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Congress is playing games. But in doing so it has dropped the ball. The U.S. Senate has failed to advance the production tax credit given to wind power -- all at a time when the nation is trying to wean itself from fossil fuels.
The renewable sector is still in its infancy. But its growth and reduction in costs over the last two decades have shown that it can gain a foothold in the marketplace. To become more firmly rooted, however, government has to stay involved. And in the mid-term, that means promoting policies to give green energy a leg up such as the 2-cent per kilowatt hour (kWh) tax credit provided to wind developers.
"Thanks in part to the production tax credit, U.S. wind power capacity is now over 16,800 megawatts -- or enough to serve the equivalent of 4.5 million average households -- and wind has been the second largest source of new electrical capacity in the nation, behind natural gas, for the past three years," says Julius Steiner, CEO of Gamesa USA, noting that his company has added 1,000 new manufacturing jobs in the United States during that time period.
The tax credit is set to expire at year-end unless Congress votes to extend it. No one doubts that the subsidy will get renewed. But the political tumult created by using the issue as a lever to extract favors does generate uncertainty. That gives developers pause and all at a time when the wind industry has a head of steam behind it.
Last year, the sector grew by more than 45 percent and attracted $9 billion in capital -- the third year in a row of such record-breaking growth. That, in turn, created about 17,000 construction-related jobs and another 1,600 full-time operational positions. A study released by GE Energy, which has a big chunk of the wind turbine market, says that the production tax credit is the impetus behind that expansion. It says the credit generates $250 million in value not just from projects but from wages, vendors and land leases.
While wind power now provide about one percent of the country's electricity mix, a study performed by the U.S. Department of Energy in conjunction with private industry says that wind alone could top 20 percent of the nation's generation portfolio by 2030. That would have the effect of creating 500,000 jobs and more than $400 billion in economic benefits. It would also reduce greenhouse emissions and other pollution by 25 percent than otherwise.
"Congress is debating how to pay for the wind tax credits perhaps without realizing that, over time, wind farms pump more money into the U.S. Treasury and state and local coffers than they take out," says Kevin Walsh, managing director of renewable energy at GE Energy Financial Services.
Political Football
The production tax credit has expired three times in nine years. Each time it has lapsed the industry suffers. And, when it has been subsequently put back in place, development has taken off. But this "boom-and-bust" cycle could level off if the tax break were extended over a longer time frame. Still, the industry says that production costs have dropped 80 percent over the last 20 years while the sector grows by leaps and bounds -- something that could be expedited by a proactive government.
The last time the credit became a political football was in 2003. The following year more than half the employees at West Fargo-based DMI Industries, a North Dakota manufacturer of wind turbine towers, were said to have been laid off. In Texas, the year after the credit lapsed, Lone State Transportation of Fort Worth lost millions in revenue because of wind project delays.
On the other hand, extension of the credit might give momentum to existing cost-cutting efforts and production innovations. That would attract an increasing number of durable players. As a result, the wind market would become more vibrant.
"The 20 percent wind scenario would only cost 2 percent more than the cost of the baseline scenario without wind," says FERC Commissioner Suedeen Kelly, referring to the Energy Department's wind projections by 2030. "At 50 cents per month for the average ratepayer, that is a small price to pay for the climate, water, natural gas, and energy security benefits it would buy -- and it does not even count the stability provided to consumers by eliminating fuel price risk."
A recent study by the Lawrence Berkeley National Laboratory gives credence to that optimism. The lab found that a 50-megawatt wind farm delivering power at less than 5 cents a kWh would -- using typical natural gas project financing terms and current tax subsidies -- generate electricity for 3.69 cents a kWh. With tax subsidies, wind energy is now able to compete head on with coal, natural gas and nuclear energy.
To be sure, the production credits are not without controversy. Critics say that developers go forth not because economics dictate it but because of the tax breaks. It's particularly true in the early years of operations. Besides the credit, they say that wind developers get accelerated depreciation and sharply reduced sales and property taxes.
"Tax breaks and subsidies are now so large that their value to wind farm owners -- not the alleged environmental benefits -- is the primary motivation for building a wind farm," says Glenn Schleede, a utility analyst living in Virginia.
That thinking has sway in some circles. But public policy is less about nuances and more about overall aims. Public opinion polls continue to show strong support for greener resources and policymakers generally are responding to that sentiment. While the production tax credit is getting bounced around now, Congress will eventually rally behind it and development will spike as a result.
For information on purchasing reprints of this article, contact Tim Tobeck ttobeck@energycentral.com. Copyright 2010 CyberTech, Inc.
