Meeren Amin
Energy Law
Professor Palmiter, Fall 2011
I. Introduction
Wind power is the future of energy in the United States. It is clean, renewable, and
relatively cheap. For years, the U.S. has wanted to reduce its dependence on both foreign energy
sources and carbon emitting coal, in favor of green, renewable energy. Over the past thirty years,
the U.S. has shifted towards this goal by incentivizing wind energy.
Wind energy was introduced in the 1980’s in California and Denmark. Early turbines
were expensive and inefficient. Today, however, wind power has become more efficient and less
expensive through improvements in technology. As costs have declined, companies have become
less hesitant to invest in large wind projects. It is now the fastest growing source of new power
generation in the U.S. and the leading form of alternative energy. However, even with increased
growth, wind energy accounts for only 1% of all electricity generated in the country. This low
percentage is attributed to the high cost of large wind projects. Power companies and investors
are more eager to invest in coal and natural gas sources, due to large, long-term government
subsidies. As this paper will discuss, while subsidies—through the use of the Production Tax
Credit (“PTC”)—are also available to wind producers, they offer only short-term benefits,
discouraging long-term investment. Without long-term incentives, firms are unwilling to make
large investments in a wind infrastructure, due to an uncertain future market.
This paper will analyze the PTC and offer recommendations to allow it to reach its full
potential of incentivizing the production of wind power. It will focus on the problem of shortterm extensions, but will not discuss design defects or limitations on availability. First, it will
discuss why wind energy is important for America’s energy future. Next, it will provide an
overview of the PTC and discuss its impacts on wind investment. It will then discuss the problem
of providing short-term extensions and offer a long-term solution. Lastly, it will briefly discuss
the lack of investment in the nation’s transmission infrastructure.
II. Why Wind Energy?
Wind energy is said to have many benefits over traditional sources of electricity
production, such as coal. It is renewable and uses the movement of the air to generate power. It
does not rely on a mineral found in the earth, which must be mined and extracted. It is therefore
a free fuel, which guarantees supply and eliminates large mining and transportation costs.
Because it relies on the wind, supply will always be steady and prices will therefore be stable.
However, the most important benefit to using wind energy is that it is “clean.” It does not
produce harmful emissions and will allow the U.S. to decrease its production of harmful C02,
which can lead to long-term climate change.
Global climate change is currently one of the biggest issues facing our planet. It is well
accepted by many in the scientific community, that for whatever reason, average world
temperatures are increasing and will continue to increase. Since 1880, temperatures have
increased by 1.4 degrees Fahrenheit. The Intergovernmental Panel on Climate Change estimates
a temperature rise of 3.2 to 7.1 degrees by the end of the century. This would wipe out over 30
percent of all animal and plant species, lead to famine and flooding, and have many other
adverse consequences. One of the major culprits of global warming is C02 emitted from cars and
the burning of coal. The atmosphere cannot handle all of the C02 being emitted from
anthropogenic sources. In order to decrease the amount of C02 released into the atmosphere, and
thus slow down or stop global warming, the U.S. and other large industrialized countries must
limit the burning of coal.
The easiest way to decrease C02 production would be to switch to wind energy.
Currently, the energy [electric power?] industry is responsible for 40 percent of all C02
emissions. By switching to wind energy, that number could end up near zero. A wind turbine
does not emit any C02 and within three to six months of operation, it will offset all emissions
caused by construction. Therefore, for the rest of its projected twenty-year life, it will produce
carbon-free electricity. In fact, through the use of wind power, the global wind industry has set
the goal of saving 10 billion tons of C02 by 2020. The Global Wind Energy Council believes that
this goal is likely to be met through the increased use of wind energy.
