Wind Energy Companies Prepare for Tax Credit's End
By Matthew Philips January 09, 2014
(Note from Mr. B: this analysis took place before the 50% fall in crude oil prices)
In Texas, the wind tends to blow the hardest in the middle of the night. That’s also when most
people are asleep and electricity prices drop, which would be a big problem for the companies
that own the state’s 7,690 wind turbines if not for a 20-year-old federal subsidy that effectively
pays them a flat rate for making clean energy no matter what time it is. Wind farms, whether
privately owned or part of a public utility, receive a $23 tax credit for every megawatt-hour of
electricity they generate. (A megawatt-hour is enough juice to power about 1,000 homes for one
hour.) This credit, which was worth about $2 billion for all U.S. wind projects in 2013, has
helped lower the price of electricity in parts of the country where wind power is prevalent, since
wind producers can charge less and still turn a profit. In Texas, the biggest wind-producing state
in the U.S., wind farms have occasionally sold electricity for less than zero—that is, they’ve paid
to provide power to the grid to undercut the state’s nuclear or coal energy providers.
This sweetheart deal looks to be on its way out, in part because it succeeded in what it set out to
do. Over the past five years, wind has accounted for 36 percent of all new electricity generation
installed in the U.S., second only to new natural gas installations. Wind now supplies more than
4 percent of the country’s electricity. At about 60,000 megawatts, there’s enough wind energy
capacity to power 15.2 million U.S. homes, a more than twentyfold increase since 2000. It’s still
tiny compared to fossil fuel: Combined, coal and natural gas supply roughly two-thirds of U.S.
electricity. But wind produces about six times more electricity than solar. That’s led Congress to
take steps to do away with tax incentives first established in 1992 to help the fledgling industry
take root. In December lawmakers allowed the credit to expire. … (but in 2015, the credits
were extended…see http://www.csmonitor.com/Environment/2015/0729/If-wind-energy-isstrong-why-does-it-need-subsidies. to understand the reasons why…Mr. B)
This doesn’t mean wind producers are suddenly out in the cold. The tax credit lasts for 10 years
after a project is complete, so most of the wind energy produced in the U.S. will continue to
receive federal support for at least a few more years. And any wind turbine that was under
construction before the end of last year will still get a full decade of credits. But projects that get
under way from now on won’t qualify for the benefits. “The wind industry is all grown up now,”
says Michael Webber, deputy director of the Energy Institute at the University of Texas at
Austin. “It’s reasonable to ask if it deserves such a big subsidy.”
Story: Pattern Energy's Mike Garland on Wind Energy Subsidies
The wind tax credit has expired before, including at the end of 2012, but Congress always
renewed it. As the 2013 deadline neared, wind developers rushed to buy equipment and get their
projects started before the end of the year. In December, MidAmerican Energy an Iowa utility
that’s majority-owned by Warren Buffett’s Berkshire Hathaway, bought $1 billion of wind
turbines from Siemens, the biggest single order for on-shore turbines ever. Mark Albenze, chief
executive officer of the Wind Power Americas unit of Siemens Energy, says he now has 18
months of work lined up. After that, business could dry up pretty quickly without the credit as an
incentive to build. “I’m already getting itchy,” he says.
Congress may decide to renew the credits as part of the larger, endlessly debated effort to
overhaul the tax code. In December, Montana Democrat Max Baucus, chairman of the Senate
Finance Committee, took a first crack at it with a proposal to do away with the country’s 42
separate energy subsidies, many of which expire every couple of years, and replace them with
two simple tax credits: one for the production of clean electricity, the other for clean
transportation fuels. The credits would expire only after the U.S. achieved certain goals in the
reduction of greenhouse gas emissions. To Blake Nixon, president of Midwestern wind
developer Geronimo Energy, that sounds like a pretty good deal even if it would mean less
money from the government. “Right now,” he says, “I would trade a smaller subsidy for a dose
of long-term certainty.”
(In December 2015, Congress acted to extend the wind farm credits as part of a political
compromise which allowed oil drillers to export for the first time since the 70s...but also
laid out a phase-out schedule for the credits. For a fair review of what happened and why,
see http://www.renewableenergyworld.com/articles/2015/12/making-sense-of-the-itc-extension-
for-wind-solar-and-bioenergy-too.html and for the details of the laws see
http://www.windpowerengineering.com/policy/five-things-you-need-to-know-about-theextension-of-the-itcptc/ …Mr. B)
Ever seen these up close? They are HUGE and moving FAST. Mr. B
Questions
1. Is Wind Energy a positive or negative externality?
Why?
2. Does the creation of Wind Energy move the MPB or MPC curve?
3. Without government action, will the private market overproduce or underproduce
Wind Energy?
4. The subsidy (tax credits for energy produced) to producers causes them to increase
or decrease production?
5. Does the tax credit for energy produced move production closer to a socially optimal
production level?
6. If the subsidy was a one-time credit for building the wind farm, rather than credits
for each unit of energy produced, would producers build additional capacity?
7. Once production reaches a socially optimal level, will the removal of tax credits
cause production to decrease? Over what time period?
8. If you were a national-level government official, would you support the removal of
tax credits? Explain.
If you were a state government
official, would it depend on the state you represented? Explain.