5 cents versus 3.69 cents. But one can produce power when needed with one of them, and the other produces the power when the wind is blowing. If looking at hard pricing, perhaps better to compare wind with the fuel costs of NG. Actually, it might not be that much different. Is this worth subsidizing? Probably, especially since NG is likely to go up in price and additional supplies needed to be liquefied and shipped thousands of miles from not-so-friendly parts of the world. Perhaps looking at wind as a crude but functional way to displace NG use is not a bad approach.
Len Gould 9.2.08
Just a curiosity. Who knows if CSP (Concentrating Solar Thermal) is granted at least the same levels of subsidy as wind. If not, why not?
jeff rosner 9.9.08
On all such subsidies, we must take the portfolio view. As long as any of these so-called 'intermittent' sources is below 10% of the total power generation, it will always displace NG which can be rapidly brought on and offline. The variable costs of the wind are nearly zero and the variable costs of NG are the fuel costs (yes, I'm neglecting maintenance costs, which may well be comparable between the two for wind and NG). Similarly, solar power can be viewed as something to use whenever available and save the NG for other uses and other times. Solar is more reliable than wind in many locales, and in those same geographies it peaks at the same time as the load peaks (mid-day).
Gregory Stangl 9.9.08
Government would do better to incent renewable energy generally as opposed to patch work subsidies that are technology dependant, e.g. 2 cents for wind, 1 cent for biomass and way too many cents per gallon for ethanol. Our goal should be to produce more energy domestically and renewably. It should not be to produce it with wind or solar thermal or wave or biomass. Just give us the energy and we'll let the market decideds who wins.
We waste so much time having to tweak the incentive scheem everytime one technolgy makes a leap forward relative to others. It turns a collabrative effort of the entire renewable energy community into a lobbying contest.
Worse still, applying the credits only to power sold to 3rd parties puts smaller distributed generation systems at a disadvantage. Here avoidance of the RETAIL cost of power is the primary motivator not taxpayer funded rebates. The end result is to incent less economic systems but are more capital intensive at the expense of techologies that are commercial today.
The last guys Americans should want picking the winners are on the Hill or K-street.
What we need is a stable regime that is long term and technology independant.
Dick Maclay 9.9.08
Jeff, keep in mind that gas fired units that can turn on and off every day and operate below half load have heat rates of 9,000 to 10,000 btu/kWh at full load. When ramping up down to compensate for variations in wind those heat rates deteriorate. This compares with a heat rate below 7,000 btu/kWh for new combined cycles that would be built without wind. Since wind is generally anti-peaking in its diurnal cycle and operates only about 30% of the time, 80% or so of the apparent fuel savings with wind are not real. This is due to the gas burn being over 40% higher than otherwise for each kWh produced by flexible units required to generate much of the energy with wind generation in the portfolio.
Expanding on Gregory's thought, if reduction of CO2 is the objective it would be useful to base subsidies on the real net reductions in CO2 with addition of various technologies into the portfolio. That would result in nuclear and most other renewables receiving larger subsidies than wind because they are more effective in achieving the objective.
stephen ahearn 9.9.08
Portfolio, portfolio, portfolio. People that pulled money out of their REITS or real estate mutual funds eighteen months to two years ago in favor of bonds may have seemed conservative then, but are way in the money now. Just a little real world example of the value of diversity. We can't expect renewable technologies to meet coming incremental load growth all by itself, but combined with robust utility and third-party administered efficiency programs, we can eat into the capex needed for the next buildout of generation. And, in a targeted manner, we can invest in some distributed applications to both support existing systems and to obviate the need for much-hated and hard-to-site trans and distribution facilities
Thomas Stacy 9.9.08
Jeff Rosner is not necessarily correct that wind energy directly displaces NG generation below 10% penetration. This is because wind energy - available only on its own schedule - is subtractive to a greater degree than additive to capacity on an ongoing basis. To the extent that wind energy over the course of time is not available when demand rises and IS there when demand is low, extends the range of demand flux. Demand flux is served, in large part by NG, so as demand flux range grows, so grows the demand for NG.
Please be careful and honest in your analysis of this topic. Environments have been compromised many times through history from the good intentions of the misinformed.
Tom Stacy savewesternOH.org
Thomas Stacy 9.9.08
Correction: two words omitted in previous comment:
This is because wind energy - available only on its own schedule - is subtractive to SUPPLY TO a greater degree than additive to capacity..
david austin 9.10.08
""Tax breaks and subsidies are now so large that their value to wind farm owners -- not the alleged environmental benefits -- is the primary motivation for building a wind farm," says Glenn Schleede, a utility analyst living in Virginia."
