wind achieving price parity with more reliable resources is the fuel source itself.
As long as wind farms operate at or under 30% capacity factors, there are too few hours of generation per year to spread the large upfront capital costs over. Energy sales alone are not sufficient to recoup capital costs or earn a profit because of two well known limitations of wind power. First, since wind typically generates at a time of day and year when the energy is least needed, the market price for its energy is low. Second, wind projects must be sited at the fuel source, which, for onshore wind is typically long distances from load. Locational constraints further lower the market value of wind's energy as well as drive up the cost of delivery (i.e. transmission).
Individual wind projects may still operate without the PTC or Section 1603 provided they're sited in areas with excellent, steady winds and within close proximity to existing transmission. But nationwide, such sites are increasingly rare.
Two technologies, if available, might enhance wind's value: forecasting and storage.
Efforts are underway to improve the predictability of wind energy through better forecasting tools. If grid-operators can more precisely anticipate when the wind will blow, how long it will blow, and at what speed and direction, it would aid in power dispatch schedules.
Improved storage technology can increase wind's usefulness as a capacity resource, but large-scale storage is prohibitively expensive and the technology is not fully proven. A DOE loan guarantee for $117 million went up in 'flames' in August when First Wind's 'innovative battery system' designed to flatten wide swings in wind output was destroyed by fire releasing massive plumes of toxic smoke into the air. The industry predicts it's at least 10+ years away from breakthrough technology that can store nighttime generation for dispatch during peak hours.
Despite a relentless, year-long campaign by the wind industry to get the PTC renewed, there is a growing realization that the subsidy has outlived its usefulness and may be harmful in its current form. This week, utility-giant Exelon declared "the PTC is no longer needed and distorts competitive wholesale energy markets causing financial harm to other, more reliable clean energy sources." If Congress let the PTC expire, the industry would respond quickly by finding ways to make up for the revenue shortfall. Turbine manufacturers, for example, would likely be pressured to lower prices by as much as 25-30% current levels. Developers will also turn to the states to recoup the rest of the funding via higher REC prices. Ultimately, costly government efforts to push rapid deployment of wind power, in spite of its inherent limitations, will falter and the industry will quietly shrink to a growth rate commensurate with the value of its energy.
 State RPS policies limit which renewable resources are eligible for meeting compliance.
 NREL found in Texas that total wind output could vary significantly in a short period, from almost 8,000 MW to near zero output. During periods of large variability, slight forecasting errors could have large consequences on system operations.
 This was the second fire involving the battery system since the project went online in March 2011.
 Assumes $1,200/kW pricing, a 30% capacity factor and half of the pre-tax value of the PTC ($35/mWh) recovered through reduced turbine prices.
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The American Wind Energy Association pumped millions into an aggressive political campaign aimed at securing the PTC's extension. It released the Navigant jobs study, funded a full-time media war room and lined up President Obama, DOE's Secretary Chu and Interior Secretary Ken Salazar as wind industry hucksters. Coordinated endorsement letters signed by the Governors' Wind Energy Coalition and brand name corporations were sent to Washington calling for immediate action while newspapers around the country published editorials rehashing the same talking points on why the PTC should be extended beyond 2012.
AWEA and its surrogates hit the topic hard, yet legislative efforts faltered. Even Mark Udall's regular pitch on the Senate floor went unnoticed.
It wasn't supposed to be this way and big wind's proponents seem shocked at the level of resistance encountered on Capitol Hill.
Carl Pope, former chair of the Sierra Club, blames the Tea Party. He's convinced its members will block anything that might help the nation's economy under Obama's watch.
In his Huffpo piece, Pope paints a dire economic picture of factories shutting, jobs lost and the unraveling of an entire manufacturing sector. By the end of his essay, Pope worked himself into an emotional fit calling the Tea Party behavior " unprecedented -- and unpatriotic."
Steve Thompson of German-based Availon, a wind industry service provider, wrote that letting the PTC lapse would "in effect impose a targeted tax increase on the wind industry, resulting in the loss of almost 40,000 American jobs."
And in a letter to Congressional leaders, Starbucks, Staples, Nike, Campbell Soup and many other name brand corporations argued that failure to extend the PTC would "tax our companies and thousands of others like us that purchase significant amounts of renewable energy and hurt our bottom lines at a time when the economy is struggling to recover."
Rebutting the claims
The claims by Pope, Thompson and name brand America may be effective but they're also grossly misleading and deserve a response.
According to the Joint Committee on Taxation ('JCT'), between 1992 and 2010, the cumulative cost of the PTC was approximately $7.9 billion. In the 2011-2015 budget window, the PTC is estimated to cost American taxpayers another $9.1 billion of which about 75% will be claimed by the wind industry. These costs are in addition to the anticipated $22.6 billion in direct cash outlays under the Section 1603 grant program which expired in 2011.
Carl Pope insists the industry and American workers will be harmed if the PTC is not extended but at no point does he consider the high cost of the subsidy or whether the country would be better served by spending the money elsewhere. In addition, wind's intermittency and remote siting mean that high upfront project costs and broad transmission expansion will place upward pressure on the price and delivery of the energy. Since the PTC is necessary to make wind projects economically viable, taxpayers deserve to know if they're getting the best value for their dollar.
Pope touts the fact that wind energy is "one of the fastest growing sectors of the American economy" but seems utterly unaware that the industry lost 10,000 jobs since 2009 or that the rapid growth was actually a bubble tied to the massive infusion of public cash lavished on big wind under ARRA. Expiration of Section 1603 coupled with record low natural gas prices, will certainly push the wind industry back to mid-2000s levels.
The PTC IS a tax
Thompson's self-centered claim that letting the PTC expire equates to imposing a tax on the wind industry is preposterous.
The PTC subsidizes wind project costs by providing an outside revenue stream for investors and project owners. The credit, in turn, artificially shields ratepayers from the true price of wind power by spreading the cost to all U.S. taxpayers. Since the PTC reduces revenues to the federal government, taxpayers are forced to pay more in taxes to ease the burden of high-cost wind on ratepayers.
Eliminating the PTC relieves Americans at large of the high cost of big wind and places the burden squarely on ratepayers purchasing the energy. If states like Iowa, Colorado and Texas mandate large wind development, it's appropriate that ratepayers in those states bear the full cost of their energy choices. Only then can they begin to make informed decisions on whether wind is the best option for meeting their renewable mandates.
Thompson's assertion that nearly 40,000 American jobs will be lost is another AWEA talking point that cannot be substantiated as I discuss here.
The PTC and Corporate Marketing
Corporations like Starbucks, Staples, Nike and Campbell Soup generally don't invest directly in wind energy development. Rather, they sign contracts to purchase renewable energy credits (REC), the "environmental benefit" of renewable energy produced elsewhere. One REC is created for each megawatt-hour of energy generated from a renewable energy facility. Businesses and residents who match their energy consumption to the number of REC's purchased often claim they are 100 percent wind-powered.
