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.