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Last Hurrah for the Wind Power Tax Credit?

Geoffrey Styles's picture
GSW Strategy Group, LLC

Geoffrey Styles is Managing Director of GSW Strategy Group, LLC, an energy and environmental strategy consulting firm. Since 2002 he has served as a consultant and advisor, helping organizations...

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  • Aug 2, 2012 7:34 pm GMT

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Ahead of Thursday’s meeting of the Senate Finance Committee, a bipartisan deal has apparently omitted the expiring production tax credit (PTC) for wind power from a package of “tax extenders”–various expiring federal tax provisions, including the annual “patch” for the Alternative Minimum Tax.  This development might surprise some of the industry’s supporters, but the politics of wind have changed since I last examined this issue in February.  A measure that once enjoyed solid bi-partisan support is now caught between two presidential campaigns that hold diametrically opposed views on its fate. 

A quick review of the PTC seems in order.  This tax credit, which covers a variety of technologies but with wind as the main beneficiary, dates back to 1992–interrupted by several past expirations but then revived in essentially its present form. That’s significant, because during the same 20 years in which the PTC has been escalating annually with inflation–from 1.5 ¢ per kilowatt-hour (kWh) to the present level of 2.2 ¢/kWh–the cost of wind turbines and their output has fallen significantly. In the same period, US installed wind capacity grew from 1,680 MW to nearly 49,000 MW as of the first quarter of 2012.  So in effect, we’re subsidizing today’s relatively mature onshore wind technology by a larger proportion than we did when it was in its infancy. That makes no sense, especially in the current environment.

The US wind industry has received substantial government support in recent years.  When the long-standing tax credit against corporate profits proved to be much less beneficial during the financial crisis, the administration gave wind developers a better option within the stimulus: a 30% investment tax credit that could be claimed as up-front cash grants, instead of having to wait until power was generated and sold over the normal 10 year period of the PTC.  From 2009-11 the wind industry received a cumulative $7.7 B, in addition to ongoing tax credits on older projects, manufacturing tax credits for new wind turbine factories, and loan guarantees for selected wind farms.  And even with new turbine installations in 2012 running well below their record rate of 10,000 MW in 2009, the wind projects that qualify for the PTC this year could receive a total of $4.5 B over the next decade. 

Many people seem to want to equate the tax breaks that wind and other renewable energy technologies receive with the controversial tax benefits for the oil and gas industry, without realizing how unfavorable that comparison truly is for renewables.  Subsidies for technologies such as wind are much higher per unit of energy produced, consistent with their intended purpose of bridging the competitive gap vs. conventional energy.  Yet since the total output of new renewables is still relatively small, the disparity in total subsidies is much larger than it appears.  One way to illustrate that is that if the oil and natural gas produced in the US received tax credits at the same rate per equivalent kWh as wind power, then the annual oil and gas tax preferences that the Congress and President Obama have been sparring over for the last three years wouldn’t be $4.8 B per year, but around $100 B per year. 

As the Reuters article makes clear, there will be other opportunities for the PTC to be reinserted in the extenders bill or other legislation.  However, by persistently arguing for extending the existing credit without modification, the wind industry and its supporters may be misreading the public’s appetite for such generous subsidies in a period of protracted economic weakness, notwithstanding the recent Iowa poll.  Despite its rapid recent growth wind still contributes less than 4% of the nation’s electricity and just 1% of our total energy consumption, and the green jobs angle is wearing thin. Last year’s expiration of the ethanol blenders credit set a precedent for ending another large, generous subsidy before its beneficiaries agreed they were done with it. If congressional Republicans line up behind their party’s standard beareron this issue, the wind industry will have missed its opportunity for a graduated, multi-year phaseout of the PTC, instead of stepping off a cliff in 2013.

Image Credit: koya979/Shutterstock

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Geoffrey Styles's picture
Geoffrey Styles on Aug 2, 2012

Update: The PTC is back in the Senate "tax extenders" package.  Will the House go along?

Philip Lewis's picture
Philip Lewis on Aug 2, 2012

Congratulations on a balanced and fair article. A rarity these days.

Erica Etelson's picture
Erica Etelson on Aug 2, 2012

I don't understand the argument that renewable energy advocates should avoid comparing RE to fossil fuel subsidies -- in the example you gave, such a comparison shows that the subsidy disparity is 20x worse when you factor in amount of energy actually produced with those subsidies. Could you clarify?

Mark Lazen's picture
Mark Lazen on Aug 3, 2012

Hi Kent--Thx for your comment.

Siemens sponsors the Energy Collective, but the site is editorially independent. Siemens has always demonstrated a laudable commitment to ensuring that a diverse range of civil and thoughtful voices can be heard here.

I suspect Geoff Styles may weigh in with his own response to you--but suffice to say that while we can all lament the fact that progress towards a truly sustainable and abundant energy future is a messy and imperfect business at best, Geoff is only a (very knowledgeable) messenger in this case. He calls them like he sees them and always has his facts in order.

Mark Lazen, The Energy Collective.

Geoffrey Styles's picture
Geoffrey Styles on Aug 3, 2012

I'm afraid you're missing several key points and reinforcing the politicization of this issue.  As I've noted in previous postings, the wind tax credit isn't very effective climate policy, because it is completely disconnected from the cost per ton of CO2 abatement, which should be the main guiding force for investment to reduce emissions as the European policies you cite are generally intended to do.  The lower the cost of emissions reductions, the more of them we can afford. 