RECs are usually certified under the National Green-E standard which means they're produced from fuel sources other than fossil fuels, nuclear and hydropower greater than 5 MW. A wind project that slaughters thousands of bats and birds annually, destroys hundreds of acres of forest or important wildlife habitat, levels mountaintops, impacts scenic view sheds or "dark sky" reserves or harms those living nearby is, nonetheless, eligible for the coveted "Green-E" stamp-of-approval without question or reservation.
Expiration of the PTC will likely drive up REC prices in states with renewable energy mandates. But bear in mind, state mandates apply to utility sales only. Private REC programs, which are entirely voluntary, are nothing more than PR opportunities for corporations to flaunt their "greenness" before an un-informed public.
Let's be clear. Starbucks, Staples and other corporations who plead to Congress that their bottom line will be impacted if the PTC is not extended are asking American taxpayers to subsidize their marketing programs.
The amount of misinformation driven by the wind industry and its surrogates has reached a point where the public and Congress are less willing to blindly follow AWEA's lead. Pope, Thompson, Starbucks et.al. appear to have embraced the idea of wind without even a basic understanding of the industry or the federal subsidies that drive it. Such willful ignorance will likely continue to plague the industry and leave its followers confused by the rising resistance to their efforts.
 At 2.2¢/kWh in after-tax income, the subsidy represents a pre-tax value of approximately 3.7¢/kWh which, in many regions of the country, equals or exceeds the wholesale price of power.
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Tens of thousands of acres across New York State have been transformed into sprawling electric generating facilities -- 18 in total -- where nearly 1,000 industrial-scale wind turbines consume the landscape and threaten communities in their way.
Think about that for a moment.
Now consider that another 1,500 giant towers will need to be erected by 2015 in order to satisfy the state's 30% renewable energy mandate.
New York's Renewable Portfolio Standard (RPS) can be credited with most of the wind development in the state. Officials insist the policy has helped New York diversify its energy resources and will ultimately lower electricity prices but such claims are more rhetoric than real. New York's RPS has already exceeded original budget projections, it's current renewable targets are unrealistic, and claims that prices will drop are predicated on a flawed understanding of how the New York wholesale power market operates.
New York first enacted its renewable energy mandate in 2004 through regulations adopted by the Public Service Commission (PSC). At the time, about 19.3% percent of electricity retailed in the state was derived from renewable resources, with the vast majority coming from large-scale hydroelectric facilities upstate and in Canada. The PSC ordered the state reach a 25% renewables target by 2013 which meant an incremental increase of 10.0 million megawatt hours (MWh) from projects built after 2003.
Unlike market-driven programs in other states, New York's RPS uses a government-administered central procurement system to acquire renewable "attributes" from qualified projects. Projects selected through a competitive-bid process receive long-term contracts to sell their renewable attributes to the state. One megawatt hour of generation produces a single renewable attribute. These payments serve as an added revenue stream for project owners. Funding for the RPS comes from fees charged on the monthly electric bills of NY ratepayers.
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The mid-course review
When the RPS was enacted, the Public Service Commission established a budget of up to $741.5 million to acquire the renewable attributes. It also defined yearly incremental RPS targets measured in megawatt hours.
In a 2009 mid-course review of the program, a number of serious performance issues were raised.
The program had nearly exceeded its entire initial budget while just half of the renewable attributes anticipated at that time were under contract. Other questions raised in the review involved the cost of necessary transmission to meet renewable goals and whether the program would ultimately reduce electricity prices as claimed.
But rather than scale back the RPS or take more time to fully assess the program's costs and benefits, the Commission insisted there were substantial qualitative benefits and ordered the goal increased to 30% by 2015 and the budget expanded.
One Commissioner who opposed the order wrote:
"... to date, RPS costs have exceeded original projections, MWh targets have not been met, and the program's administration remains unchanged. With this history, it is difficult to see how the expansion of the RPS will achieve the results desired."
Wind In The Mix
At the start of 2012, New York had 4.67 million megawatt hours of large-scale projects under contract representing about 2% of the state's generation. Most NY-sited wind energy facilities were under contract. In total, wind is the dominate fuel in the RPS, representing 80% of all renewable fuels.
Since projects are awarded RPS contracts before they're built, the state must estimate operating capacity factors on intermittent resources. For wind, if a project fails to meet a minimum obligation (80% of the contracted energy) for three consecutive years the contract amounts could be reduced. The Noble Clinton, Ellenburg and Bliss wind facilities were all reduced by one-third for this reason.
We reviewed the contracted figures against actual production for operating wind projects and found that, in all but one case, the state significantly overestimated project capacity factors (see table). If the inflated capacity factors were adjusted downward to more accurately reflect wind's poor performance, the state would need to contract even more generation to meet the mandates. In general, New York's wind resource has proven marginal with annual average capacity factors ranging between 22-23% across all projects.
RPS and electricity prices
State officials insist the RPS will reduce electricity prices through a mechanism known as 'price suppression' whereby renewables with no fuel cost displace more expensive power in the wholesale market.
This argument may sound convincing but completely ignores how the wholesale market operates in New York.
The New York power market uses a day-ahead auction where generators are required to offer firm levels of production for each hour of the next power day. The energy price, in turn, is determined based on those bidding into the system; all generators receive the same price per MWh of production. Significant penalties are applied if a generator is unable to meet his commitment.
Because of its intermittency, wind typically does not operate in the day-ahead market preferring the real-time (spot) market which carries no penalties for non-performance. The real-time market represents less than 10% of available generation Since the price paid over ninety-percent of the generation is established 24-hours in advance, any participation from wind will have only a marginal impact on prices limited to the real-time market. Generators that bid in day-ahead who can back down are likely to do so to the greatest extent possible in order to save fuel and other costs. Since generators in the day-ahead market are still guaranteed payment, any price suppression from wind would be limited to the spot market. Thus, any downward pressure on pricing will go largely unnoticed.
Ultimately, New York's RPS will cost ratepayers billions of dollars to support the construction of new generation. And if the state continues to rely on wind as the dominate resource, more turbines will be necessary to make up for low capacity factors. The program is up for review again in 2013. It's time for the PSC to remove the rose-colored glasses and acknowledge the program for what it is: Regulatory Capture at its finest.
1. NY's RPS supports two tiers of projects, Main Tier and Customer-sited Tier. Main Tier projects include those built to meet grid-scale energy needs. Customer-Sited Tier applications support smaller behind-the-meter renewable generation. The bulk of the electricity needed to reach the RPS mandate comes from Main Tier resources.