So what's the alternative? Mandates? And how would they be enforced? By whom and against whom? I don't see congress ever mandating any alternative energy source for power companies. Not ever.
Joseph Somsel 9.17.08
"The renewable sector is still in its infancy."
EXCUSE ME? Windmills are millennia old. Solar has been the basis for argiculture for even longer. Even the use of wind for electrical generation goes back to the 1930s. Even photovoltaics have been around for decades.
The only thing new here is the political intervention, and without that intervention, no utility manager or investor would look to wind or solar for a place in their portfolio. Windmills have not improved that much and prospects for further improvement are limited by the resource, not the technology.
I'd like to restate how the broken window fallacy applies to arguments for renewables. In energy, the greatest productivity and hence best value to society occurs with the FEWEST people employed in supplying energy. That leaves the most energy available for other uses. If it were otherwise, we could employ half the population to pedal stationary bicycles connected to little generators.
One can look to California's Altamont Pass and its abandoned machinery for a visual confirmation that windmills largely make money when you build them, not when you run them.. Otherwise, the owners would keep them in better repair.
Scott Brooks 9.19.08
Stacy, Somsel and Austin have hit all around the problem. Because of over subsidization wind is more of investors and producers wet dream. Wind is too intermittent and supplies power at non peak periods to justify it use for grid supplemental power. and since wind power is not on demand power it must be backed up with spinning reserve which is usually gas turbine compressor generators that consume 40% of NG just idling. Idle turbines tend to overheat, and shutdown turbines tend to fail to start at a moment's notice. Turbines are most efficient when fully loaded. They take 5 times the amount of steal and concrete than that of a coal plant they would replace.
Their productive capacity is anywhere from 10 to 20% of installed capacity on average. and they consume some of that power for the various controls. In fact, when they are not running in a minimum wind condition the props must be turned by switching the generators to motor mode so that the heavy props don't warp and bow the shaft. Most wind power will be generated in the middle of the country although most of the power is needed in the more densely populated areas near the coasts. This requires long transmission lines.
The investors make money as about 80% of their cost are covered by production subsidies, mandated generation power, depreciation and tax breaks, and other generous breaks that are covered by both taxpayers and consumers. Pickens would not even consider his plan without it which is why he has a petition out. He speculates that he will make 15~25% off of the project. Since NG is being imported by 18%, using it for both parallel peaking power generation and vehicles will drive up costs. A good deal for Pickens who owns a large sector of NG suppliers.
The National Academies of Sciences, as well as numerous other independent analysts, have stated that wind power does not reduce our use of fossil fuels, or materially reduce greenhouse gas emissions. Wind is free but harvesting it is not. Some point to Denmark, which does produce 20% of its electrical power from wind. But they can do that because the whole Danish system is part of the northern European grid." The larger European grid provides the backup needed for wind power's erratic performance. In addition, the country exports nearly 50% of the wind power it produces, largely because it comes at the wrong time, when it isn't needed. When the country needs additional power, it's forced to pay premium prices. Denmark therefore has the highest power bills in Europe. Not a single conventional power plant has been closed in the period that Danish wind farms have been developed
People who live around windfarms complain of the noise they produce, a the rhythmic thumping of the sound, a pattern found at a distance from the turbines of up to 0.9 of a mile, but not immediately under or among the turbines, can be sufficient to prevent or interrupt sleep and even cause migraine headaches for some people. Reports of windfarms chasing out wildlife, degrading the recreational value of the lands.
Enviros call it free, clean and green. Investors call it the best deal since Fannie Mae and Freddie Mac. Users will be calling it wind vultures. Wind is not as viable as it is hyped and has limited uses. Take away the subsidies and it won't stand on it own. I'd take nuclear and coal fuel cells over windfarms any windy day. Concentrated solar in the SW and SE, especially thermal solar. Bio is going to take time and solar could be used to help lower costs. I don't know about Nano solar as they don't have a proven tract record, but if they prove out then PV solar would be ready for the masses. Energy in this country is something that has to be mined and drilled now while alternates are developed for later.
Thomas Stacy 10.14.08
This blog is excellent. Hats off to the experts from within the electric power industry who posted here. Especially Scott Brooks, Joe Somsel and Dick Maclay. I am printing this out for future use. Thanks again!
Tom Stacy www.savewesternOH.org
Joseph Somsel 10.7.09
Hee's a recent piece detailing how the tax code favors wind over nuclear through accelerated depreciation:
