By Melissa M. Powers in Articles, Volume 43, Issue 2
Topics:Energy Industry, Production Tax Credit, Wind Power Industry
In January 2013, the wind energy industry appeared to dodge a bullet when Congress extended the Production Tax Credit (PTC) for another year. Within a few months, however, it became clear that the renewed PTC would offer little benefit and that the industry would have to return to Congress to seek more support. This is nothing new; Congress has consistently failed to provide renewable power with long-term or predictable support.
This Essay explores how intermittent subsidies weaken the renewable energy sector by considering how the PTC debate has affected the wind energy industry. The Essay first explains why renewable power deserves continued government support, despite the objections of “free-market” advocates. The Essay then explains how intermittency exposes the renewable power sector to economic and political uncertainty that the fossil fuel industry avoids. Next, the Essay explores whether two proposals to alter wind power subsidies will provide the industry with more certainty. Finally, while the Essay concludes that both proposals have merit, it suggests that renewable energy policy reform must go beyond subsidies to ensure a more sustainable transition to renewable power.
On January 1, 2013, the wind power industry and advocates of renewable energy breathed a sigh of relief when Congress renewed the Production Tax Credit (PTC) for another year. The wind power industry had sought an extension of this critical subsidy for more than a year, without any response from Congress. Midway through 2012, the failure to secure an extension had already adversely affected the industry. By that point, it also appeared that a short-term extension would come too late to do any good, because the existing PTC required facilities to be placed in service to be eligible for tax credits—and wind projects often take more than a year to develop. Congress nevertheless renewed the PTC for another year as part of the grand bargain to prevent the United States from going off the “fiscal cliff.” Moreover, Congress modified the eligibility requirements to allow facilities that began construction before 2014 to qualify for production tax credits. At first glance, it appeared that Congress’s delay in extending the PTC would not significantly stifle wind power development.
However, by the middle of February 2013, it appeared that the PTC extension would offer little benefit to the wind power industry. In theory, by tying the tax-credit eligibility to the start of construction, rather than its completion, the PTC extension should have given wind developers more breathing room. Yet, uncertainty about how the Internal Revenue Service (IRS) would implement the revised PTC led many wind energy companies to delay investing in new facilities. Even without the uncertainty surrounding the IRS rules, it was unclear whether the revised PTC would promote significant development of new wind farms, given that it can take more than a year to negotiate the deals and secure the permits necessary to begin construction. At most, it seemed likely that a one-year extension of the PTC would benefit companies that began wind projects in 2012 or earlier but, for some reason or another, failed to complete them in time. Most wind companies will spend 2013 eagerly anticipating more effective action by Congress and the President, instead of investing in and deploying more renewable facilities.
Unfortunately, uncertainty has become a recurring problem affecting renewable energy development in the United States. Rather than providing the renewable energy industry with assurance and a clear pathway toward growth, federal policy makers have used intermittent subsidies to support renewables. These on-and-off subsidies inject uncertainty into the industry and constrain renewable energy investment. Intermittency also makes renewable power politically vulnerable because, unlike fossil fuel power producers that benefit from permanent subsidies and the political inertia that allows them to perpetuate, renewable energy companies must regularly petition for affirmative renewals of their intermittent subsidies. These dynamics only exacerbate the uncertainty in the renewable power industry.
Opponents of subsidies have argued that these dynamics support elimination of the PTC and other renewable energy subsidies. Their arguments, however, ignore the urgency of climate change. They also are premised on the unfounded notion that fossil fuels receive fewer subsidies than renewable power. While it is true that renewable power facilities have benefitted significantly in recent years from subsidies like the PTC, historical fossil fuel subsidies eclipse recent government support for renewable energy. Perhaps more importantly, the externalized costs of fossil fuels far outweigh the costs of any subsidies renewable energy sources have received. Indeed, although subsidies for renewable power will likely never offset the competitive advantages fossil fuels have received from lax regulation, they at least help to level the playing field and could ease the transition to a more sustainable electricity system.
This Essay explores the debate surrounding subsidies for renewable energy and focuses particularly on the role the PTC has played in promoting, and sometimes undermining, the wind energy industry. Part II of this Essay explains the essential role subsidies must play in promoting a transition to an electricity system powered by renewable energy sources, and explores why opponents of subsidies have failed to make a convincing case for allowing the “free market” to control energy choices. Having explained why subsidies matter greatly in the modern energy sector, Part III explains how the PTC’s intermittency has affected the economic and political viability of the wind energy industry. Part IV then explores some alternatives to intermittent subsidies that could foster sustainability in the wind energy sector while allowing it to become more self-sufficient.
