Wind power subsidies -- do they have to be all or nothing?
October 10, 2012
Among the most debated renewable energy issues during this election cycle has been the production tax credit (PTC) for wind power, set to expire at the end of this year. President Obama has called for the PTC to be extended while Governor Romney prefers that the credit expire as scheduled. The PTC has existed since 1992 but has undergone a series of expirations (in 1999, 2001 and 2003) and subsequent extensions (in 1999, 2002 and 2004), which has led to a series of booms and busts in the industry.


Having been extended continuously through a series of policies since 2004, the PTC for wind is again facing expiration, and wind project developers and manufacturers are bracing for a substantial drop in demand in 2013. To be fair, the looming expiration of the PTC is not the only obstacle for the wind industry. Low natural gas and wholesale power prices, low electricity demand growth, limited new capacity needed to meet state renewable portfolio standards and transmission constraints also hinder the near-term prospects for wind. In addition, given the history of PTC extensions following expirations, project developers may hold off on opportunities that do exist with the expectation of a subsequent renewal of the PTC and higher project returns as a result.

Besides the history of expirations and extensions, there is another unusual feature of the PTC: the incentive has not declined over time. Established in 1992, the PTC was set at 1.5 cents per kilowatt-hour in 1993 dollars and indexed to inflation, so it currently stands at 2.2 cents/kWh. Wind projects receive this inflation-indexed tax credit for the first 10 years of the project lifetime. This is in contrast to the investment tax credit for solar power, which provides a tax credit equal to 30% of the capital costs of solar installations. There are good reasons to incentivize production rather than investment, such as not encouraging excessive capital costs (gold plating) and rewarding well-performing systems. However, since the PTC is not based on a percentage of costs and was not scheduled to step down over time, the incentive has remained constant despite the concurrent improvements in wind power technology.


These two negative features of the PTC -- the instability of the incentive and constant per kWh level over time -- could be reversed to provide both a preferable policy for wind power as well as a political compromise. Given that wind projects require one to two years to be developed and installed, the PTC could be extended in the following fashion: 1.5 cents/kWh for systems installed in 2013-2014, 1.0 cents/kWh for installations in 2015-2016, 0.5 cents/kWh for installations in 2017-2018 and no tax credits thereafter. Such a schedule would provide predictability to the market, avoiding the boom-bust cycles of the past and stepping down incentives for a maturing industry.