2. Attribute prices ranged from as low as $14.75/MWh in 2007 to as high as $28.70/MWh in 2011.
3. The PSC forecasted 5.79 million MWh by the end of 2009. The state had acquired 3.03 million MWhs.
4. The incremental increase of only 0.4 million megawatt hours needed to reach the 30% target assumes that New York reaches significant energy efficiency goals aimed at reducing electricity needs in the state. If energy efficiency were not included in the analysis, the state would require 17.0 million MWh of new renewable generation to meet the RPS.
5. New York typically signs 10-year contracts for 95% of the energy from large wind projects. The Cohocton/Dutch Hill contracted less. Maple Ridge 1 contracted 100%. (see table)
6. Actual annual generation (MWh) varies in NY due to the variable nature of renewable energy, including hydroelectric. Demand in NY also dropped since the RPS was enacted. Since the RPS was enacted, renewables in the state increased from around 19.3% to about 23% today, including all generation.
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The debate surrounding the Production Tax Credit (PTC) intensified last quarter following several high-profile attempts by Congress to extend the credit before it expires at year-end. Industry warnings of precipitous declines in clean-tech investment and imminent job losses have reached a fevered pitch. The New York Times, for example, reflexively accused budget-hawks in Congress of being preoccupied with safeguarding the dominance of the oil and gas industries.
The idea that wind, which represents less than 3% of total electricity generation in the country after huge taxpayer benefits and state mandates, could threaten the continued use of fossil fuels in electric generation is fantasy. It demonstrates a general ignorance about wind energy's purpose and its limited contribution to our energy portfolio.
While we might forgive a newspaper editor's misunderstanding of the complexities of renewable energy policy, it's quite another thing to see the same level of ignorance on display on Capitol Hill by the very people tasked with understanding and voting on these policies.
Last month, the House Subcommittee on Select Revenue Measures invited fellow House members to speak on behalf of bills they introduced or co-sponsored that would extend more than sixty expiring tax provisions, including the PTC. Of the nearly thirty witnesses who testified, one-third pressed for immediate extension of the credit.
Representatives Bass (R-NH) and Welch (D-VT) from New England, Deutch of Florida, Reichert of Washington and others repeatedly echoed the same AWEA talking points about job creation, the need to reduce reliance on fossil fuel, risks of climate change and, my favorite, economic opportunity for their state.
Like the Times, they touted the importance of the U.S. remaining a strong global clean energy market.
And like the Times, not one of those advocating for the PTC had a clue the role of the subsidy in the power market or the likely outcome if the subsidy were to expire. Either that, or political expediency ruled the day and they didn't care.
PTC and RPS Policy Links
In the early 1990′s following enactment of the PTC there was no demand for wind power. States did not have renewable mandates and by time the Asian Financial crisis hit, oil prices collapsed taking with them any financial incentive to install costly renewables. When energy prices recovered somewhat there was an uptick in wind development but it was concentrated in four states with renewable programs - California, Iowa, Minnesota and Texas.
In the years 2000, 2002 and 2004, the PTC expired and wind development stalled but in that same period, energy prices were fluctuating, the 9/11 terrorist attack shocked the US economy and we slipped into recession. Claims that expiration of the credit alone caused wind development to stall are overly simplistic. In fact, given available data, it's impossible to isolate the PTC's affect. Some energy experts maintain the PTC was largely irrelevant in those years.
After 2004, the subsidy may have contributed to growth, but so did State policies mandating renewables..
When states adopted Renewable Portfolio Standards (RPS)  as a means of addressing climate change wind installations showed marked growth. Legislators believed claims made by wind proponents that wind, with no fuel costs, would protect ratepayers from dramatic swings in fuel prices, and eventually stabilize and lower energy prices. In return, they envisioned a transition to more renewables, the decommissioning of older fossil plants and cleaner air.
But wind is an unpredictable, non-dispatchable resource that's built long distances from load and largely delivers energy at a time of day and year when least needed. With high upfront costs and fewer hours to spread the cost over, wind cannot compete with reliable, lower-priced fossil and nuclear generation. It's inherently a low-value resource, that demands above market prices.
The PTC subsidizes project capital costs by providing an outside revenue stream  for investors and project owners. The credit, in turn, artificially shields ratepayers from the true price of wind power.
Yet, federally subsidizing wind is not enough to incite utilities to buy.
RPS policies created demand for wind  by establishing non-competitive segments of the power market for qualifying renewables. Today, over half of the states have RPS policies which apply to more than 50-percent of total U.S. electricity load.
Life after the PTC: No Free Lunch
The PTC and RPS combined provide the wind industry a market for its energy and a means of shielding ratepayers from the true cost of their product. But the PTC disproportionately benefits ratepayers in States with renewable mandates by distributing the high cost of wind to taxpayers at large.
Some complain that Americans are double-paying for wind - once through above-market energy prices and again in their taxes, but this is not true. In fact, we are paying the true price of wind allocated in both the rate-base and the tax-base. If the PTC were to expire, people living in Georgia, Wyoming and other states with no RPS policies would rightfully be relieved of subsidizing policies enacted in other states. But what would happen in states with mandates?
Existing wind projects that are still collecting the PTC would not be impacted, but proposals for new wind would be under pressure to significantly lower their capital costs and improve their production numbers in order to account for the lost federal revenue. In addition, the value of the renewable energy credits would likely increase thus placing even more upward pressure on renewable energy prices. Legislatures will be forced to confront the real cost of wind power and evaluate whether the policy will ever deliver on goals originally envisioned.
The AWEA insists the PTC is an effective tool to keep electricity rates low. In fact, it is nothing more than a cost imposed on all taxpayers in order to accommodate development of a politically well-connected, high-priced, low-value resource that cannot meet our electric capacity needs.
Wind also benefited from rising natural gas prices (over $5 per million BTU) making wind power contracts an attractive way to displace higher-cost natural gas generation.
RPS policies mandate utilities supply a minimum percentage of their customer load with electricity from qualified renewable sources.
The open-ended subsidy of 2.2¢/kWh in after-tax income represents a pre-tax value of approximately 3.7¢/kWh.. The PTC is tied to the Consumer Price Index (CPI) and therefore is scaled each year. Today, the PTC costs US taxpayers $1.5 billion per year.
 Wiser, R., Namovicz, C., Glelecki, M., Smith, R., Renewables Portfolio Standards: A Factual Introduction to Experience from the United States Some states allow out-of-state generation to count toward their RPS requirements. Renewable capacity built in a non-RPS state may be used to meet another state's mandate.
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The Big Wind lobby has descended on Washington DC and its objective is singular -- secure a four-year extension of the Production Tax Credit ('PTC'), the 20-year ‘temporary' subsidy most credited for market growth in the wind sector. The PTC is due to expire at the end of this year.