III. The Production Tax Credit
The PTC was created by the Energy Policy Act of 1992, which sought to stimulate the
use of renewable technology. The PTC provides a tax credit of 2.2 cents per kilowatt-hour
(“kWh”) to independent power producers (IPPs). It was created in order to subsidize the
emerging wind industry and close the cost gap between renewable energy and traditional forms
of power generation. The credit acts as a subsidy, giving IPPs a 2.2 cent credit for each kilowatt
hour generated for a facility’s first ten years of operation. It was originally codified to give a 1.5
cent credit, but has been adjusted upwards due to inflation. The credit is available to companies
that generate wind, solar, geothermal, and closed-loop bio energy. It is only available to
producers that sell the electricity to independent third parties, thereby making it available only
available to IPPs and not to investor owned utilities (“IOUs”). This results in the credit being
unavailable to those that do not pay taxes, such as rural electric cooperatives, non-profits, and
publicly owned utilities.
Since 1992, the PTC has expired three times, and has been extended on five occasions.
However, the credit has lapsed for six months, two months, and nine months, in 2000, 2002, and
2004, respectively. During each of these periods, there has been no credit available to producers
of wind energy. Each lapse occurred because of Congress’ failure to extend the credit past its
expiration date. Throughout the credit’s history, Congress has only extended its viability for 1–2
year periods. It was most recently extended in 2009 as part of the federal stimulus package, but is
set to expire again at the end of 2012 if Congress is unable to reach an agreement. The result
would be a temporary or permanent end to the PTC.
With expiration looming, stakeholders in the wind industry are running to Congress to
secure an extension by the end of the year, in order to eliminate potential market uncertainty.
H.R. 3307, which extends the PTC an additional four years to the end of 2017, is currently in the
House Ways and Means Committee. This bill, if passed, would create the longest PTC extension
in recent history, and allow wind investors to secure the credit until the end of 2017. In
opposition to H.R. 3307, H.R. 3308 eliminates the PTC. The bill would cut $90 billion in energy
tax subsidies over the next ten years, while reducing corporate tax rates at the same time. The bill
would cut a vast majority of the government’s support for renewable energy projects.
IV. Impact of the PTC
When it comes to total wind power produced, the United States is second to only China,
which only recently took over the top spot. While the typical price for producing a kWh of wind
energy is about 6–7 cents, the PTC reduces the cost by 2.2 cents/kWh, which is roughly one third
of the total price per hour. This decreased cost creates an incentive for firms to invest in wind
and allows for wind power to compete more successfully with traditional fossil fuels that also
receive large subsidies. Since the PTC’s inception, the use of wind energy has greatly increased,
with an aggregate investment of over $13 billion. Wind capacity has increased every year from
1997, with the exception of years in which the PTC has lapsed. It is no coincidence that this
increase began the year that the PTC went into effect. Before the PTC, annual wind capacity in
the U.S. was consistently under 500 MW. However, after passage, this number steadily grew,
and in 2008 it reached over 8,000 MW. This number will continue to climb as the cost of
production decreases.
The true impact of the PTC can be seen during the lapse years of 2000, 2002, and 2004.
The credit has expired three times and for periods ranging from 3–9 months, there has been no
PTC available to wind producers. Investment has fallen drastically when the credit has expired,
as investors have been uncertain about the future of the credit. In lapse years, investment fell 73–
93%. This is not an indication that investors were simply waiting for the PTC to be reapplied, as
each time it expired, there was uncertainty about its return. There was no evidence indicating that
the PTC would be reapplied, causing firms to halt investment to pre-PTC levels. During these
lapse years, annual installed capacity fell back down to below 500 MW. The years following the
lapse, installed capacity rose back up to above 1,500 MW in 2001 and 2003, and close to 2,500
in 2005. The dramatic decrease in investment during lapse years shows that companies are
unable and unwilling to invest in wind projects without the PTC.
V. Short Term Extensions
While the PTC promotes wind investment, providing only short-term extensions before
expiration limits its potential. Every time the PTC has been extended, it has been for short 1–2
year periods. This has led to boom and bust cycles of “tight and frenzied” periods of
development. During years of PTC viability, investors fear its long-term existence, causing a
scramble on investment. Because firms want to invest in wind, they attempt to take advantage of
the credit by investing in wind projects during the extension period and then almost completely
chilling investment when the credit lapses. They are hesitant to devote resources to the
production of wind energy without the certainty of long-term credits. Short-term credits restrict
the ability of investors and manufacturers by creating future market uncertainty, which has
adverse effects on investment, cost, commitment to transmission infrastructure, manufacturing,
and R&D.