Finally, this Essay concludes that, regardless of the particular subsidy mechanism Congress adopts, it must provide stability and certainty for wind power producers.
II. The Importance of Subsidies in a Distorted Market
The renewable energy industry had a banner year in 2012. Both the wind and solar industries reported record levels of facility installations and growth. By the end of 2012, the wind energy industry reported that it had installed approximately 13,000 megawatts of new capacity, outpacing even the new capacity additions of natural gas. The solar industry was also on pace to have a record number of new facilities, having doubled its rate of installations during the first half of 2012. Based on these figures, it might appear that the renewable energy industry has finally found its footing and that policy makers can ease back from their efforts to promote and support renewable power. In reality though, the massive deployment rates—for wind power, in particular—are a symptom of the uncertainty plaguing the renewable energy industry, as developers regularly find themselves scrambling to qualify for expiring subsidies rather than pursuing long-term growth strategies. Although both wind and solar power have expanded across the United States and become more cost-competitive with fossil fuels, they are still emerging industries that could decline without more consistent policy support.
Opponents have argued that renewable energy subsidies waste taxpayer money on energy sources that cannot compete on their own with fossil fuels. Of course, that is the whole point of subsidizing renewable energy: if it operated on an equal footing with fossil fuels, subsidies would not be necessary. Advocates of renewable power thus view a lack of competitiveness as the underlying rationale for subsidization. Critics of subsidies, not surprisingly, take the opposite view. In essence, they argue that subsidies distort the market by improperly allowing the government to pick winners and losers. This argument disregards the myriad ways existing policies already favor certain energy producers and thus expressly or implicitly select winners. For example, various policies allow companies to externalize their costs—including their central role in accelerating climate change—on society and thereby maintain artificially low prices. Anti-subsidy critiques are also premised on a fundamental misunderstanding of the role of the market in the electricity sector. As this Part explains, while strategies other than subsidies may correct the flaws in the electricity market, subsidies are among the few strategies that receive support in today’s political environment.
A. Climate Change, Externalities, and Fossil Fuels
It is no secret that fossil fuels cause significant environmental and public health damage that market prices fail to reflect. Indeed, most studies that attempt to calculate externalized costs fail to consider the full scope of this damage, and thus, likely underestimate the social costs of fossil fuels. Nonetheless, when one considers the harm caused by fossil fuels in the electricity sector, namely by coal and natural gas, it is clear that the extraction, transportation, and combustion of these fuels exact enormous societal costs.
Coal has rightly earned a notorious reputation for harming people and the environment. Historically, underground mining exacted an enormous human toll. As “one of the few occupations in which a person faced a very real risk of death by all four classical elements,” it “was probably the most dangerous profession of a dangerous time.” Underground miners could die from carbon dioxide asphyxiation, carbon monoxide poisoning, immolation by methane-induced fires and explosions, not to mention cave-ins and floods. Property owners above the mines could lose their lands and homes to subsidence, and often lacked a legal remedy for the damages they suffered. Although laws eventually developed to protect coal miners and prevent subsidence, coal production and consumption continue to have devastating impacts. Today, coal extraction, particularly mountaintop mining, buries streams beneath miles of overburden, contaminates drinking water, and destroys habitat for plants and animals. Coal combustion releases particulate matter, sulfur dioxide, nitrogen oxides, and toxic pollutants that cause or contribute to human health problems like asthma, heart disease, and lung diseases, as well as cause acid rain, smog formation, visible haze, and mercury contamination in the environment. And, of course, miners continue to die when mining shafts collapse or fires erupt. Although regulatory controls could prevent or reduce many of these problems, domestic laws have long allowed coal mining and combustion to escape serious regulation.
Natural gas is also becoming an increasingly harmful fuel in the electricity sector, due to the expanded use of hydraulic fracturing (fracking) technologies that allow gas companies to access previously unavailable natural gas deposits. Natural gas production and combustion have potential links to drinking-water contamination, property damage, and habitat loss. Natural gas production also emits many of the same air pollutants as coal, albeit in lower amounts, as well as toxic pollutants like benzene. As with coal, natural gas has benefited from numerous exemptions from environmental laws, including statutory exemptions from the Safe Drinking Water Act and a pervasive lack of regulation by the U.S. Environmental Protection Agency and many state environmental agencies.