For the last month, the industry poured millions of dollars into its nationwide campaign aimed at convincing the public that any lapse in the subsidy would prove a crushing blow to American jobs. Most of the ads targeted Congressional House members who resisted the industry's demands for their PTC earmark. The cry for action reached a fevered pitch last week as Congress negotiated the payroll tax bill, viewed by many as the last best chance to attach an extension of the PTC before November's presidential election.
Politicos from wind-friendly states like Iowa and Kansas wrote letters repeating the same tired talking points about jobs. It was embarrassing to see these politicians blindly repeat what they were told with no apparent understanding of the costs and impacts of their pro-wind policies. They clearly viewed their support of the PTC as safe politically. Not so fast.
The Public Pushes Back
Last week the American public proved that support of the PTC was, well, complicated. Thousands of Americans from eigtheen states signed letters to Congress asking their representatives to vote NO on extending the PTC.
Three key arguments were raised in the letter:
1. Since the PTC was adopted in 1992, its annual cost has ballooned from $5 million a year in 1998 to over $1 billion annually today. The open-ended subsidy of 2.2¢/kWh in after-tax income represents a pre-tax value of approximately 3.7¢/kWh, which in many regions of the country equals, or exceeds the wholesale price of power!
2. If the PTC were to sunset, taxpayers would still be obligated to cover nearly $10 billion in tax credits for wind projects built in the last decade. This debt is in addition to the nearly $20 billion already accrued for wind projects built under Section 1603.
3. Despite the billions in public funding since 2008, the wind sector lost 10,000 direct and indirect jobs, bringing the total to 75,000 jobs. In states like Vermont, government models have shown that above-market energy costs tied to renewables have the deleterious effect of reshuffling consumer spending and increasing the cost of production for Vermont businesses. These increased costs reduce any positive employment impacts of renewable energy capital investment.
The PTC -- Outdated and Inefficient
Even if we accept that earmarks for big wind are still appropriate, the PTC is highly inefficient and should, at least, be updated to respond to current market conditions. For example, since it is uniform across the country the PTC supports poorly sited wind development in some areas while in other areas pays for projects that would have been built regardless of the credit.
The policy also ignores other crucial factors driving wind development in the U.S. including State mandates and energy prices. With more than half the states demanding renewable development, some policy experts question why projects receive benefits from both State renewable portfolio policies and the PTC. Good question!
Last week Congress listened to the American public and said 'no' to extending the PTC. By all accounts, the Big Wind lobby was stunned by the vote and has now pulled out all the stops to pressure Congress to vote for an extension as soon as possible. This time, their pressure will be met with an equivalent response from Americans nationwide who are determined to stop this unneeded, wasteful spending perpetuated by lazy, thoughtless politicians.
The message from taxpayers is simple: The cost of the PTC is excessive, the benefits elusive and, big wind's pitiful performance as measured against industry promises makes this entitlement an easy one to sunset.
 Lawrence Berkeley National Laboratory reports (p. 7): "The American Wind Energy Association, meanwhile, estimates that the entire wind energy sector directly and indirectly employed 75,000 full-time workers in the United States at the end of 2010 - about 10,000 fewer full-time-equivalent jobs than in 2009, mostly due to the decrease in new wind power plant construction." A recent AWEA blog (February 3, 2012) confirms the 75,000 is still current.
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In recent weeks, wind developer Terra-Gen terminated plans to build its Horseshoe Wind Farm in Illinois, NextERA suspended the permitting process for a 150-megawatt project in South Dakota and Iberdrola announced its Desert Wind Energy Project in North Carolina was delayed and might be scrapped altogether. In each case, company officials blamed current market conditions and the inability to secure a long-term power contract with area utilities.
PTC in review
The American Wind Energy Association (AWEA) insists the industry is at risk of a slow-down if Congress does not act quickly to extend the production tax credit (PTC), the federal incentive most often credited for market growth in the wind sector. The PTC expires at the end of 2012.
But if the PTC were to expire, the damage would be less than what AWEA claims.
The industry has clearly grown addicted to the production tax credit but our findings suggest that attributing market activity to the PTC is overly simplistic and fails to consider other crucial factors driving development in the U.S.
The PTC was established by the Energy Policy Act of 1992 to stimulate use of renewable technologies for power generation by providing a production-based credit for the first 10 years of project operations. Initially set at 1.5¢/kWh, the credit is adjusted annually for inflation and today stands at 2.2¢/kWh.
When adopted, the House Ways and Means Committee insisted on an expiration date (June 30, 1999) to give Congress an opportunity to assess the effectiveness of the credit in meeting its goal.
In each of the five years following the PTC's enactment wind capacity declined. It wasn't until 1998 and 1999 before the trend drifted upward. (see chart)
While it's possible the market needed time to respond to the new subsidy, other more significant factors likely stalled growth.
The U.S. was awash in generation and oil prices were low and stable. Deregulation shifted plant ownership to independent power producers which led to improved plant management and increased efficiencies. This was particularly true for nuclear power where average capacity factors grew from 66% in 1990 to over 90% currently.
State mandates key
The demand for renewable energy largely didn't exist except in States with programs that encouraged renewable generation. It's no accident that the bulk of new wind built in 1998-99 occurred in four states with renewable programs -- California, Iowa, Minnesota and Texas.
When the Asian Financial crisis hit in 1997, oil prices collapsed taking with them any financial incentive to build new renewable generation. The PTC expired in 1999, the same year oil prices bottomed out, and new wind installations went bust the following year.
AWEA has complained for ten years that expiration of the PTC in 1999 caused development to slow calling it the boom-bust cycle. Yet given available data, it's impossible to isolate the factors that contributed to the decline. Clearly other macroeconomic issues played a crucial role. Some energy experts maintain the PTC was largely irrelevant in those years.
After 2004, the PTC may have contributed to growth in the wind market, but so did State policies mandating renewables . Wind benefited from rising natural gas prices as well (over $5 per million BTU) making wind power contracts an attractive way to displace higher-cost natural gas generation.
Economic Downturn and Section 1603
By the middle of 2008 the U.S. economy stumbled and energy prices dropped off quickly. With incomes falling, tax-based policy incentives lost much of their effectiveness as tax equity investors disappeared. Section 1603 cash grants created under the 2009 stimulus were designed to fill the void by granting project owners payouts equal to 30 percent of a project's qualifying cost. Wind proponents and the Department of Energy advertised the grants as PTC-equivalents without the middle man, but nothing could be further from the truth.
Wind capacity ballooned to nearly 45,000 megawatts with over 30,000 megawatts brought online in the last four years .
The PTC and wind's future
Section 1603 is expected to expire this year and the wind industry has again turned its attention to extending the production tax credit (PTC). Ditlev Engel, chief executive officer of Vestas Wind Systems A/S complained that U.S. turbine sales may "fall off a cliff" unless lawmakers extend tax credits beyond 2012.
Sales may decline, Mr. Engel, but not because of the PTC.
