Market conditions back in 1992 no longer exist. Big wind no longer needs the Production Tax Credit, and certainly cannot justify the extraordinary benefits received [3.5¢/kWh pre-tax]. Retaining the subsidy in light of lower installation costs and increased production serves only to further distort the market and bestow a bounty on big wind that far exceeds what 1992 lawmakers could ever have envisioned.
Market conditions back in 1992 no longer exist. Big wind no longer needs the Production Tax Credit, and certainly cannot justify the extraordinary benefits received [3.5¢/kWh pre-tax]. Retaining the subsidy in light of lower installation costs and increased production serves only to further distort the market and bestow a bounty on big wind that far exceeds what 1992 lawmakers could ever have envisioned.
The American Wind Energy Association’s latest market report touts an industrial- wind-energy construction pipeline of 29,634 megawatts, that, if all built, will bring the US installed capacity to nearly 115,000 MW. Installed capacity stands at 85,000 MW today.
You can bet that all (or most) of the new megawatts will meet the Obama/IRS requirements for full-tax credit eligibility. As we’ve written before, the Production Tax Credit ‘phase-out’ was little more than a 5-year extension of the PTC after Congress looked the other way while the IRS implemented its own definition of the phase-out.
For U.S. taxpayers, another 30,000 MW of wind means adding another $25 billion in public handouts to what we’re already paying today for existing facilities.[1] This estimate does not account for the repowering of older turbine projects which are also PTC-eligible.
Since the tax credit is an open-ended subsidy we can only estimate the full cost, but on a kWh-basis, the scale of the PTC benefit is enormous. The 2.4¢/kWh in after-tax income represents a pre-tax value of approximately 3.5¢/kWh. For most regions of the country this equals, or exceeds, the wholesale price of electricity. But the distortion does not end there.
PTC Subsidy Magnified
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 2.4¢/kWh.
The cost of living adjustments might have been justified back in 1992 when wind development was still in its early stages and project costs were likely to increase rapidly with inflation. But in the last 25 years, wind energy costs have dropped and capacity factors have increased dramatically. As such, the effect of the adjusted PTC is staggering.
Consider a 1000 kW project built in 1992 at an assumed installed cost of $2000 per kilowatt and a 22% capacity factor. Over ten years, the project would produce 19,272,000 kWh of electricity and receive production tax credits valued at $289,080.[2] Since the PTC is spread over 10 years, we assumed a net-present value, discounted at 10% of $177,627. The value of the tax credit as a percent of project cost comes to 14%. Applying the discount, the PTC represents just 9%.[3]
That same 1000 kW facility in 2017 would have a project cost of $1600 per kilowatt and an average capacity factor of 42.5%, earning $893,520 in tax credits on 37,230,000 kWhs produced. The net present value would be $549,029. In this scenario, the 2017 PTC represents 56% of project cost. Had the PTC remained a flat 1.5¢/kWh since 1992, it would still represent 35% of project costs. (Click to expand)
Repeal the PTC!
In the last two weeks, EPA Secretary Pruitt and Senator Grassley traded public statements on the issue of tax credits. Pruitt called for ending the subsidies for wind and solar while the Iowa Senator asserted the PTC will remain until the bogus phase-out ends in 2020. Pruitt is right. The PTC has to go and the sooner the better. The tax reform debate on Capitol Hill is the right forum to correct this issue.
Market conditions back in 1992 no longer exist. Big wind no longer needs the PTC, and certainly cannot justify the extraordinary benefits it receives. Retaining the subsidy in light of lower installation costs and increased production serves only to further distort the market and bestow a bounty on big wind that far exceeds what 1992 lawmakers could ever have envisioned.[4]
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[1] Since its adoption in 1992, the production tax credit (PTC) for wind energy has ballooned from roughly $5 million a year in 1998 to $4.2 billion today.
[2] kWh = 1000 kW * 8760 hours/year * Capacity Factor * 10 years.
[3] Estimated capacity factors and project installation costs are taken from Department of Energy annual Wind Technologies Market Reports 2006-2016.
[4] This same analysis would apply to the solar industry following precipitous reductions in project cost.