Navigant Research Blog

The Economic Argument For Production Tax Credits

— December 31, 2012

With the U.S. Congress struggling to reach a deal on the so-called fiscal cliff, the Production Tax Credit, or PTC, has become an object of intense scrutiny.  Enacted in 1992, the program functions by awarding a corporate tax credit for each kilowatt-hour (kWh) of electricity produced by specific technologies.

The PTC for wind expires at the end of 2012, unless Congress votes to retain it.  Critics of the subsidy have suggested that retaining the PTC distorts markets in favor of a technology that would not otherwise be competitive to cheaper energy sources like coal and natural gas.  Technically, these critics are correct about the function of a subsidy (which the PTC is).  But they’re missing the point.

Ignoring the subsidies that coal, oil, and natural gas also receive, the PTC’s function is not only to help out nascent technologies, but also to help compensate new technology for its environmental benefits.  Wind energy, like most of the other technologies to which the PTC applies*, produces no carbon dioxide.   The credits help put a price on the damages from carbon emissions, by subsidizing non-polluting technologies.  In fact, the PTC is set at a level that falls within the range of estimates per ton of carbon.  In a 2005 paper in the journal Energy Policy, Richard Tol, a scientist at the Institute for Environmental Studies in Amsterdam, examined numerous estimates of the dollar damage of carbon emissions and found that the median cost was about $14 per ton of carbon; this falls within the $11-$22 dollar per megawatt-hour price of the subsidy provided by the PTC.  Well-designed subsidies and taxes, their analogue, can be economically efficient, if politically unpopular, since they maximize the value of carbon reductions.  In that sense, the PTC acts less as a political instrument, and more of an economic one.

From a jobs standpoint, the PTC has had significant positive impacts on the economy.   Expiration of the PTC for wind energy would reduce the sector’s 75,000 jobs by nearly half.   Obviously this is not the invisible hand of the free market, but government intervention on behalf of job creation is hardly a novel concept.  The oil and gas industry received approximately $7.1 billion during the 2002-2008 time period – subsidies that no doubt helped create jobs in that sector.

Finally, expiration of the wind PTC would increase the cost of installed wind capacity, and reduce the amount of total installed wind power.  Previous PTC expirations in 2000, 2002, and 2004 led to decreases in wind installations ranging from 73% to 93%.  A similar situation now would put the federal goal of 20% wind power by 2030, set by former President George Bush and endorsed by President Obama, out of reach.

*Biomass, waste-to-energy, and anaerobic digestion do emit carbon dioxide in the final stages of electricity production.  However, there has been much debate about this, and the whole production process may indeed be carbon-neutral or carbon-negative.


Plug-In Hybrids Pull Away from BEVs

— December 28, 2012

After 6 straight months of increasing sales numbers and being the top selling plug-in electric vehicle (PEV) in the United States, the Chevy Volt was finally knocked off its pedestal in November by the Toyota Prius Plug-in and the Nissan LEAF.  The Volt has dominated monthly PEV sales tallies through the last half year; but, the expiration of multiple discount deals for lease and sales promotions in November effectively cut Volt sales in half from the previous month.  Additionally, November was the first full month of sales for the Ford C-MAX Energi, another plug-in hybrid (PHEV) with a 20-mile all electric range.

While the sudden plunge in Volt sales is not a welcome sign for a robust PEV market, other developments signal the emergence of a strong PHEV market from the beleaguered market for battery electric vehicles (BEV).

Cumulative EV Sales, United States: December 2010 to November 2012

(Source: Pike Research)

The current PHEV market comprises the hatchback Volt, Prius Plug-in, and C-MAX, as well as the high-end sports car, Fisker Karma.  Next year will bring four new models in two new vehicle classes: two four door sedans, the Honda Accord and Ford Fusion; the first PHEV SUV for the mass market, the Mitsubishi Outlander; and another high end sports car, the Cadillac ELR.  In Europe, the Opel/Vauxhall Ampera (the Volt’s European version) has done particularly well with fleets, and Volvo sold out of its first production run of the first diesel PHEV, the V-60, before it even hit showrooms.

Numerically, BEVs have the advantage as there are eight models currently available in the United States.  Geographically, however, only three are available to markets outside of California; the Nissan LEAF, the Mitsubishi i-MiEV, and the Tesla Model S.  The rest are available either as “for demand only” or to meet California ZEV mandates.

Three new major BEVs are expected to become available in 2013: the Fiat 500e, the Chevy e-Spark, and the Smart ForTwo ED, with the Tesla Model X expected to follow in 2014.  The Fiat 500e and Chevy e-Spark will join the ranks of California-compliant cars.  The Smart ForTwo, which will be the lowest cost OEM-produced BEV, and the Tesla Model X will be marketed at large.  While the number of models will increase, some smaller BEV brands may not last through the winter.

Despite BEVs’ numerical advantage, they have only accounted for roughly 24% of the 2012 U.S. PEV market to date, a significant drop from the 56.4% market share they held at the end of 2011.  Sales of BEVs did jump significantly in November, thanks to estimated increases in Model S deliveries and the LEAF’s third highest month of sales.  However, additional PHEVs outside the class of hatchbacks and high-end sports cars will significantly alter the PEV dynamic toward PHEVs.  The rise of the PHEV market will also have a significant impact on the electric vehicle supply equipment (EVSE) industry, as PHEVs are not compatible with DC fast chargers and there are significant differences between charging behaviors of PHEV and BEV owners.