Coal and natural gas consumption also exacerbate climate change, “arguably the most far-reaching market failure ever.” In 2010, the entire electricity sector accounted for about 34% of U.S. greenhouse gas emissions. Coal plants, which produced about 45% of U.S. power in 2010, contributed about 81% of the electricity sector’s carbon dioxide emissions that year. Recent declines in natural gas prices, however, have reduced coal’s market share, and thus indirectly driven down carbon dioxide emissions from coal plants. As a result, electricity sector emissions fell by about 4.6% in 2011. While this data may suggest that natural gas has a beneficial impact on climate change by displacing coal-fired power plants, it does not paint a complete picture of the lifecycle emissions from natural gas production, transportation, and combustion. Indeed, recent studies indicate that natural gas lifecycle emissions of methane—a much more potent greenhouse gas than carbon dioxide—may offset the potential climate benefits of replacing coal with natural gas. Thus, both coal and natural gas are major contributors to climate change and the harms it exacts.
While the environmental and health consequences of fossil fuel use are apparent, it is extraordinarily difficult to place a price tag on these externalities. The external-cost estimates of coal, for example, have ranged from $62 billion to $345 billion annually, depending on the scope of externalities considered. The National Academy of Sciences (NAS) has also calculated that emissions of sulfur dioxide, nitrogen oxides, and particulate matter from natural gas power plants amount to $740 million in externalized costs per year, but these figures exclude the full lifecycle emissions from natural gas production, transportation, and combustion. Similarly, while the NAS study did estimate climate-related damages from natural gas combustion at power plants, it did not calculate the full lifecycle emissions of greenhouse gas from natural gas production and transportation. Yet, as noted above, these phases of the natural gas lifecycle have a much greater impact on climate change. As a consequence, studies that attempt to calculate the externalities from fossil fuels have typically underestimated their total value. While it may be impossible to establish a precise number for the external costs of fossil fuels used in the electricity sector, it is clear that they far exceed the externalized costs of renewable power sources.
B. The Flawed Arguments of Subsidy Opponents
Opponents of renewable power subsidies usually do not confront the externalized cost estimates head-on. Nor do they discuss how externalities have distorted the electricity market for decades. Instead, subsidy opponents often argue that renewable energy can easily compete with fossil fuels if Congress simply repeals all subsidies. Renewable energy subsidy opponents also suggest that the development of a broader free market in the electricity sector will allow renewable power to become competitive. None of these arguments offers a realistic approach for addressing the distorted economic advantages that fossil fuels receive and have received for decades.
1. Fossil Fuel Subsidy Reforms Are Inadequate
Those who oppose renewable power subsidies argue that subsidy reform for fossil fuels could effectively level the playing field to make renewable energy competitive on its own. But even assuming that fossil fuel subsidy reform were politically feasible—and this is a huge assumption—the structural advantages that fossil fuels have received as a result of historical subsidies and externalized costs would make it nearly impossible for renewable energy sources to catch up within a reasonable time frame. Renewable energy sources are less competitive with fossil fuels precisely because fossil fuels have benefited from a long history of government largess and lax regulation. While subsidy opponents are correct that governments should quit subsidizing fossil fuels, they are wrong to suggest that this would automatically level the playing field for renewable power.
Natural gas and oil, for example, have benefited from more than a century of federal subsidies supporting research and development, increased production, fuel transportation, and facility construction. Although the exact values of historical subsidies are difficult to track, a recent study estimates that oil and gas subsidies over the past 100 years equal, on average, about $4.86 billion annually—more than thirteen times the average annual subsidies to renewable energy sources in recent years. These disparities, however, do not paint a complete picture; rather, what matters most is how historical subsidies enabled coal and natural gas to gain market share and become important electricity fuels today. For example, government subsidies led to the creation of combustion turbines capable of producing electricity from natural gas. Such subsidies also financed modern hydraulic fracturing technologies that have enabled companies to extract natural gas from shale and other diffuse natural gas deposits previously considered inaccessible. These innovations, in turn, have led to cheap natural gas prices that have driven down wholesale electricity prices and made it difficult for renewable power to compete. Even if natural gas subsidies stopped today, the industry has already gained a competitive advantage over emerging renewable technologies. Thus, the argument that subsidy reform for all energy resources would level the playing field for renewables is false.