The 2008 recession slowed economic growth causing demand for electricity to drop. Many States, including California, are now signaling their renewable mandates are being met which will weaken demand for wind. Recent discoveries of abundant shale gas reserves are expected to keep gas prices low and stable through to 2020 and likely longer. Since natural gas is among the important elements in determining the competitiveness of wind, low gas prices will generally reduce wind's attractiveness as a 'fuel saver'. These are the market conditions Terra-Gen, NextERA, Iberdrola and others are facing. In fact, the Energy Information Administration is now forecasting flat growth in the wind sector for the next ten years regardless of what happens with the PTC.
The PTC: overpriced and unneeded
The production tax credit largely benefits corporate investors and wind project owners. For investors like General Electric, the credit is an open-ended subsidy offered for each kilowatt-hour of electricity produced. Because the PTC directly reduces the amount of federal income taxes paid, it should be thought of as providing 2.2¢/kWh of after-tax income (in 2011 dollars).
This represents a pre-tax value of approximately 3.7¢/kWh (assumes a 40% marginal tax rate). When measured relative to the price of wholesale power, the PTC is exceptionally generous.
In New England, for example, where wholesale electricity prices are currently around 5.5¢/kWh, the subsidy equals nearly 75% percent of the power price. In areas where coal-fired power predominates, the subsidy on a pre-tax basis is approximately EQUAL to the wholesale price of electricity. Bear this in mind next time AWEA claims cost parity with non-renewable resources.
For consumers, the production tax credit disproportionately benefits ratepayers in States with renewable energy mandates by distributing the high cost of wind to taxpayers at large. And since the subsidy is uniform across the country it's highly inefficient, supporting poorly sited projects as well as projects that would have been built regardless of the credit. This is certainly true in Texas where wind exceeds transmission capacity and New England where utilities routinely sign long-term power contracts at prices significantly above market.
The production tax credit turns twenty years old next year. It's time for Congress to act on the wishes of the House Ways and Means Committee and assess the effectiveness of the subsidy. AWEA's myopic, superficial justification for extending the PTC is not supported by the facts. Rather, the credit serves little purpose today other than to line the pockets of project owners and tax-advantaged investors, distort the market by artificially masking the true cost of wind power, and encourage the development of poorly sited renewable projects that are far from load and deliver inimical to demand cycles.
Special thanks Mr. William P. Short III for co-authoring our editorial this week. Mr. Short is an independent consultant with a practice that specializes in renewable energy in the New England states.
1. House Bill (H.R. 3307) has been filed that extends the PTC for another four years.
2. The PTC expired three times in the period between 1999 and 2003 and each time it was extended retroactively. At the same time, oil and gas prices were less stable before rising steadily after 2004.
3. The Department of Energy reported in 2003 that of the fifteen States with renewable programs on the books, 86 percent of new renewable energy capacity was a result of mandates, and the majority (93 percent) of the new capacity consisted of wind power installations.
4. Includes the period from 2008 to 2011. Despite meteoric growth, wind still represents under 3% of U.S. generation.
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The House of Representatives is working to slash federal discretionary spending.
Tell Congress to cut the Section 1603 Cash Grant renewable energy bailout program!
The Section 1603 Cash Grant program disproportionately benefits wind energy development by shifting substantial debt to U.S. taxpayers. Cutting this program is a quick and painless way to eliminate $5 billion in Federal waste.
As you may know, the Section 1603 cash grant program was extended for one year as part of the tax bill passed in December 2010. This program enables wind developers to secure direct monetary outlays from the Federal government to cover 30% of a project's qualifying cost, no questions asked.
There are cheaper, much more effective opportunities for achieving clean energy goals. Instead, we have succeeded in adopting a policy that drives up construction and energy costs while eliminating any incentive to build projects that meet the highest performance standards. In fact, the more expensive, less efficient a project is to build and operate the greater the benefit for owners, vendors and contractors while the public assumes the debt.
This program is not equivalent to the Production Tax Credit ('PTC'). Please see our analysis on how cash grants differ from the PTC here.
The Appropriations Committee is preparing the 2011 budget ('Continuing Resolution') for a vote on the House Floor as early as Wednesday, February 16.
Please Call, Email and Fax your Congressional House delegation TODAY.
Ask them to defund the Section 1603 program in the budget. A sample letter is provided here for your convenience.
To find your representative click here: http://www.house.gov/house/MemberWWW_by_State.shtml
In addition to your representative, the Republican members below need to hear from you:
Appropriations Committee Republican Members:
Harold Rogers, KY
Jerry Lewis, CA
C.W. Bill Young, FL
Frank R. Wolf, VA
Jack Kingston, GA
Rodney Frelinghuysen, NJ
Tom Latham, IA
Robert B. Aderholt, AL
Jo Ann Emerson, MO
Kay Granger, TX
Michael K. Simpson, ID
John Abney Culberson, TX
Ander Crenshaw, FL
Denny Rehberg, MT
John R. Carter, TX
Rodney Alexander, LA
Ken Calvert, CA
Jo Bonner, AL
Steve Latourette, OH
Tom Cole, OK
Jeff Flake, AZ
Mario Diaz-Balart, FL
Charles Dent, PA
Steve Austria, OH
Cynthia Lummis, WY
Tom Graves, GA
Kevin Yoder, KS
Steve Womack, AR
Alan Nunnelee, MS
This is an important and unique opportunity we cannot afford to miss. OUR WINDOW OF OPPORTUNITY IS NOW!
If you have any questions, or concerns, please email me at firstname.lastname@example.org .
Thank you very much,
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In the waning hours of the tax bill debate last December, the Obama Administration and GOP leaders released the terms for continuing the Bush-era tax cuts. The framework negotiated between the parties initially omitted any reference to extending the renewable energy programs introduced under the American Recovery and Reinvestment Act of 2009 (ARRA), which were scheduled to sunset last December.
The response from the renewables industry was fierce. A media blitz hit overnight, and wind and solar lobbyists huddled with lawmakers on Capitol Hill. Repeated warnings of job loss and the immediate harm to green energy businesses worked. Lawmakers relented and sanctioned a 1-year extension. The windfall? A check from the U.S. Treasury for 30 percent of a project's qualifying cost.
With the fuss now behind us, we decided to examine one of the more popular renewable subsidy programs to be extended, the Section 1603 cash grants. Our analysis revealed a pattern of rewarding inflated project costs and decreased energy production, while shifting a substantial portion of the development risks to American taxpayers.
Supersubsidy upon Subsidy
Following the collapse of Lehman Brothers in September 2008, tax-based policy incentives lost much of their effectiveness as the number of tax equity investors declined. Provisions under ARRA were designed to fill the void by reducing, and essentially eliminating, the need for tax advantaged investors. The Section 1603 cash grant program enabled developers to secure direct monetary outlays from the Federal government to cover 30 percent of a project’s qualifying cost. (Greenwire October 14). The criteria for receiving the grant were not onerous and the Treasury Department was prohibited by law from ranking the projects before distributing the funds.