Comparing the tax benefits for wind power to those for domestic oil and gas production exposes a disparity of orders of magnitude, based on output.  The effective tax benefit per gallon for oil is $0.02, while for wind--if wind competed with oil imports, which at least in the US it clearly does not--works out to $0.32/gal.  If the tax benefits are intended to yield energy and jobs, the tax benefits for oil & gas are doing that much more effectively than the PTC.  There's a deeper issue here, as well, that might be lost on someone not familiar with the US tax structure.  The tax benefits for the oil & gas industry have the same effect as those for most US industries: they result in activities, the taxes on the profits from which more than offset the tax incentives that helped to spur them.  The best evidence that the PTC fails to deliver similarly is that many wind developers must swap out their tax credits to other, profit-making firms in other industries, because the tax credits exceed their own profits.  When that "tax equity" swap process broke down during the financial crisis, wind developers needed up-front cash in the form of grants  from the US Treasury, instead.  So it's much harder to argue that the PTC pays for itself.   

As for climate denial, you won't find it here.  However, concern about climate change doesn't mean we shouldn't pursue smarter, more effective solutions to address it.

Geoffrey Styles's picture
Geoffrey Styles on Aug 3, 2012


Please take a look at my response to Kent, above.  It's all about effectiveness--what we get for these incentives--and competitiveness, especially for the oil and gas industry, which unlike the domestic wind farms helped by the PTC must compete globally both for investment and markets. It doesn't take a big change in tax expenses to render some oil projects here less attractive than projects outside the US, with consequences for our imports and energy security.

As it happens, I think that the vast majority of these corporate tax incentives--"tax expenditures" in the parlance of the policy wonks--should be phased out via comprehensive tax reform that results in lower corporate tax rates that would make all US businesses more competitive globally, including our cleantech industries.

Philip Lewis's picture
Philip Lewis on Aug 3, 2012

"Wind subsidies in the U.S. are being slashed while fossil fuel subsidies are being continued at very healthy rate to people raking in money hand over fist."

This is nonsense of course, but even if it were true the proper response would be to attack the subsidies on fossil fuels, not propose more government indebtedness for a particular kind of power generation just because you like it. Or are employed by it.

Geoffrey Styles's picture
Geoffrey Styles on Aug 3, 2012

Thanks very much.

Noah Thomas's picture
Noah Thomas on Aug 3, 2012

If you factor in the externalized costs of fossil fuel production (environmental degradation, CO2 emissions, etc) into the bang for the buck argument for/against subsidies, how does the petroleum industry fair against wind?  

Since subsidies are a way for government to foster the development of industry perhaps we should look at total projected costs over say a 20 year period (similar to how returns are figured in renewable investment). The Federal Government is concerned with many cost aspects of society including environmental clean up costs and health care, I would argue that it is not unreasonable to include externalized costs of industry into the equation when discussing government subsidies. 

In any case I would agree that European models with long term stable energy pricing, like the various Feed-in-Tariff schemes, are more effective both for subsidizing innovation and for creating a more stable investment environment for renewables such as wind. 

Paul O's picture
Paul O on Aug 4, 2012


People come here with preconceived ideas, They simply aren't listening, sadly!


Geoffrey Styles's picture
Geoffrey Styles on Aug 4, 2012

Unfortunately, those same feed-in tariffs triggered massive global overcapacity in cleantech manufacturing, even compared to generously subsidized demand.  The result has been a wave of cleantech bankruptcies that extends far beyond Solyndra, while undermining the public finances of countries like Spain.  That's hardly a "stable investment environment."  The more I ponder this, the more I conclude that the least wasteful government incentives and the ones most worth supporting are for R&D, where funds go much farther than in deployment.

As for externalities, you raise an important point.  However, we could argue until the end of time about the right level of externalities for petroleum, chiefly based on what to include and exclude.  The easiest externality to gauge and likeliest the largest one is for CO2.  Based on recent emissions trading in the EU that's worth about $0.08/gal of gasoline, still much less than the equivalent PTC value--which isn't really equivalent because renewable electricity doesn't compete with oil, at least in the US.

Noah Thomas's picture
Noah Thomas on Aug 4, 2012

Yes, government investment in R and D is good policy, you could argue most of the innovations that propel our economy were a result of post war government investment. Getting those innovations to market needs a new subsidy strategy or some combination of public private financing, as has been discussed at lenght on this site.

I think its a little far fetched to blame the undermining of public finances in Spain on their renewable energy investment strategy though. Even the EU commission reacted negatively to Spains withdrawl of the Feed-in-tariff.  As far as overcapacity, when an investment environment becomes unstable because of a government withdrawl of support for incentives relating to that industry it seems like that could be read either as overcapacity or as the failure of institutional support for a new economic sector, as resultant overcapacity is triggered by financial projections that assume certain incentive programs, such as tax credits or feed-in-tariff schemes, will exist in the near future. When they are withdrawn overcapacity is the result.  

You bring up an interesting political point though, with the withdrawl of incentive programs at this stage in the development of renewable energy industries it is kind of like the pro-fossil fuei elements of the various political systems have found quite a bit of leverage to take out nacent industries that don't have the depth of capital to be flexible when favorable investment climates dissipate.

Geoffrey Styles's picture
Geoffrey Styles on Aug 4, 2012

In fact, the overcapacity I cited has little to do with the withdrawal of incentives; it was overly generous incentives (Germany's solar FIT being a prime example) that led to global over-investment in manufacturing capacity in the first place, with solar firms now falling by the wayside left and right, and a number of wind firms looking shaky.  The expected growth materialized--even better than many thought could be sustained--but manufacturing expanded to meet 2X that.  Result: hundreds of millions or billions of shareholder capital and many "green jobs" lost. 

As for Spain, I only suggested that excessive incentives contributed to their current problems.  The Eurozone's problems obviously go much deeper, and renewables are a sideshow.  However, the Spanish certainly thought they were a prime candidate for cutbacks when they needed to trim budgets.

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