This subsidy reform argument also ignores the economic advantages that fossil fuels have in terms of externalities. Even if Congress were to miraculously repeal all tax breaks, tax credits, and other subsidies for fossil fuels, renewable power would still be at a competitive disadvantage because fossil fuel prices do not account for the many externalities imposed on society. Fossil fuels are cheap, in part, because their market prices do not reflect their full costs. Until regulations force fossil fuel companies to internalize their full societal costs, mere subsidy reform aimed at fossil fuels will not level the playing field for renewable power.
2. The Electricity Sector Is Not a Free Market
A final argument advanced by critics is that renewable power subsidies disrupt the free market, and that the market itself should decide which types of power receive consumers’ support. As the above Sections make clear, the energy market is already distorted by externalities and historical subsidies. More fundamentally, the electricity system itself is not a free market, so market principles have very little applicability to the fuel mix that utilities use.
Since the early 1900s, most states have regulated electricity utilities as natural monopolies. Under typical regulatory schemes, state Public Utility Commissions (PUCs) regulate the types of investments utilities make, the rates they charge their consumers, the presumptive revenues those utilities may earn, and the resource mix they use to obtain power. In the majority of states, utilities are vertically integrated, meaning they produce the power that they provide to their end-users. Whenever these utilities seek to build new power plants, they must justify their decisions to a PUC before building the plant or collecting revenue for construction costs. Most PUCs, in turn, operate under legislative mandates requiring electricity to come from “least-cost” resources. While some states have broadened the considerations utilities may make when building power plants or procuring power, the least-cost mandate remains dominant. Today, natural gas-based electricity often satisfies this mandate, due in part to the economic advantages the natural gas industry has received from historical subsidies and lax regulations. Thus, the market failures discussed above skew utility investments toward fossil fuels as least-cost resources.
Even in states that have restructured—exposing utilities to some degree of competition—the market still plays a limited role in the choice of resource mix. In most of these states, monopolies still provide retail power to consumers and must still choose the resource mix pursuant to least-cost or other cost-oriented mandates. Electricity end-users rarely get a choice regarding the types of power they receive. While some retail customers do have choices of power suppliers—and have at times chosen to receive renewable power—these limited situations do not convert the electricity sector into a free market.
Thus, arguments about the free market in the electricity sector are fundamentally misplaced. The very structure of the electricity sector belies the idea that free-market principles could somehow enable renewable power sources to thrive. Moreover, the cost distortions due to externalities and historical subsidies make it difficult for renewable power to compete with fossil fuels, particularly natural gas. Other corrective measures, such as increased environmental regulation to minimize externalities and increased taxes to recover historical fossil fuel subsidies, could theoretically level the playing field between fossil fuels and renewable sources. The likelihood that government agencies would implement such measures, however, is exceedingly small. In today’s political environment, subsidies provide the best hope for enabling renewable power to become competitive. Yet, for subsidies to work, they must provide long-term, predictable support. As the next Part describes, the dominant renewable energy subsidies do the exact opposite.
III. The Effective, but Unstable, PTC
Since 1992, the PTC has served as the primary incentive for wind power development. The PTC allows qualifying facilities to earn inflation-adjusted tax credits, currently 2.2¢, for each kilowatt of electricity they deliver to the grid. To be eligible for the PTC, wind power companies must build their facilities by specified deadlines. Once a facility becomes eligible for the PTC, wind companies may receive production-based credits for the first ten years of a facility’s operation. Although the value of the credits may decline if the market price of electricity increases to a specified amount—obviating the need for a full subsidy—production levels do not directly affect the availability or value of credits. Renewable energy experts attribute a substantial amount of the growth in renewable energy facilities, and particularly wind farms, to the PTC.
Despite the success of the PTC in promoting wind power, Congress has had a fickle attitude toward the policy. The PTC expired three times between 1999 and 2005, and expired again at the end of 2012. Whenever the credits have expired, investment in wind energy has stagnated and growth in the renewables industry has stopped. Restoration of the tax credits has typically spurred new rounds of investment and redevelopment, but usually only when the tax-credit extension lasts multiple years. The on-again, off-again development cycle promotes a rush mentality when the tax credit is available, followed by a decline whenever it expires. This boom-and-bust cycle threatens the overall stability of the renewable energy sector.
