The production tax credit (PTC) for wind energy is set to expire at the end of this year, but its supporters are arguing for an everlasting extension using twisted logic.
For a while, the argument was that businesses need certainty. The law as it currently stands provides certainty—eligibility for the PTC ends on December 31, 2012. Supporters of wind energy, in their Orwellian thinking, replaced the certainty of existing legislation with debate about uncertain modifications of the existing legislation.
A subsequent argument is that the PTC needs to be “phased out” instead of just stopped. Though the eligibility date has a sharp cutoff, the financial flows themselves do follow a phase-out pattern. Wind generation that is put in place by December 31 will receive the tax credit for next 10 years.
For instance, in January 2013, all wind turbines placed in service after January 2003 will receive the PTC. Then, in February 2013, the 10-year eligibility for turbines placed in service in February 2003 will expire. Each subsequent month, another group of wind turbines comes to the end of its 10-year-eligibility period and the program winds down until January 2023, at which point no turbines will be eligible for the PTC.
This is the way the current legislation is written. There is a certain, clear cut-off date for eligibility, and the payments phase out in a perfectly predictable pattern over a 10-year period. Certainty? Check. Phase-out? Check.
What proponents of a PTC extension really seem to want is a perpetual series of extensions to provide an immortal tax benefit. Since the benefit is so juicy, it is perfectly understandable why they would want it.
So far this year, the wholesale prices of electricity in the different U.S. markets average from less than three cents per kilowatt hour (kW-h) to about 4.5 cents per kW-h. The PTC provides a subsidy of 2.2 cents per kW-h to wind energy producers. So this PTC subsidy is equivalent to 50 percent to 70 percent of the wholesale price of electricity. (Note: It is the wholesale market into which the wind producers are selling their energy.) That’s a big subsidy.
Though you would not know it from wailing and gnashing of teeth over the expiration of the PTC, many states also have renewable energy standards that force ratepayers to buy wind, solar, and biomass produced electricity regardless of how much it costs. These renewable standards are separate from—and, for wind-power producers, in addition to—the PTC.
Without a PTC, some wind will be competitive and some will not. That is how business goes. However, a business that cannot survive without taxpayers paying for 50 percent of the costs (in addition to the benefit of the renewable mandates) is not one that is helping the economy overall. Instead, it is using resources whose value exceeds the value of the electricity produced.
The current law is costly and inefficient. Nevertheless, it is unambiguous and has a 10-year horizon for reducing total payments. Ten years is plenty long enough to live with this bad policy.