A year ago, we wrote about the potential expiration of the wind power production tax credit (PTC), which has helped support the US wind industry for most of the last 22 years. The PTC provides a subsidy of about $23 per megawatt hour (or roughly 30 percent above wholesale electricity prices). It was set to expire at the end of 2012, but Congress extended it at the last minute for another year. Congress did not authorize another extension in 2013, however, allowing the PTC to expire.
Several times in the past the PTC has been renewed even after expiring, and the wind industry will undoubtedly push hard for a renewal. But the process of repeated lapsing and potential renewals raises a basic question: just what are the implications of eliminating the PTC? There are at least two possible effects: on greenhouse gas emissions and on innovation.
Greenhouse gas emissions: Renewables like wind and solar do not directly emit greenhouse gases, so producing electricity from these technologies, rather than by burning fossil fuels, would reduce greenhouse gas emissions. If eliminating the tax credits makes wind a lot less attractive, it will undercut substitution from fossil fuels to wind and increase emissions relative to a world where they persist.
Yet recent forecasts suggest that elimination of the PTC would reduce, but not eliminate wind investment over the next several years. About 13 gigawatts of new wind capacity were installed in 2012, compared with an expected 6-10 gigawatts in 2014 and 3-7 gigawatts in 2015 (these estimates assume the PTC will not be reinstituted). One reason wind investments won’t collapse is that many states—29 plus Washington D.C., at last count—have renewable portfolio standards (RPSs), which require renewables (and some other technologies) to account for a certain fraction of electricity generation. These policies provide something of a cushion for future wind investment.
The lapse of the PTC does mean, however, that federal taxpayers will pay less for individual states’ RPSs. The PTC essentially provided much of the subsidy needed to support renewables investment, and therefore state RPSs only had to do part of the work of subsidizing renewables. Now, without the PTC, more of the costs for investing in renewables will fall on producers and consumers in the states that have RPSs; electricity prices may rise as well. While these changes could weaken political support for the RPSs (which to date have been quite popular, for the most part), it is arguably fairer for the states that implement RPSs to pay their costs.
Innovation: By increasing the total amount of wind investment, subsidies like the PTC could raise the incentive for innovation. But, there is little reason to believe that continuation of the PTC would cause any further innovation. For one thing, the US market accounts for roughly one-third of worldwide investment in new wind generators, which equaled $80 billion in 2012. Even if the US market were to vanish, manufacturers would still have plenty of incentive to improve wind technology for other markets. Moreover, most of the wind technology being used in the US market is relatively mature, and there’s no strong evidence that the PTC has caused any of the recent improvements in turbine performance. Finally, some of the industry’s most rapid innovation occurs in offshore wind, for which the US market share essentially does not exist. Given the importance of other nation’s markets, it’s hard to see why the expiration of the PTC would have a strong effect on innovation.
Ultimately, there is a lack of compelling evidence that the expiration of the PTC would significantly affect greenhouse gas emissions or innovation. The worst thing about the expiration of the PTC is that Congress didn’t replace it with something more effective at reducing carbon emissions or promoting renewables innovation. After all, devoting just a fraction of the recent cost of the PTC to direct R&D investments in wind and other technologies would more directly address the challenges of dramatically reducing the costs of renewables.