Spanish energy giant Iberdrola Renewables, Inc., which received nearly a billion dollars in cash grants alone, argued the money was crucial to promote jobs and economic opportunity (as if the money spent elsewhere would not have done the same….).
But a preliminary evaluation of the grant outlays published last year found that 61% of the grant money distributed through to March 2010 “likely would have deployed under the PTC [production tax credit] if the grant did not exist.” In many cases, money went to projects that were already under construction, and in some cases already producing electricity.
In an interview with Greenwire, an executive for a foreign subsidiary whose projects received Section 1603 money complained that it was unfair to criticize them for taking the funds because those projects otherwise would have received the production tax credit. He insisted, “The cost to the U.S. government is not materially different.”
The executive is not alone in his thinking. Others in the renewables industry have made the same claim which helps explain why support existed for extending the grant program for another year.
But cash in hand is worth more than discounted subsidies paid out over the course of ten years. And the obvious intrinsic value of cash versus a tax credit in today’s financial circumstances cannot be ignored. But we were prompted to look further into the numbers themselves to test the claim of equivalence. Our analysis revealed that the cash grant program offers significant monetary assistance over the production tax credit while reducing benefit back to the public.
Analysis of 12 Projects
To evaluate the claim of equivalence, we looked at two operating geothermal facilities, five operating onshore wind energy facilities and five approved, but not built wind projects including two offshore applications proposed for New England coastal waters.
The table below shows our findings.
Of the twelve projects, the total cash grants that were (or will be) distributed exceeded anticipated production tax credit amounts by over one-half billion dollars. In particular, those projects with greater development costs and/or lower net capacity factors received substantially higher benefits from the cash grant than the current PTC.
To keep the table simple, we did not apply a 7.5% discount rate to the production tax credit. If we had, the monetary differences of the two programs would have been more stark since the cash grant is received at the start of the operational life of a renewable energy project.
Comparing the Subsidies
Around the time ARRA was passed, researchers at Lawrence Berkeley National Laboratory provided an academic comparison between the production tax credit and the ITC/cash grant from the perspective of a project developer/owner. The authors claim that the programs are — at least in theory — equivalent but offer a quantitative financial analysis to determine which program might provide the better financial option based on project characteristics. The study looked at total installed project costs ($/kilowatt) and net capacity factor and calculated the difference between the two subsidies.
Tables 2 and 5 from the report show the net value of the ITC/cash grant for wind and geothermal respectively. For wind, the report concluded that “under most capacity factor assumptions, projects that cost $1,500/kW or less are likely to receive more value from the PTC, while projects that cost more than $2,500/kW are likely to be better off with the ITC [cash grants].” For geothermal the report found “the PTC provides more value in nearly all cost and capacity factor combinations examined.”
While we do not doubt the arithmetic used, the range of project costs considered do not reflect the market and leave the reader with a sense that the PTC is an equal or better benefit than the cash grant. For example, wind project costs were assumed to range between $1500/kW and $2500/kW, yet most onshore wind projects built since 2009 are at least $2200/kW and many cost more than $2500/kW. Offshore projects are double at $5000/kW. The authors placed geothermal project costs at under $6000/kW, but typical project costs now start at $6000/kW. Net capacity factors for wind ranged from 25% to 45%, representing generation levels much higher than actual and forecasted for the projects we reviewed, including offshore wind.
There are other qualitative benefits under the cash program which shift the rewards to wind and geothermal developers while laying project debt and risks at the feet of American taxpayers. For example, the production tax credit is dependent on project performance; the cash grant is not. This has the effect of eliminating performance risks for the developer. If a project’s net capacity factor is marginal the public still grants the cash and projects that would normally not meet financial threshold requirements are apt to get built anyway. The Section 1603 program substitutes government payments for private investments after which the government just walks away.
An Addicted Industry
Upfront cash grants have only served to grow the industry’s dependency on federal subsidies and in return, developers have minimal incentive to negotiate lower prices with suppliers and no financial obligation to meet claimed capacity factors. The speed at which the industry became reliant on this new stimulus should not surprise anyone.
However, there are cheaper, much more effective opportunities for achieving clean energy goals. Instead, we have succeeded in adopting a policy that drives up construction and energy costs while at the same time eliminating any incentive to build projects that can meet the highest performance standards. In fact, the more expensive a project is to construct the better for vendors, contractors and developers.
It doesn’t stop there. For intermittent resources, higher construction and operational costs also push up energy prices since there are fewer hours of operation to spread the inflated costs over. Power purchase agreements for onshore wind are at least two times higher than traditional sources of generation. Offshore wind agreements are priced at four times energy market rates.
Budget Cuts, Anyone?
If Congressional leaders are serious about cutting government waste in the discretionary budget, green energy subsidies deserve another look, beginning with the Section 1603 program. The incentives in place today go in the wrong direction by rewarding higher construction costs, higher energy pricing, and marginal to poor performance.
We wish to thank Mr. William Short for co-authoring our editorial this week. Mr. Short is an independent consultant with a practice that specializes in renewable energy in the New England states.
 The federal production tax credit (PTC) was authorized by the Energy Policy Act of 1992 and amended over time. The subsidy provides a 10-year, inflation-adjusted production tax credit for power generated by certain types of renewable energy projects, including wind, biomass, geothermal, and other renewable fuels excluding solar. The inflation-adjusted credit is currently at $21/MWh. To qualify for the PTC, the power must be sold to an unrelated party. The cash grant program under ARRA creates a new subsidy, administered by the Treasury. The program provides grants covering up to 30% of the cost basis of qualified renewable energy projects that are placed in service in 2009-11, or that commence construction during 2009-11 and are placed in service prior to 2013 for wind, 2017 for solar, and 2014 for other qualified technologies. The Treasury is required to make payments within 60 days after an application is received or the project is placed in service, whichever is later.
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The pressure is on to finalize the proposed tax bill before Congress that would extend the Bush-era tax cuts for all Americans. Last minute amendments are expected in order to garner support among lawmakers who oppose the initial agreement forged between the White House and key Republicans. The worry now is whether the bill will become a vehicle for piling on more spending as the lame duck session finishes up.
AWEA and the wind industry are in a huff over the possibility that a subsidy first introduced as part of the stimulus plan (American Recovery and Reinvestment Act) will be allowed to expired on December 31.
They're asking that the 1603 tax grant money (ITC), due to sunset this year, receive a one-year extension. If extended, this will add $3 billion to the deficit in 2011 alone, according to congressional tax estimators, on top of the billions already pledged in the form of production tax credits granted operating wind facilities.