A. The Economic Consequences of the Unstable PTC
These intermittent subsidies have significant impacts on the wind energy market and its long-term viability. They create instability in the wind energy industry’s labor force, and disrupt manufacturing processes and supply chains. In turn, these disruptions impair the industry’s ability to respond quickly to renewed tax credits or other market forces that could incentivize additional energy production. The intermittent subsidies also lead to inflated prices for goods and labor, as actors in the wind energy industry seek to offset foreseeable lulls in production and demand by raising prices during the times when the PTC is in effect. Finally, the intermittent subsidies likely affect the bargaining power of wind developers when they negotiate power purchase agreements (PPAs), because utilities know that wind developers must make a deal to be able to sell their power to qualify for the PTC. Ultimately, the sporadic nature of these subsidies affects the efficiency and sustainability of the entire wind industry.
The unstable PTC has substantial impacts on the wind energy industry’s labor force, which expands and contracts depending on the status of the tax credit. When the tax credit is available, wind developers must send employees to negotiate deals with landowners for facility siting, acquire siting permits and other authorizations, as well as negotiate PPAs with utilities. Through its employees, a wind developer can also participate in public utility commission hearings to ensure approval of the PPAs, negotiate contracts for the purchase of the turbines, and, ultimately, build new facilities. Wind power companies thus require a significant number of employees to do the upfront preparations, but as the expiration date of the PTC nears, the need for these employees dissipates. There is simply no need for wind developers to keep staff on the payroll if future wind facilities will not qualify for the PTC. Not surprisingly, then, the first wave of layoffs typically involves those involved in project development. At the end of a PTC expiration year, another round of layoffs occurs when those involved in the actual construction activities lose their jobs. A similar scenario plays out with wind turbine and equipment manufacturers, who will likely shed employees, and may even close their facilities, when orders for new equipment dry up as the PTC becomes unavailable.
Renewal of the PTC does not result in an automatic buildup of the previous labor force. Some companies will delay hiring if a PTC extension lasts only a short time, as the 2013 extension does. Even where a PTC renewal extends the subsidy for multiple years, it can take several months for the wind industry to ramp back up. Wind developers must either rehire laid-off employees or train new ones to develop new facilities, to negotiate new contracts, and to navigate the siting and permitting process. Training new employees takes time and costs money for wind developers, so securing an adequate workforce will be slow at first. In many cases, wind developers will order turbines and other equipment only after they have negotiated a PPA with a utility, so it may take months before equipment manufacturers receive enough orders to justify rehiring laid-off workers or training new ones. Similarly, if a manufacturer closed a plant during a PTC suspension, the manufacturer will need to reestablish supply chains and get the plant up and running before it can begin production. These start-up costs, measured in dollars and days, can significantly delay the deployment of turbines and other equipment.
The cycle of layoffs and plant closures can occur even if Congress ultimately renews the PTC, if renewal occurs too late. With the most recent expiration of the PTC on December 31, 2012, for example, proposals to develop new wind farms began to decline in the last quarter of 2011. Practically speaking, any proposed wind farm that had not already received necessary permits by then would be unlikely to qualify for the PTC by the end of the following year. Accordingly, layoffs in the wind energy industry began in 2011, as projects dried up and manufacturers received very few new equipment orders. Although 2012 was a banner year in terms of new facilities coming on line, most of the development work for those facilities had ended a year before. Thus, even though Congress renewed the PTC only a couple of days after it expired, the economic harms of the expiration began at least a year earlier. This makes the transition back to robust development and manufacturing levels that much slower, as many laid-off employees will presumably have moved on to other jobs.
The intermittent subsidies also lead to distorted prices when the subsidy is in effect and an expiration date looms, as well as once it expires and renewal is pending. Almost every actor in the wind power industry is aware that developers must operate within tight timeframes to qualify for the PTC. Land prices, labor prices, and equipment prices all spike as the window for development begins to close. This drives up the costs of building wind farms. On the other side, utilities and other wind power purchasers know that the operators of wind farms must sell their power to qualify for the PTC. This gives them greater bargaining power with the wind energy producers, and thus drives the wholesale prices for wind power down. In short, the looming deadlines associated with the intermittent PTC inflate the costs of development and depress the rates wind farms can charge for their power. This dynamic only increases the wind power industry’s reliance on subsidies and other economic support.
B. The Political Consequences of the Unstable PTC
The intermittent PTC also intensifies the wind power industry’s political vulnerability by requiring the industry to continually seek extensions from Congress. The political debate surrounding each extension, combined with the difficulty of getting Congress to act, can diminish the likelihood that Congress will in fact renew an expiring PTC. This intermittency can also paint a distorted picture of the renewable energy industry as a whole, because it may give the public the false impression that the renewable power sector is unique among the energy industry in receiving subsidies. This, in turn, can weaken public and political support for future government subsidies.