There are five ways in which temporary 1–2 year extensions can hinder the effectiveness
of the PTC. First, the risk of PTC expiration can slow wind development in certain years. Wind
technology is an expensive and risky investment. Wind projects require extensive planning and
take years to complete. Without the proper time to plan, research and implement a project,
companies will be less likely to invest in a venture.
Second, the temporary extensions have raised project costs. The cost of wind projects
decreased substantially between the 1980s and early 2000s, but even with improved technology,
they have increased since 2002. While the market crash of 2008 has had an effect on prices, the
greatest effect has been the “erratic market cycle of frenzied investment.” Without an ability to
project future earnings, supply and operation costs have increased.
Third, U.S. firms have either slowed manufacturing of equipment or shifted focus
overseas. U.S. companies have been hesitant to manufacture wind technology for domestic
projects due to future uncertainty. Domestic manufacturers are unable to accurately determine
future demand due to insecurity in the wind market. Foreign, state-backed firms have taken their
place to provide more expensive technology. These firms are able to manufacture technology for
their respective domestic markets and are backed by national governments, allowing them to take
speculative risks in the U.S. wind market. Domestic companies, which do not have such backing,
are unable to take the same risk.
Fourth, the U.S. has under-invested in the transmission grid in recent years. Without the
ability to predict the future growth in wind technology, FERC and the states have been unwilling
to invest in the expensive transmission infrastructure necessary to expand availability of wind
power. While effective transmission exists in certain regions in the country where wind power is
already prevalent, the lack of investment in a more whole scale manner greatly limits the
willingness of investors to engage in wind projects.
Lastly, short-term PTC extensions decrease the willingness of private firms from
investing in long-term wind technology R&D. Alternative energy R&D is seen as a long-term
investment, and with the wind market predictable for only a year or two at a time, companies do
not have an incentive to engage in long term technological research.
VI. Solution: 10 Year Extension
With the inadequacy of the short-term PTC, the most practical alternative would be a 10year extension of the PTC, upon expiration at the end of 2012. A longer-term PTC could lead to
a more stabilized wind market that could encourage investment and drive down the cost of wind
energy. A study conducted at Berkley National Laboratory suggests that a longer-term PTC
could drive down the cost of wind energy and increase availability. The study found that a 5–10
year extension would 1) have diverse benefits; 2) increase growth in domestic wind turbine
manufacturing; 3) encourage R&D; and 4) significantly reduce installation prices.
The study found that the most important benefit to a longer-term PTC would be the
greater number of wind installations resulting from policy stability. The boom and bust cycle
would end, as a long-term guarantee would allow for firms to make informed investments over a
ten-year period, rather than a short 1–2 year window. A ten-year extension promotes long-term
planning by a firm and encourages large-scale projects that would be infeasible to accomplish in
a short credit availability window. While impossible to tell exactly how much investment would
increase by, it is estimated that just a four-year extension would increase PTC claims by about $4
billion. [source?] A ten-year extension would likely increase claims by even more, potentially
creating greater stability in the wind market.
The second benefit is an increase in domestic turbine manufacturing. A long-term PTC
would encourage investment in manufacturing, as firms would be able to more easily calculate
long-term demand, by planning for a ten-year period. For example, in 2006 when the PTC was
extended for two years, GE increased wind turbine sales and companies built new wind
manufacturing plants in three different states. While the increased manufacturing was in
response to a short-term extension, it was done immediately following passage of the bill,
indicating that companies were reacting to the potential for two years of increased demand. If
demand for wind technology were incentivized over a ten-year period, domestic companies
would likely emulate the 2006 trend and re-invest in the domestic wind infrastructure. The
Berkley study suggests that a ten-year PTC extension would increase the domestic
manufacturing share from 30%, to an astounding 70%. This increase would greatly decrease
dependence on foreign manufacturing, while boosting the domestic economy, specifically in the
local economies home to manufacturing plants.