Earlier this week, AWEA complained that 15,000 wind-related jobs were at risk if the ITC expired but by today upped the ante to 25% of U.S. wind-related jobs, about 20,000 jobs. As is typical, the wind lobby offered no substantiation for its figures but we know that most are temporary construction positions.
Before Congress caves to these complaints, legislators should revisit the articles from this fall that discussed how billions in grant money were squandered on projects that would likely have been built without federal funding. A preliminary evaluation of the ITC grant outlays found that 61% of the grant money distributed through to March 2010 "likely would have deployed under the PTC [production tax credit] if the grant did not exist." In many cases, money went to projects that were already under construction and, in others the wind facilities were already producing electricity.
Spanish energy giant Iberdrola Renewables, Inc., alone, received nearly a billion in cash grants.
After decades of federal subsidies flowing into big wind's coffers, the industry's appetite has grown to a point where it cannot be sustained. The upfront cash grants have only served to grow that dependency and in return, developers have no incentive to negotiate lower prices with suppliers and no financial obligation to meet claimed capacity factors.
The speed at which the industry became reliant on this new stimulus stands out and should raise a red flag for all of us -- especially our legislators.
If you agree, please take the time today to e-mail or fax members of your Congressional delegation and ask that they let the 1603 grant program expire. There are cheaper, much more effective opportunities for achieving clean energy goals without coddling the wind industry -- an industry that peddles a low-value electricity product and which, after decades of public handouts, has yet to show it can survive on its own.
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The American Wind Energy Association (AWEA) is on a mission to keep its members fat and happy as they bloat up at the public trough. The goals are simple:
1) Create a set-aside power market that pays a premium for wind energy and eliminates competition from lower-cost, more reliable fuel options;
2) Encourage policies that pave the way for wind-related transmission development at the expense of rate- and taxpayers; and
3) Make permanent the free-flow of public subsidies for renewables and shield the funding spigot from changing political and economic tides.
In the last two years, AWEA's had some success. On the power market front, more than half the States have RPS programs mandating that a percentage of their electricity needs be met with renewable energy. Senator Bingham (D-NM) introduced a bill seeking the same non-compete set-aside for the entire country that he hopes will be acted on during the lame-duck session. On transmission, the Federal Energy Regulatory Commission (FERC) issued a notice of proposed rulemaking (NOPR) that considers amending transmission planning and cost allocation processes to facilitate broader public policy goals -- i.e. a national grid system to deliver wind power. This deviates from current rules that look mainly at grid reliability. And Obama's $787 billion stimulus passed in February 2009 authorized billions be spent on renewable energy and energy efficiency initiatives which kept the wind industry from collapsing when the big investment banks needed bailing out.
The debates surrounding a national RPS policy and FERC's transmission priorities are not settled and will likely come down to cost. But the stimulus programs that spent lavishly on pet wind projects -- while a success for AWEA members -- are proving to be a waste for the public.
Under the stimulus, we saw the investment tax credit (ITC), which was popular back in the 1980's, brought back again. The ITC enables developers to obtain direct cash outlays from the government for up to 30 percent of their costs. Any company or person who qualifies and applies for the money can get a grant. (Greenwire October 14), The qualification criteria are not onerous, the grant amounts are unlimited, and the Treasury Department which doles out the cash is prohibited by law from ranking the projects.
Between direct cash payouts, federal loan guarantees, existing state tax credits and State RPS policies that assure premiums for renewable energy, wind developers can't fail.
Spanish energy giant Iberdrola Renewables, Inc., who received nearly a billion in cash grants alone, argues the money helped create more development which led to jobs and economic opportunity but according to Gilbert Metcalf, a Tufts University professor who teaches energy economics and tax policy: "Any time you use subsidies to encourage new investment, you're always going to end up giving money to people who would have done the project anyway." (Greenwire October 14) And that appears to be exactly what happened.
A preliminary evaluation of the ITC grant outlays published earlier this year by the Lawrence Berkeley National Laboratory found that 61% of the grant money distributed through to March 2010 "likely would have deployed under the PTC [production tax credit] if the grant did not exist." In many cases, money went to projects that were already under construction and, in others the wind facilities were already producing electricity.
So what did the public receive in return for all the money spent? High risk and overpriced carbon reduction benefits.
That's according to an October 25 White House memo penned by chief economic aide Larry Summers and senior policy aides Carol Browner and Ron Klain. The memo uses the 845-megawatt Shepherds Flat wind energy facility in Oregon to illustrate the problem. Shepherds Flat will be the largest wind plant in the country consisting of 338 GE wind turbines. According to Summers, the $1.2 billion in governmental subsidies covered 65% of the cost and risk for the project while its equity sponsors incurred only about 11% with an estimated return on equity of 30%. That's a hefty return for a project where the American public is absorbing the bulk of the risk.
Summers makes clear in the memo that the project would likely have "moved without the loan guarantee" since the "economics are favorable for wind investment given the tax credits and state renewable energy standards". Examining the carbon reduction benefits, the memo concludes that the reductions "would have to be valued at nearly $130 per ton CO2 for the climate benefits to equal the subsidies (more than 6 times the primary estimate used by the government in evaluating rules)".
The Wall Street Journal published an informative editorial on the memo that's well-worth reading.
The White House memo enumerates several options for reining in the free spending and shifting risk back to developers, but frankly, tweaks made at this level are misguided.
It's time for Capitol Hill to take a hard look at the renewables feeding frenzy underway and adopt policies that better suit the public's needs. For starters, let the funding programs set to expire this year do just that -- expire! Remaining programs (i.e. PTC) should be adjusted to reward projects that can deliver energy according to time of day or seasonal demand requirements and that are built close to load centers.
There are cheaper, much more effective opportunities for achieving clean energy goals without coddling the wind industry -- an industry that peddles a low-value electricity product and which, after decades of public handouts, has yet to show it can survive on its own.
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Senate Jeff Bingaman, chair of the Senate Energy and Natural Resources Committee, signaled he's determined to see a national renewable portfolio standard ("RPS") passed in the Senate before the members recess for the fall campaign season. Joined by majority leader Harry Reid (D-NV) and twenty other co-sponsors including three Republicans: Sens. Sam Brownback of Kansas, Susan Collins of Maine and John Ensign of Nevada, Bingaman introduced new RPS legislation that will require retail suppliers of electricity to secure a percentage of their generation from renewable energy resources.
Bingaman's apparent explanation for pushing the bill now, according to a press announcement this week, is hardly convincing: "I think that the votes are present in the Senate to pass a renewable electricity standard. I think that they are present in the House. I think that we need to get on with figuring out what we can pass and move forward."
Is that the best he can muster to justify a mandate for purchasing renewable energy and setting aside 15% of the electricity market solely for wind, solar, and other preferred forms of generation?