One need only consider the debate leading up to the 2013 PTC renewal to get a sense of how the renewable energy industry comes under attack regarding subsidy extensions. Throughout 2012, commentators wrote multiple op-eds about the PTC and the wind energy industry generally. Detractors claimed that the PTC propped up an industry that cannot hack it on its own, and was a profligate expense since the subsidies at times exceeded the market price of electricity. In addition, they argued that the PTC cost taxpayers an inordinate amount of money for the number of jobs it created, and amounted to the government improperly picking “winners and losers” among different energy sources. Although some of these commentators may have, as an aside, argued for elimination of all subsidies as a demonstration of their “free-market” principles, they focused the brunt of their attacks on renewable energy subsidies. The public debate about the PTC even entered the 2012 presidential campaign, with candidate Mitt Romney opposing it in order to “end the stimulus boondoggles and create a level playing field on which all sources of energy can compete on their merits,” and President Obama supporting it as a boost to jobs. While the electorate seemed to support the policy as a jobs-creation bill, one must wonder if the same outcome would result in a different economic time. Nonetheless, missing from the debate was a broader discussion about externalities and the unsustainable nature of our existing energy policy.
Intermittent renewable power subsidies also provide further advantage to fossil fuels, which receive subsidies that are essentially permanent. Fossil fuel subsidy reform requires affirmative action by Congress and the President, yet inertia usually prevails in Washington, D.C. This inertia provides a distorted advantage to fossil fuels, because their subsidies will persist unless Congress acts, whereas renewable power subsidies, in contrast, will continue only if Congress acts. In an age of legislative gridlock, awaiting congressional action can become an exercise in frustration, as the wind energy industry knows all too well.
IV. Alternatives to Intermittency
Few would dispute that intermittent subsidies provide a suboptimal strategy for supporting the renewable energy industry. The question then becomes: What other approaches should governments use to support a transition away from fossil fuels and toward renewable power? More specifically, how can Congress support the wind energy industry’s development without exposing it to the boom-and-bust cycle of the PTC?
Congress could take a number of different approaches to improve subsidies, and thus increase certainty in the renewable energy sector. Two options stand out as potentially viable, because they are based on existing policies and have proven their efficacy. First, Congress could enact a modified PTC that would extend the eligibility deadlines for several years and decrease the subsidy amount over time to allow the industry to transition to market prices. The American Wind Energy Association (AWEA) proposed a similar arrangement as part of its efforts to get the PTC renewed in 2012. Second, Congress could replace the PTC with treasury grants similar to those it created as part of the 2009 stimulus bill, as the Climate Policy Initiative (CPI) has proposed. While each policy would lessen the problems associated with intermittency, neither would necessarily settle the subsidy debate over the long term. Nonetheless, they represent viable options for the wind energy industry to pursue in this time of deep uncertainty.
A. A Modified PTC
To provide predictable support for wind energy, Congress could enact a longer-term extension of the PTC that would reduce—and ultimately phase-out—the PTC value over time. AWEA’s proposed policy would have used such an approach. Specifically, AWEA proposed to extend the PTC’s eligibility deadlines through the end of 2018—meaning that all facilities that are placed in service by December 31, 2018 would receive production tax credits. However, the actual value of these credits would decline over time. Facilities placed in service in 2013 would earn the full 2.2¢ credit per kilowatt-hour. Over the next five years, the value of the credits would decline by 10% each year, so that facilities placed in service by the end of 2018 would earn only 1.32¢ per kilowatt-hour. All facilities built by the eligibility deadlines would presumably continue to earn credits for the first ten years of operation. Thus, the subsidy would remain in effect for nearly two more decades, but facility eligibility would phase out much sooner.
The proposal submitted by AWEA has several advantages. First, and perhaps most importantly, it reflects a policy that AWEA believes would keep the industry viable. Second, its phase-out process would potentially allow an orderly transition away from subsidies and thus allow the industry to plan its strategy for becoming economically viable without government support. A phase-out may also prevent another boom-and-bust round induced by uncertainty. If the current erratic development process results primarily from the intermittent nature of the PTC, then a planned phase-out date would presumably reduce that uncertainty. Finally, the gradual reduction of the value of the PTC could increase the proposal’s political viability by mitigating the risk that wind developers could receive windfall subsidies if market prices of natural gas increase thereby making wind power competitive on its own.
