After seeing the Production Tax Credit (PTC) extended through 2013 in the recent “fiscal cliff” legislation, the wind industry is now looking ahead to the tax reform debate. According to E&E Publishing several industry lobbyists are preparing for a renewed push for a longer-term extension of the PTC that would phase out over time.
Based on industry analysis of the impact of the PTC, the American Wind Energy Association proposed a six-year tax credit phaseout, which specifies that “The tax credit would start at 100% of the current 2.2 cents a kilowatt-hour for projects started in 2013, and be phased down to 90% of that value for projects placed in service in 2014; 80% in 2015; 70% in 2016; and 60% in both 2017 and 2018, ending after that.”
However, some members of Congress, such as Rep. Dave Reichert (R-Wash), aren’t optimistic about further extending the PTC. Congressman Reichert told E&E Publishing, “I don’t think there will be another attempt” to renew the credit.
How vital is the Production Tax Credit to the wind industry? What’s your take on the AWEA’s proposed six-year tax credit phaseout?
No doubt the fiscal situation has made the extension of the PTC really tenuous – most people following the issue were surprised it made it into the January tax deal at all. There’s also a huge anti-clean energy sentiment carried by a big section of the GOP in Congress (not all by any stretch, but very significant), why this is the case is a bigger conversation than fits here. Additionally, the wind industry pressed a marketing campaign over the last couple years trying to frame wind as having grown up and being mainstream, this message undercut the story that the industry (and even more so the other PTC supported industries) really needed the support of a 2.2cent/kwh subsidy.
As a result, the political landscape going forward means any extension will be extremely difficult. Against this new reality (and it’s not clear we don’t end up here despite the messaging error) some kind of phase out is almost the only real hope for further extension. Six years is a nice idea, it would provide some longer-term certainty and ought to be a decent runway.
I see two basic problems with the six year plan as proposed. 1) The proposed plan looks a lot like the opening offer of a negotiation, and if that’s the case expect to see an agreement that provides a much steeper phase out. 2) The biggest competitive hurdle for good wind projects is that the price of wholesale power is low, largely because of extremely cheap natural gas and the phase out may or may not match the necessary competitive shift created by rising gas prices and wind equipment price declines. The key to this second point is that it’s not a natural market dynamic, it’s a distortion created by near-term oversupply of gas from the fracking boom. We know these prices are going up, so to leave the wind industry unprotected risks eviscerating an industry that may be competitive but for this distortion in the gas markets.
The other issue that isn’t addressed are small projects, community and distributed wind – these markets basically evaporate during the phase out, unless there is some significant market shift, so a carve out might be worth considering.
I’d prefer to see a phase out indexed to some wholesale electric reference price, or to a natural gas benchmark. Basically have the industry agree that the downward trajectory on capital and operating costs would allow wind to be competitive with natural gas at some benchmark ($7.00? 6.50?), with an annual downward adjustment (5%?). The credit would then be calculated off of this index – with a hard upward cap and horizon to limit the total cost. I might have this wrong, but I think there’s an easier justification for this kind of indexing, and with that it will be easier to win wind-supporting GOP House members as it would be harder to characterize this as endless giveaway to an uncompetitive technology as has been done recently.
Obviously this ignores the externality/cost to the commons questions – wind is non-carbon emitting, but we don’t price greenhouse gas emissions and wind doesn’t use water, which is an unpriced (or at least underpriced) common commodity not accurately reflected in energy prices. Pricing these would further limit the need for direct incentives.
As for the first question – it’s pretty vital in the near term. I have spent some time on how to move the industry forward without the PTC and some of that discussion can be found here: http://www.energytrendsinsider.com/2012/11/16/5-ways-that-wind-power-can-survive-without-a-ptc-extension/