Removing Big Wind's "Training Wheels": The case for ending the federal production tax credit

Executive Summary

The federal wind Production Tax Credit ("PTC"), first enacted in 1992 to "jump start" a nascent, but promising industry,2 provides wind producers with a subsidy of $22 per megawatt hour of electricity generated.3 The PTC has been extended seven times,4 but is scheduled to expire under current law on December 31, 2012. Extension of the federal wind PTC has become the "stalking horse" in the debate on government's role in picking energy "winners and losers." Although wind advocates proffer several internally inconsistent rationales for continuing the federal wind PTC, a closer examination of compelling facts and data indicates these purported justifications are not about wind's continued viability without the PTC. Rather, the wind industry's arguments supporting a continuation of the federal wind PTC simply represent a classic case of "rent seeking" by an established industry seeking to maintain profits through a generous tax subsidy.

This research finds that the federal wind PTC is an inefficient, expensive, and unsustainable policy mechanism for promoting wind that should be allowed to expire in today's challenging fiscal environment for the following reasons:

• Contrary to popular rhetoric, the wind industry is not an "infant industry" in need of continued training wheels, but one that is comprised of 50,000 megawatts ("MWs") of nameplate capacity, representing close to a five-fold increase since 2006 and a 1,300 percent increase in riskier merchant wind over the last ten years.

• Renewable portfolio standard ("RPS") mandates in 30 states and D.C., not the federal PTC, have primarily driven explosive wind development over the past five to eight years, and most significantly, have established a substantial guaranteed longterm market for renewables including wind that is expected to triple by 2030, even without the PTC. Standards & Poor's recently estimated as much as $150 billion in new renewable energy investment opportunities over the next 10 years, even if the PTC is not renewed, driven in large part by opportunities in wind energy development. Thus, offering billions of dollars in federal tax subsidies to wind generation, in addition to mandated state renewable subsidies, allows wind generators to "double dip," and reflects a gross waste of limited fiscal resources.

• The federal wind PTC is not needed to ensure an increase in future wind generation. The U.S. Energy Information Administration forecasts that even if the PTC and other incentives are eliminated, renewable generation will still be on track to rise from 500 billion kilowatt-hours in 2011 to approximately 750 billion kilowatt-hours by 2035.

• The "one-size-fits-all" federal wind PTC is an exceptionally inefficient and expensive means of supporting wind generation that fails to recognize the industry's heterogeneity and operational differences, and grossly wastes limited fiscal resources by over-subsidizing many projects and driving over-development. The congressional Joint Committee on Taxation estimates that a one-year extension of the federal wind PTC will cost taxpayers an astronomical $12.1 billion. The fact that the wind industry may experience a market-driven downward correction in output and employment does not signify some type of policy failure justifying an expense of this nature.

• Over 50 percent of wind capacity is located in only five states; over 75 percent is located in just 11 states. The federal PTC, however, unfairly shifts wind energy development costs from taxpayers in the RPS states to those with little or no wind development, forcing taxpayers across the country to support an industry concentrated in only a few states. In fact, under the inequitable federal PTC, taxpayers in the states without RPS mandates pay approximately 24 percent of the PTC funding, even though they receive no direct benefit.

• The generous federal wind PTC has created distortionary "negative prices" in many regional power markets across the country by perversely incenting wind producers to pay the system to take their unneeded power just so they can collect the subsidy and still make a profit. These PTC-driven market distortions harm reliability by penalizing the conventional generators needed to backstop wind when it does not blow, forcing conventional generators to operate at a loss or not at all. As such, the federal wind PTC subsidy unfairly tilts the playing field in favor of intermittent wind, and disadvantages reliable and essential conventional resources such as natural gas.

• Wind generation has already led to billions in hidden costs for electricity consumers to cover the costs of interconnecting these intermittent, remotely-located resources, and providing backup generation when federally-subsidized wind resources fail to perform.

For all of these reasons it is clear the federal PTC should expire since it has morphed from an ill-designed temporary subsidy for a purportedly "infant industry," into an inequitable tax hand-out for what is clearly a well-established industry that distorts markets and allows wind to compete unfairly with both conventional generation resources and even other types of renewables.