Subsidizing in Spurts: Our Production Tax Credit Policy, or Lack Thereof

by Lesley McAllister
Alexandra Klass

February 12, 2013

Taxes and energy are subject to constant partisan debate. Both are at play in politically-charged discussions about the government’s role in promoting renewable energy, particularly wind energy. Since 1992, the federal government has granted a production tax credit (PTC) (currently 2.2¢ per kilowatt/hour (kWh)) for production of certain renewable energy. The credit initially focused on wind, closed-loop biomass, and poultry-waste energy resources; in 2004 Congress expanded the program to include open-loop biomass, geothermal, and several other renewable energy sources. With this support, the wind energy industry has begun to take off.  By 2011, installed wind capacity exceeded 45 gigawatts (GWs), accounting for about 4% of U.S. installed electricity capacity, 3% of total U.S. generation, and more than 10% of total generation in several states. And in 2012 alone, the industry added more than 13 GW of wind energy, surpassing the previous record of 10 GW in 2010.

Yet unlike the significant tax benefits for fossil fuels, which have been in place for many decades, the PTC has never been a permanent part of the tax code. Instead, it was created with set expiration dates, and expires on those dates unless Congress specifically reauthorizes it. This resulted in the PTC expiring at the end of 1999, 2001, and 2003, and almost expiring in numerous other years, including 2012.  Although Congress extended the deadline for one more year as part of the “fiscal cliff” budget negotiations in January 2013, this temporary fix means that the debates over the long-term use of tax benefits to encourage renewable energy will continue.

These expiration cycles have had a significant impact on project investment, wind energy jobs, and technology development.  Generally, investment increases in the 12 months leading up to the real or threatened PTC expiration and then drops afterward. These cycles create uncertainty, and research has shown that this uncertainty, even more than the lack of the PTC in “off” years and the pending expiration in other years, drives investment volatility and hurts the industry.  While 2012 was a record year for wind installations, most of the investments in those projects came in the previous year and the uncertainty over the PTC expiration in 2012 means that developers have not planned significant projects for 2013.

Moreover, the uncertainty over whether the PTC will expire or not creates misaligned assumptions between wind generators and utilities in negotiating Power Purchase Agreements.  The wind generator must assume the PTC will not be renewed for purposes of obtaining financing, which results in it seeking a higher contract price because it cannot rely on the tax benefit. For its part, the utility must assume that the PTC will be renewed, resulting in it seeking a lower contract price because otherwise, the wind generator will receive a windfall. This results in the parties needing to wait until Congress resolves the uncertainty, leading to the boom-bust cycle in new wind construction that has been prevalent during the life of the PTC.

Wind energy has the potential to become a major part of the country’s energy mix, bringing with it reduced GHG emissions, new clean technology jobs, and a more diverse energy mix for the nation’s transmission grid. But the tax benefit expiration cycles erode the financial security that the industry needs to continuously grow and thrive.  It is precisely the long-term continuity of government investment that created the multi-billion dollar fossil fuel industry that exists today. With similarly reliable government support, wind energy and other promising renewable energy technologies will have the opportunity to mature to the point that they can stand on their own and grow into the reliable and clean energy supply of the future.

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Lesley K. McAllister is a Professor of Law at the UC Davis School of Law.

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