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.

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.

Wind energy in China has been expanding at an incredible rate, and the Chinese government hopes to speed up this deployment in the future.  Currently, China has approximately 62.4 gigawatts (GW) of wind energy installed, mostly in the remote northern and western regions of the country.  Transmission infrastructure, however, has not kept pace; up to 20% of the power generated is wasted because the wind farms are not connected to the grid.

Microgrids could be the solution, or at least an interim step, to integrating this burgeoning generation capacity.  By definition, microgrids incorporate distributed generation resources and have the ability to isolate, or “island,” themselves from the greater electric grid.  Deploying microgrids near the sites of non-grid connected wind power would have three main benefits:

First, microgrids utilizing the wind generation would provide the surrounding communities with a more reliable source of electricity.

Second, since microgrids have their own generation resources, they draw less power from the electric grid than regular loads.  This means that capital investments in transmission infrastructure would be reduced, since less power would need to flow into the microgrid, and already strained utility budgets would be eased.  For example, a significant amount of wind capacity exists in Inner Mongolia, but the region has a relatively small load compared to the more urbanized parts of China.  The regional utility, Inner Mongolia Grid, lacks the funds to build sufficient transmission capacity to the rest of the country.  Using that power to create local microgrids would benefit both the region and the power producers.

The third benefit is more subtle.  Microgrids enabled with storage components (e.g., batteries, flywheels, and so on) can be used to smooth out the intermittent nature of wind power.  When wind power is greater than load in the microgrid, the electricity can be delivered to the national grid.  With storage components installed, electricity could be delivered in a smoother and more predictable pattern.  Not only would this cause less strain on the physical grid, but the stored power could also be used for peak shifting and load-leveling applications, if the storage capacity is large enough.

Along with the entire Asia Pacific region, China currently has a relatively small share of microgrid installations, only about 118 megawatts (MW), according to Pike Research’s Microgrid Deployment Tracker 4Q 2012.  Microgrid deployments are accelerating in Asia, though, and significant increases in wind power should reinforce that trend.

Microgrid Capacity by Region, World Markets: 4Q 2012

Now that the 2012 presidential elections are well behind us, investors and developers with their sights on clean energy technology markets are settling down to figure out the regulatory and policy landscape moving forward into 2013.  As always, California could provide a glimpse of the future for much of the rest of the country.

In the election’s aftermath, the launch of the nation’s first “cap and trade” auction – occurring in California – seems serendipitous.  The auction is one of many programs helping to implementing the state’s 2006 landmark AB 32 law, also known as the Global Warming Solutions Act.  Will this market-based attempt to price carbon become a precursor for the rest of the country, or will it fall flat and give Republicans a political edge in the 2014 midterm elections?

Put another way, given the still fragile state of today’s economy, is now the time to impose a de facto tax on carbon?

If one listens to the California Chamber of Commerce, the answer is no.  Interestingly, the state Chamber actually endorses taking action to respond to climate change.  But this business advocacy group has filed a lawsuit taking issue with provisions of the law that require businesses to divert a portion of auction revenues to fund state programs.  Ironically enough, the California Public Utilities Commission is now proposing that a portion of these same revenues be rebated back to residential consumers, echoing the theories of “cap and dividend” first floated by Peter Barnes in his 2003 book, Who Owns the Sky? Early auction results showed a low carbon price of $10.09 per ton, a result of competing bids that sold out and an auction design that awards allowances on the lowest clearing price.

The results of these policy debates in California may influence the fate of the federal production tax credit (PTC) for wind power, a policy that clearly was caught in the crossfire of election-year politics.  The stop and go nature of policy support for renewables in the United States is costing the nation jobs, as several factories have laid off staff, and the American Wind Energy Association claiming that 37,000 new jobs hang in the balance.

Rumor has it that one “grand bargain” that may appeal across both sides of the aisle might be a longer extension of the current PTC for wind of around $0.02 per kilowatt-hour (3 to 5 years) in exchange for a final sunset on the subsidy (or a decline in the subsidy rate over time).  The rationale is that both wind and solar are now dropping in cost, and therefore “permanent” subsidies should not be necessary.  This may all be wishful thinking, however, as record low natural gas prices have made it more difficult for renewables to compete.  The renewable energy lobby also points out that fossil and nuclear technologies have received government assistance for decades, and could still balk at such compromises.

In any case, the election results, and the launch of the nation’s most advanced carbon reduction market, will likely prove to be fertile ground for new policy reform next spring.  And California’s cap and trade program could reveal some populist twists that will influence decisions made in Washington, D.C.