The End of Wind Tax Credits?

by Anne Szustek

Congress allowed some 55 tax breaks to expire on December 31. Among them was a spate of tax breaks for green energy initiatives, including for electricity-generating wind farms.

First enacted under the 1992 Energy Policy Act, the federal production tax credit (PTC) provided energy developers ample incentive—2.3 cents per kilowatt-hour produced—to construct wind farms. In turn, the tax breaks have essentially translated into increased U.S. energy sustainability. The U.S. wind energy sector, largely on the back of this tax credit, grew to approximately 3.5% of the U.S. energy supply by the end of 2013.

But in a another cycle nearly as constant as turbine rotation, the tax breaks routinely expire, leading to a stopgap rush to get them passed and leaving wind producers in a state of uncertainty. This situation makes wind producers reticent to launch new projects. The last time the credit came due for renewal was during the legislative brouhaha surrounding the 2013 “fiscal cliff” deal. And although the renewal gave the wind industry a quick jolt, it came with a special stipulation that was also a near-tacit affirmation that this go-around would perhaps be the last renewal: namely, any new wind farm to break ground in 2013 would be eligible for the tax credit once it was online. The deal’s estimated cost was $12 billion over a 10-year period.

After the 2012 iteration of the credit, producers were yet again worried that it would expire—so much so that they rushed to get their latest projects constructed and running by the end of the year. The prize at the finish line of this proverbial long-distance sprint was an extra 12,000 MW of capacity fed into the U.S. power grid. But this stop/start, herky-jerky development is indicative of wind farm producers feeling left in the lurch with each new year. Another round of tax credits would help instill confidence in both wind production companies with regards to their balance sheets, as well as in outside investors who, although they want to support green energy initiatives, want clear returns on investment.

Though the PTC has expired, legislators are considering another extension of only one year, if that. But some legislators say it is time for the industry’s training wheels to come off and for it to stay up on its own. Representative Mike Pompeo (R-KS), whose state is a significant wind producer with 2,713 MW of installed capacity as of the third quarter of 2013, wrote in November to Representative Dave Camp (R-MI), the chairman of the House Ways and Means Committee, to “urge” the expiration of the credit: “The growth in wind is driven not by market demand, but by a combination of state renewable portfolio standards and a tax credit that is now more valuable than the price of electricity the plants actually generate.” Signing on in support of the proposal were 52 other members of Congress from both sides of the aisle. Some are from top wind-producing states such as Colorado and Illinois.

This being said, other options to prolong some sort of subsidy have been suggested, although such plans are in their nascent stages.

Another twist in the negotiations is the nomination of Senate Finance Committee chairman Max Baucus, presently the third-longest serving member of the Senate and a long-time champion of wind power, as President Obama’s next ambassador to China. During a meeting with members of the Senate Finance Committee in early December, Senator Chuck Grassley (D-MT) suggested tax extenders as a lifeline to the PTC, and this is likely how the PTC will survive.

Tax extenders, though not exactly palatable to members of Congress who have been pulling for an all-around overhaul of the tax code, would not likely get any legislative floor time until this spring or summer. If anything, the PTC could be a tool on the Democrats’ belt as Congress pursues tax reform this year. Senator Ron Wyden (D-OR), currently the chairman of the Senate Energy and Natural Resources Committee, will take over the Finance Committee when Baucus heads to China. For Wyden’s part, he has mentioned that issues concerning energy tax credits would be best addressed by way of an overhaul of the tax code. But for the time being, he concurred that extenders are likely the way forward to preserve the PTC, especially considering that the Republican-controlled House of Representatives sees the credit as a less-pressing priority.

Outside of the Finance Committee, a large swath of Congress issued two letters in December in support of keeping the PTC and nine other green-energy tax credits at the top of the proverbial pile as Congress was rushing to push through a stopgap, bipartisan budget agreement before the end of the year. Signing on to one letter were 25 Senate Democrats and 6 House Democrats. It stated, in part: “These tax credits have helped scale up production and drive down the cost of clean energy technologies. They remain critical to addressing the market failures that prevent cost-effective, market-ready technologies from being deployed to their full potential.”

Wind energy is hardly the first matter to fan Congressional hot air. But whether or not it turns up again in legislative debate in 2014, the wind industry knows that it is set until at least 2019 should the credit be phased out. Crucial to this, however, is the wider overhaul of the tax code that both Democrats and Republicans are pushing. A rider from the most recent extension stipulates that any project started before the end of 2013 would continue to be subsidized; this has meant that thousands of megawatts of wind power are set to come online during 2014. At the lower end of the range of estimates is the IHS Emerging Energy Research’s forecast of 6,000 MW set to come online this year; at the higher end is the U.S. Energy Information Administration’s prediction of 10,100 MW. Heading into 2015, figures look slightly less robust, with Bloomberg New Energy Finance predicting 3,200 MW. IHS Emerging Energy Research is at the higher end of the 2015 estimate range, with 7,300 MW.

In the medium term, the outlook for U.S. wind energy is solid. Combined with the new energy set to come online, U.S. utility companies have purchased more than 5,670 MW and have gotten the green light to build utility-owned plants worth 1,870 MW. In the longer term (after 2015), though the picture is not clear, it isn’t murky either.

The average prices of wind turbines has dropped some 20% to 35% since late 2008, according to DOE statistics, which has helped to hone wind power’s cost efficiency. Forecasts by Bloomberg New Energy Finance show that the U.S. wind market is poised to generate some 6,200 MW of new capacity starting in 2017. The levelized costs of wind production have also dropped in recent years, with some of the lowest costs in the hydrocarbon-producing Great Plains, including Texas and “little Kuwait on the prairie” North Dakota. According to DOE statistics, purchased power agreements in the region put wind production costs between $20 and $40 per megawatt-hour, which would likely rise to $47 to $75 should the PTC fully expire. Tax credit or not, this level is still comparable with costs of natural gas–powered plants. And should wind production technology continue to develop, these costs could drop even lower. Costs for other regions are higher but offer an even more attractive price differential in favor of wind power.

The future of the PTC remains uncertain, whether it’s a bandage of a tax extender, written into a full-on tax overhaul, or forgotten by legislators. But the numbers show that, despite any wrangling in Washington, the Great Plains, long associated with wrangling of a different kind, can continue to keep wind power turning.