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On PTC, Wind Industry Seeks a Winning Hand

— December 27, 2012

The American Wind Energy Association (AWEA) sent a letter in December to leading members of Congress, urging them to include a modified extension of the wind energy Production Tax Credit (PTC) in the fiscal cliff budget deal.  The existing PTC is scheduled to expire at the end of the year.  The cleantech industry, which has fared well in times of economic, political, and natural disasters, is counting on yet another last-minute breakthrough on a policy that should have been enacted a long time ago: the stepped-down wind PTC that replaces the industry killing on-again-off-again cycle with a predictable, long-term approach that phases the tax credit out over time.

Here’s an excerpt from the letter:

“The industry has undertaken an extensive analytical effort to determine what level of the PTC over a specific number of years would be needed to keep the industry minimally viable.  The analysis assumed that the industry would meet ambitious technology-improvement and capital cost targets.  Analytical results indicate that a PTC beginning with 2.2 cents per kilowatt-hour, or 100% of the current level for projects that begin construction in 2013, followed by 90%, 80%, 70%, 60%, and then 60% of the current level for projects that are placed in service in years 2014 through 2018, with no PTC in 2019 or afterwards, would sustain a minimally viable industry, able to continue achieving cost reductions.”

The damage has already been done for 2013, as U.S. installations are projected to drop from approximately 10 gigawatts (GW) this year to less than 2 GW in 2013.  The stepped down approach could return the industry to the 8-10 GW annual installation range, given the likelihood of cost reductions and of renewable portfolio standard target deadlines immediately following that time period.

Wind Power Capacity Growth, United States: 1992-2012

(Source: EIA)

Back at the Trough

It’s unfortunate that it has taken this long to get this kind of framework on the table.  It appears that the wind industry overplayed its hand, counting on the richer $0.022 per kWh incentive in shorter increments, renewed every few years.  Given the variability of American energy politics, that proved to be wishful thinking.

For years the wind industry has made the argument that wind is a mature technology that can produce cost-effective renewable energy today and is on a cost-reduction path to compete with fossil fuels, but needs federal support in the meantime.  Granted, the American tax-credit system routinely defies logic on multiple levels, doling out billions to the oil and gas industry each year, but 2 to 3 years is not a realistic amount of time to drive down costs and reach market stability for any new technology.  Especially when the entire industry shrivels during the interim negotiating period, as we are seeing today.

You have to credit the hard working people working at AWEA and in the industry more broadly for their impressive accomplishments to date, from both a wind energy deployment and economic growth perspective.  They were counting on wind being recognized by Congress as a clear win-win bipartisan issue that has been a boom for red and blue states alike.  Instead, the wind industry has had to come back to the trough every few years and bargain for short-term extensions at the expense of a healthier longer-term approach that would have provided both predictability and pressure on the industry to reduce costs.

Given the macro trends at play – specifically, low-cost natural gas and modest U.S. electricity demand growth – the stepped down approach is no guarantee of industry success.  Under the circumstances though, it’s still the most sensible policy moving forward.  Hopefully it’s not too late.


In Disasters, Cleantech Opportunities

— December 26, 2012

In recent weeks, to the surprise of many, carbon tax legislation has re-entered the debate at the federal level.  Given the revenue raising opportunity the tax would provide, and with cuts to the sacred cows of Medicare and Social Security off the table for both parties for now, many wonder if the carbon tax could win new support as part of, or a consequence of, the fiscal cliff negotiations.

This would be a remarkable turnaround, considering that a cleantech championing Democrat-controlled Senate and House in 2009 could not even pass the American Clean Energy & Security Act that called for a 20% national renewable energy target.   Indeed, there has been little enthusiasm on Capitol Hill to renew the federal wind power production tax credit (PTC), which has been successful in terms of deploying wind power and creating jobs, in blue and red states alike.  The effect of the PTC expiration will be to stop wind power development in its tracks.

The renewed talk of a carbon tax stems from one little-noted fact: cleantech has always fared well in the wake of national disasters.  The combination of Hurricane Sandy and the fiscal cliff could form just the tonic that cleantech supporters need to achieve meaningful legislation to support clean energy deployment in the United States.

Consider the following political gains made by the cleantech industry in the past 12 years:

During the George W. Bush administration, despite federal inaction, several states emerged as leaders for deploying clean energy.  Between 2001 and 2008, 24 states established renewable energy targets or standards, enacting a wave of incentive schemes to fill the void at the federal level.  Thirty states plus Washington, D.C.  have enacted such targets and standards today (although many are currently under attack and may not survive).

Bush’s Boldness

A little more than a year after Hurricane Katrina, with oil prices around $70 per barrel, the prospects for advancing clean energy industries in the United States seemed dim.   In his 2007 State of the Union speech, though, George W.  Bush made the bold statement that our country is addicted to oil, shocking many of his fossil fuel industry supporters with increased investment in clean technology research and the introduction of the U.S. renewable fuel standard, which led to significant public and private investment in biofuels, in particular.  The prospects for achieving the targets for advanced renewable fuels (cellulosic biofuels) are low, but Bush’s move helped move the industry into a new phase.

In 2009, with the U.S. economy contracting, the newly elected Obama Administration unleashed $770 billion in cleantech stimulus funding that has been the single most effective investment for the U.S. cleantech market ever.

These examples underscore the herky-jerky nature of cleantech support and deployment in the United States, which has hamstrung the competitiveness of investors, companies, and the nation.  I personally think that the 2-15 Washington Wizards (a disaster of an NBA franchise) located only a few miles away, have a better chance of winning the NBA title than the carbon tax has of being passed on Capitol Hill.  Nevertheless, the prospects for positive action on federal support for clean energy are better than they’ve been in years, thanks partly to disasters both natural and manmade.


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