The third benefit is that a longer-term PTC would encourage private R&D. A ten-year
PTC would encourage companies to improve technology as they increase long-term investment.
Because a firm would be committed to make investments for longer than a 1–2 year period, it
would have an incentive to make their technology less expensive and more efficient. It would
have a guaranteed ten-year window to improve technology, rather than only a guaranteed shortterm window.
The fourth benefit is the significant potential for reduced installation costs. While the cost
for producing wind energy has been rising, a ten-year extension would reverse this trend. A tenyear extension of the PTC would decrease installation cost by about 15 percent. [sour ce – how
calculated?] It is difficult to determine the exact reduction in cost a longer-term PTC would lead
to, but it can be estimated that a five-year extension would decrease cost by about 8 percent,
while a ten-year extension could decrease cost by about 15 percent. This would be caused by an
aggregate of benefits—namely improvements in wind technology through R&D, increased
domestic manufacturing, and reductions in project development and financing costs that are
currently driven by rushed development schedules. The result would be savings passed onto the
consumer due to the decreased cost of production.
While a ten-year extension would increase credit claims by companies and require the
Federal government to spend billions of dollars in the form of direct subsidies, it is possible that
the overall cost to the government would be zero. Increased investment would also lead to
increased tax liabilities as companies would increase expenditures and produce higher income.
This would also boost certain industries and local economies, also creating greater tax liability. It
is also possible that increased tax liabilities would not completely cover the cost of a long-term
credit. A potential response to this problem would be to limit the subsidies available to
traditional fuel sources. Coal producers enjoy over $14 billion a year in tax credits. [source –
what kinds of subsidies?] Decreasing these subsidies would allow for the Federal government to
make the credit revenue neutral, while also making wind more competitive with coal.
VIII. Can the PTC Stand Alone?
Cost is not the only reason wind power only accounts for only 1 percent of the total
electricity generated in the United States. The lack of a transmission infrastructure has prevented
companies from engaging in wind projects that would provide power to consumers in distant
locations. Electricity produced from wind energy is not fully integrated in the U.S. transmission
grid, allowing wind energy to only reach customers in a proximate geographic location. Wind
sources are often far from large demand centers, making it impossible for the energy produced to
reach these costumers. It is often too expensive for companies to build transmission lines to the
large demand centers, where the energy would be available to a large number of consumers.
However, investment into the transmission infrastructure of wind energy can solve this problem
by allowing wind energy to be used by consumers far removed from the wind sources.
Without the ability to reach a large number of consumers, companies have been reluctant
to invest in expensive wind projects. However, with investment and integration into transmission
infrastructure, wind power would be a far more attractive investment to energy companies. The
U.S. Department of Energy estimates that that constructing about 12,000 miles of new
transmission lines, at a cost of $20 billion, coupled with the PT, would allow wind energy to
account for 20 percent of the electricity generation in the United States by 2030. This
improvement in the wind energy transmission grid is technically feasible, as long as states and
FERC are able to reach joint agreements allocating costs. With increased production of wind
energy, state and Federal governments and agencies would be more willing to invest in
transmission, as they would face pressure not only from wind producers, but also customers that
desire a cleaner, cheaper, source of energy. Without a commitment to improving transmission
infrastructure, it is likely that the use of wind power will plateau well below the 20 percent
desired by the DOE.
IX. Conclusion
With the supply of traditional sources of energy disappearing and threat of global climate
change looming, it is imperative that the U.S. moves towards a greener, more renewable source
of energy. Wind energy offers the most effective way to move towards this goal. However,
without a PTC that offers market certainty for a period longer than 1–2 years, wind energy will
not be able to reach its full potential. If the government creates market stability with a longerterm PTC, and commits to improving the nation’s transmission infrastructure, the US should be
able to transition to a cleaner, greener, and renewable way of life.