However, an extended PTC like that proposed by AWEA will not necessarily pave the way to a sustainable wind energy industry or foreclose wind companies from seeking additional support if market prices of electricity actually decrease. It may simply provide certainty through 2018, at which point more lobbying will ensue for the creation of another round of support. Six years of certainty may be enough to allow the wind industry to gain more solid footing, but a number of other factors, including power demand, regulation of fossil fuels, and natural gas prices could affect the wind energy’s competitiveness. In addition, it is unclear whether the incremental decrease in the credit values under the PTC would mitigate the “boom” mentality by making the PTC less important over time, or instead stifle future development as the credit values decline. Most wind companies already receive less than the full value of the credits due to tax equity investment arrangements. Would they lessen the pace of investment if the value of tax credits declined further? AWEA’s proposal does not explain how the industry would likely respond as credits decline. Thus, a modified PTC may carry some of the same risks as today’s PTC, if tax credits continue to drive wind investment. While the wind energy industry would likely prefer a modified PTC to nothing at all, other policy proposals, such as the treasury grants discussed next, may offer more stable support to the industry.
B. Treasury Grants for Production
As part of the 2009 stimulus bill, Congress created a one-year treasury grant called the Section 1603 grant program that allowed wind energy companies eligible for the PTC to instead receive a one-time payment worth 30% of the capital costs of building a wind power facility. The underlying rationale for the Section 1603 grants was concern that the recent economic crisis had weakened the tax equity market and thus eroded renewable power companies’ access to capital. In response, Congress agreed to allow wind energy companies to receive direct cash grants for their own investments. Many wind companies took advantage of the treasury grants in lieu of the PTC. Although it is difficult to assess whether the treasury grants alone spurred investment, analysts believe treasury grants played an important role in promoting wind power development.
The main advantage of direct payments over the PTC can be found when examining the cumulative tax-credit value that actually goes to support renewable power. Under the PTC, wind power companies typically earn only about two-thirds of the full value of the available tax credits as a result of tax equity investment arrangements. By allowing tax equity investors to buy the tax credits, the government is effectively giving a third of the tax credit to an entity unrelated to the wind industry. In the aggregate, this arrangement makes the tax credit more expensive for the government than direct payments.
To address these inefficiencies, the CPI has proposed a “taxable cash incentive for production” (TCP) that would give wind power producers direct, taxable payments for power production. The value of the TCP would change over time, based on the projected market price of power and the anticipated costs of producing wind power. Thus, if electricity market prices declined and wind power production prices escalated, the TCP value would increase to support the wind industry during a difficult time. In contrast, reduced production costs and rising electricity market prices would yield a lower TCP value. Overall, the TCP would enable the wind energy industry to remain competitive without granting it a windfall. If the wind energy industry knew it could count on a stable subsidy tied to market prices of power, rather than dates on a calendar, the industry could develop the certainty it needs to become stable over the long term.
In addition, according to the CPI, the direct payments would significantly reduce government costs, allow wind energy to remain competitive with other electricity sources, and provide the wind power industry with incentives to produce power. If these projections are correct, a transition away from tax credits and toward direct payments could make continued wind support economically attractive.
While the CPI’s proposal has significant potential, it is unclear whether wind energy advocates will pursue its adoption. Despite the success of the Section 1603 treasury grants in spurring renewable power investment, Congress showed little interest in extending the grants after they expired. Perhaps policy makers and industry insiders have grown accustomed to the PTC, warts and all, and have less interest in exploring more effective options. If so, the modified PTC proposed by AWEA may provide the best option for stabilizing the subsidy cycle for wind producers.
If renewable energy generation is to become a meaningful part of the electricity system, subsidies will have to support the industry. Years of fossil fuel subsidies and the pervasiveness of externalities make it impossible for renewable power sources to compete on their own. In an ideal world, effective regulation and pricing would reduce the economic disparities between fossil fuels and renewable energy; but in the world we live in, subsidies play a vital role in bringing some level of balance to a distorted system.
Unfortunately, despite the importance of renewable energy subsidies, the PTC fails to deliver the certainty that nascent industries require. For the past two decades, the wind power industry has experienced booms and busts driven by the erratic PTC. Despite these odds, wind power capacity has expanded significantly, and it could be poised to contribute a significant amount of power to our electricity grid over the next several decades. For this to happen, Congress must establish a more predictable subsidy system. Whether Congress modifies the PTC as AWEA has proposed, uses direct payments as the CPI recommended, or uses a different program to balance the disparities between fossil fuels and renewable power, a clear signal must be sent to the wind industry, its investors, and power purchasers that wind development will remain stable and predictable over the long-term.