Perhaps he's relying on AWEA's Denise Bode to make his case with her boast that a national RPS "is the single most important thing we can do to grow jobs here in the United States and keep 85,000 American wind energy workers on the job." Denise must have missed the latest press on green jobs that explained, again, how the hype surrounding green projects is not matching reality. What's missing entirely in the discussion is how much a 15% RPS will cost the American ratepayers and how many jobs in every other sector in the country will be lost due to higher energy rates.
More than half of the U.S. States has already adopted RPS legislation in the last decade and a number of these programs are up for review to determine whether their promises of job growth and low impact on electricity rates have been realized. Wouldn't it be prudent to understand the costs and benefits of these programs before launching into new, farther reaching mandates?
Or maybe we already know what these reviews will find.
According to a March 2007 study released by the Lawrence Berkeley National Laboratory, adoption of State RPS policies hinged on state-sponsored studies that projected the costs and benefits of programs. However, across all state studies, the methodologies used in determining projected electricity rate impacts, environmental effects, and public benefits were limited and failed to account for key costs including:
1. transmission and integration costs for wind energy*,
2. fluctuating capacity values,
3. increasing capital costs for the turbines, and
4. likelihood that coal-fired generation, not natural gas, will drive wholesale market prices in some regions.
*The bulk of the renewable generation is expected to be satisfied by wind according to the report.
In an interview, Berkeley Lab researcher Ryan Wiser said that "many of the studies were designed with the explicit intent to either influence legislative processes or, alternatively, to potentially affect the design of RPS policies as established by regulatory agencies."
The "disparity between study expectations and current market reality suggests that the actual cost impacts of state RPS policies may significantly exceed those estimated in our sample of studies, especially if higher wind costs persist."
Do we have any reason to believe Bingaman's bill will do better?
There are other practical considerations of a national RPS that suggest a 15% mandate will have serious negative consequences.
In their 2008 paper entitled "A National Renewable Portfolio Standard? Not Practical", Dr. Jay Apt and others were clear in explaining the perils of a national RES as excerpted here:
A national RPS is a bad idea for three reasons. First, "renewable" and "low greenhouse gas emissions" are not synonyms; there are several other practical and often less expensive ways to generate electricity with low CO2 emissions. Second, renewable sources such as wind, geothermal, and solar are located far from where most people live. This means that huge numbers of unpopular and expensive transmission lines would have to be built to get the power to where it could be used. Third, since we doubt that all the needed transmission lines would be built, a national RPS without sufficient transmission would force a city such as Atlanta to buy renewable credits, essentially bribing rural states such as North Dakota to use their wind power locally. However, the abundant renewable resources and low population in these areas mean that supply could exceed local demand. Although the grid can handle 20% of its power coming from an intermittent source such as wind, it is well beyond the state of the art to handle 50% or more in one area. At that percentage, supply disruptions become much more likely, and the highly interconnected electricity grid is subject to cascading blackouts when there is a disturbance, even in a remote area.
Renewable energy sources are a key part of the nation's future, but wishful thinking does not provide an adequate foundation for public policy. The national RPS ...would be expensive and difficult to attain; it could cause a backlash that might doom renewable energy even in the areas where it is abundant and economical.
As it stands, subsidies for wind dwarf most fuel types at $23.37 MWh not including state and local tax breaks and subsidies for project owners, tax- and ratepayer funded transmission costs, and other public perks thrown at the industry. It's time to step back and consider what's best for us as a Country and demand that Congress stop picking favorites and stand behind a free energy market where companies succeed by building cheaper, better products than competitors. Saying NO to a national RPS would be an important first step.
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Along with our economic downturn and troubles on Wall Street, the market price for Massachusetts Renewable Energy Credits (RECs) has fallen 50% from its highs last spring.
Renewable energy goals for Massachusetts are mainly established through its Renewable Portfolio Standard (RPS), a legislated program that requires total sales of Retail electricity meet a minimum percentage of new renewable generation each year.
The Massachusetts Technology Collaborative (MTC), a quasi-public agency responsible for promoting renewable generation in the State, actively provides public financing for renewable energy projects as one way to meet the State's clean energy goals. In return, MTC receives a portion of the RECs generated by these projects on a long term basis, and sells them.
On October 8, the MTC held an auction of its current year (2008) RECs and a forward sale of 2009 RECs. In total, MTC auctioned 7,683 Massachusetts and Connecticut renewable certificates from 2008 and 26,000 Massachusetts renewable certificates to be generated in 2009.
The results of the auction were mixed depending on your perspective. Wind projects in New York and Canada, racing to participate in the Massachusetts RPS market, have helped the state meet its goals, suggesting the RPS is working. With the minimum percentages met, prices dropped. The 2008 RECs sold at half of their value from a few months ago, and MTC was unable to secure an acceptable bid for its 2009 RECs, as the market anticipates further declines.
However, if wind and other renewable developers were anticipating high REC values, the economics of the RPS are no longer as attractive and could well slow or even stop development. The question becomes what will the State do in this situation?
Windaction.org warns we're in an unsustainable boom and bust scenario, that rewards speculators for playing the REC market rather than effectively producing useful reliable electricity.
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The wind industry's lobbying of Congress to extend the Production Tax Credit (PTC) reached a fevered-pitch last week when the Federal government took no action on the PTC before recessing for August break. Ralph Cavanagh, director of the Natural Resources Defense Council's energy program called Congress' inaction a "criminally irresponsible failure", Sierra Club e-mailed marching orders to willing soldiers calling on them to demand their "do-nothing" representatives do something, and print media did its best to dutifully deliver the daily message: without the production tax credit, giant corporations now on the verge of unleashing an economic and environmental boom will go elsewhere, and our most desperate regions of the country will remain desperate.
After decades of receiving significant subsidies from ratepayers and taxpayers, and recent assertions by the American Wind Energy Association that wind is "no longer an alternative energy source, it's mainstream", the industry's cries portend something else: that wind energy is uneconomical and cannot survive without government intervention. The Federal cost to extend the production tax credit for a single year is $7 billion, the most expensive item in the energy bill debated last Spring. According to the U.S. Energy Information Administration (EIA) subsidies for wind dwarf most fuel types at $23.37 MWh. Yet, what do we get for this "investment"?
A) An intermittent, unreliable (but very sexy) energy resource that does not deliver electricity during the very time of day and year when we need it the most.
B) A resource built hundreds of miles from load centers requiring up to a trillion dollars in public dollars to string transmission lines through undeveloped rich habitat, and
C) The requirement that up to 90% of the electricity from wind be matched with redundant generation to ensure reliability when the winds die down.
Last week, Massachusetts Secretary of Energy Ian Bowles said "Renewable plants have an enormous subsidy under the renewable (energy) portfolio laws. If they still can't compete, they probably shouldn't be built."
Windaction.org couldn't agree more. It's time for our Federal representatives who support the production tax credit to hear from those who understand the economics behind "big wind". Contact your representatives today, and tell them "enough is enough".
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