Analysts say tax credits to jump start wind industry drive incentives that cost consumers more

The production tax credit was meant to jump start the new wind industry. It's now 30 years old, and two analysts say it's driving irrational incentives that are costing taxpayers and energy consumers more money.

Published: March 2, 2024 10:20pm

In a recent article in the Des Moines Register, Sen. Chuck Grassley, R-Iowa, celebrated the 30-year-old Wind Energy Incentives Act, which he authored in 1993. The law created the first-ever wind energy production tax credit (PTC), and the Iowa senator is considered the “father” of American Wind energy because of it.

In his article, Grassley praised the law for boosting Iowa’s wind energy industry, providing an income to farmers through wind leasing, who are dealing with recent drought conditions.

When it was created, the PTC was meant to boost the nascent wind industry. Once this new industry matured and became self-sufficient, supporters claimed, this temporary federal program would be suspended. Instead, over its 30-year life, it’s been renewed more than a dozen times.

As Mitch Rolling and Isaac Orr, policy fellows for the Center of the American Experiment, say on their “Energy Bad Boys” Substack, this ongoing program embodies the Milton Friedman statement that “Nothing is so permanent as a temporary government program.”

“If they’re the cheapest sources of energy around, why do they need subsidies perpetually going into the future? That’s because it’s simply not true,” Rolling told Just The News.

Ongoing support

The PTC’s latest extension was embedded in the 2022 Inflation Reduction Act. While it’s commonly said that the renewable tax credits are only extended through 2032, according to an analysis by Wood MacKenzie, they will likely be extended for as much as 40 years, unless the act is repealed. This is because they’re only phased out when emissions are equal to or below 25% of 2022 levels.

By 2049, the Wood MacKenzie analysis shows, these tax credits for all forms of renewable energy, including energy storage systems, will cost taxpayers cumulatively $2.5 trillion.

Besides being costly, Rolling explains, the PTC creates a number of irrational incentives that are driving up utility bills and undermining grid reliability. For the past few years, seasonal and long-term reliability assessments by the North American Electric Reliability Corporation, a nonprofit international regulatory authority tasked with overseeing the North American grid, have found increasing risks of blackouts in most parts of the U.S. during periods of high demand.

According to the assessments, this is due to overreliance on intermittent wind and solar farms and the early retirement of coal plants. This has left the grid more reliant on natural gas-fired generation to back up unreliable wind and solar. During times of extreme cold weather, gas is diverted to heating homes, which leaves less for running electricity generators.

Rolling said that, with the lucrative payments that the PTCs provide to renewable energy developments, there’s little incentive to build more reliable power plants. Capital investments are instead flowing to renewable energy projects.

The subsidy also undercuts coal, nuclear and natural gas plants’ electricity on the wholesale market.

The PTC, Rolling and Orr explain, pays wind projects $27.50 per megawatt hour of electricity produced, whether or not that power is needed. For comparison, the average American home consumes 875,000 watt hours per month.

In some cases, wind energy is producing more power than is needed on the grid, so wholesale prices fall to negatives, meaning generators are paid to produce electricity that isn’t being used. With the PTC, a wind farm can produce power and still turn a profit at negative wholesale prices. According to Orr and Rolling, when prices are negative, coal and nuclear plants are forced to pay other people to take their power because their generators aren’t easily ramped up and ramped down. These plants often find it easier to just exit the market.

“They simply can’t compete with the generators that earn the subsidy anymore. So it impacts future additions to the grid, but it also impacts the existing thermal [nuclear, coal and natural gas plants] generators that are on the grid,” Rolling said.

Investment incentives

It’s also profitable to build more wind farms, Rolling said, even if the transmission capacity isn’t available to move the electricity being produced.

“These are areas where the wind resources are pretty good, but everyone wants to build their wind farms there. So there’s already transmission congestion in those areas,” Rolling said.

Lawrence Berkeley Labs has a tool that maps out the frequency of negative pricing, and the Great Plains down the center of the U.S. — an area of heavy wind farm development — is covered with the highest frequency rates.

The production tax credit expires after the first ten years of a project’s life. If companies want to extend the credit, they can “repower,” which involves replacing aging turbines or components. Wind farms are said to last 25 years, but the reality is their power output begins to decline within a decade.

An analysis by Enverus Intelligence Research found that companies can weather the economic challenges that the wind industry is facing as a result of rising capital costs by investing in repowering. As a result of developers chasing this profit option, the analysis estimates that half of all new wind capacity in 2024 will come from repowering wind projects.

This is driving the effort to build out more transmission lines, but the projects cost as much as $2.5 million per mile and take decades to permit and construct.

The cost of these tax credits, as well as the cost of the investments being made that chase those credits, eventually end up costing taxpayers, either through higher taxes or higher utility bills.

Rolling and Orr analyzed eight of the largest recent rate increases that utilities have requested from public service commissions in the U.S. “Every single one of them uses renewable investment as a primary justification for increasing prices on their customers,” Rolling said.

The two analysts argue that it’s time to bring the PTC to its end.

“The PTC is older than I am. The question is, how much more of a jumpstart does it [the wind industry] need? It's over 12% of the installed capacity on the grid. Some would say that that's pretty mature,” Rolling said.

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