Associate Professor of Law, Lewis & Clark Law School. I am grateful to Rob Molinelli for his helpful research assistance. I also thank the editors and students at Environmental Law, especially Zach Pilchen and Adrienne Thompson, for their excellent editing and feedback.
India’s trade-distorting farm subsidies are already far in excess of the limits agreed to in their World Trade Organization commitments. Now India wants WTO members to look the other way while it increases subsidies further. With global commodity prices weakening, those subsidies are likely to damage farmers in other countries, tempt tit-for-tat reactions from their governments, and threaten the rules-based international trading system. To staunch that threat, agricultural trading nations should bring a WTO dispute-settlement case seeking an end to India’s abusive practices.
India purchases basic crops from farmers at artificially high prices, and then sells a portion in 500,000 “fair price” stores to some 800 million poor people at low prices. An estimated 40 percent of the food never reaches its intended consumers. Much of it escapes from government control due to graft and corruption. The remainder of the wastage is due to inadequate storage and transportation facilities. The Food Corporation of India (FCI), a government agency, held 68.7 million metric tons (MMT) of grain in storage on July 1. Three MMT of that supply (equivalent to the annual wheat consumption of the Philippines) were kept in sacks on the ground covered only with plastic sheeting. Government-induced loss of food seems particularly cruel in a country where many people remain hungry. Yet India continues to exacerbate this inefficient system.
India’s farm subsidies harm its own economy. Farmers are incentivized to devote more land and water to subsidized crops (wheat, rice, sugar, etc.) desired by the government. This leads to less production and higher prices for other items (fruits, vegetables, etc.) that consumers also want to buy. India justifies these policies under the guise of achieving “food security” by encouraging domestic production of basic crops. The same excuse is given to justify commodity prices being held above world levels through the use of high tariffs and other import restraints. Most economists would agree, however, that security of supply is hurt rather than helped by import restrictions. A failure of India’s annual monsoon rains can lead to drought and reduced crop output. By relying so heavily on its own production, India is more vulnerable to food supply shocks than would be the case if its agricultural economy was integrated fully into the large and resilient global market.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
WTO rules on agricultural subsidies came into effect in 1995 at the conclusion of the Uruguay Round negotiations. WTO members strongly supported limits on trade-distorting subsidies because the global marketplace had been wracked by rampant subsidy competition among wealthy nations, most prominently the European Community and the United States. Farmers in non-subsidizing countries suffered with low prices. The Agreement on Agriculture addressed this problem by placing limits on trade-distorting subsidies, while allowing a wide range of non-distorting government services and payments to be provided to farmers. It also permitted governments to spend as much as they wish to provide food to low-income people. An insightful (and conservative) 2011 study by DTB Associates calculated that India was then exceeding its allowed domestic support levels by a minimum of $37 billion. That much subsidization can do serious damage to world commodity markets and the farmers who depend on them.
India is now proposing that the WTO should reverse position and endorse an increase in distorting farm subsidies. Keep in mind that India is not a small player in global agriculture. It not only boasts the world’s second largest population, it also has the second largest area of arable land. Recently India ignored the WTO’s prohibition on new export subsidies and began to use them on sugar, thus undercutting sugar exporters such as Thailand and Brazil. If India won’t follow the rules to which it has agreed, other countries are likely soon to follow suit.
Last December, when India was resisting conclusion of the WTO Trade Facilitation Agreement (TFA), it received assurances that there would be a “peace clause” under which other countries would agree not to challenge its agricultural subsidy programs. When India finally blew up the TFA in July, the peace clause was blown up along with it. That’s just as well, because the WTO Agreement on Agriculture is genuinely worth defending. WTO members should do India and the world a favor and file a dispute-settlement case against India’s agricultural policies. The goal would be to encourage India to shift toward using farm support measures that the Agreement on Agriculture specifically allows. Such an outcome would be far more constructive than pushing the global agricultural economy back into a subsidy war in which the clear losers would be taxpayers, farmers in other developing countries, and the rules-based international trading system.
Dan Pearson is a Senior Fellow for Trade Policy Studies at the Cato Institute. Before Cato, he served 10 years on the U.S. International Trade Commission.