Tag Archives: Production tax credit

“Please, sirs, may I have some more … subsidies for wind power?”

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Michael Giberson

From The Hill’s Energy & Environment Blog:

A group of military veterans pressed congressional Republicans on Thursday to renew a tax credit for the wind industry that their party’s standard-bearer, Mitt Romney, has vowed to end.

The veterans, who are all employed by the wind industry, secured meetings with staff for House Majority Leader Eric Cantor (R-Va.), House Ways and Means Committee Chairman…

The two elements of half-hearted policy substance mentioned in the article are both suspect: “jobs for veterans,” and “reduces dependence on foreign energy.”

Over the last decade the domestic oil and gas production industry added twice as many jobs as the 37,000 jobs the wind industry claims expiration of the PTC will threaten. The only “foreign energy” we import in any quantity is petroleum, excepting some power and natural gas from Canada, and the wind power subsidy has approximately nothing to do with how much petroleum we import.

On the other hand, increasing domestic oil and gas production actually is reducing “dependence on foreign energy,” including imports from OPEC members and other sources, and even including power and natural gas from Canada.

Using military vets to lobby for wind power tax breaks? I guess some K Street lobbying genius imagined using vets would help the industry get a bit of face time with Republican lawmakers who would otherwise rather meet with representatives of some other special interest group. Don’t our military veterans deserve better than to be made into poorly-informed lobbyists for wind energy?

What’s next, retired firefighters, grizzled ex-cops, harried emergency room nurses?

Why not just round up some starving orphans and have them come plead Congress, “Please, sirs, may I have some more … subsidies for wind power?”

Any reason to be worried about wind power industry layoffs?

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Michael Giberson

In an article titled “4 Reasons All Americans Should Be Worried About Wind Layoffs,” you’d think there would be at least one reason that people should be worried about wind industry layoffs.

Sadly, no.

Instead the author tells the reader: (1) wind power installations are largely in GOP-held congressional districts, (2) the U.S. is losing the “race” with China to build the most wind power, (3) fossil fuels receive tax breaks too, and (4)  natural gas prices are low.

The only substantive content in the short piece was a casual invoking of “the externalities of fossil fuel.” I’d encourage the writer to hold on to this sentence, toss the rest, and start again.

Negative power prices due to wind power’s subsidy

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Michael Giberson

On the NYTimes.com Green blog, Matthew Wald reports on “An argument over wind.” The issue is the scheduled-to-expire Production Tax Credit for wind power. As previously mentioned here, former PTC-supporter Exelon Corp. has come out against the PTC extension. It parted ways from the American Wind Energy Association, of which it had long been a member, over the issue.

Wald reports on an Exelon-funded study done by The NorthBridge Group, “Negative Electricity Prices and the Production Tax Credit.” According to Wald:

The study sponsored by Exelon, prepared by the NorthBridge Group, which does extensive consulting for utilities around the country, found pockets where the number of negative hours reached 12 percent or more. While various types of electricity generation have received subsidies over the decades, said Frank Huntowski, one of the authors, “I don’t think we’ve seen something as dramatic as this.’’ …

Negative pricing occurs mostly on spring and fall nights when the wind is blowing strongly but offices, stores and factories are mostly closed and temperatures are so mild that there is virtually no demand for home heating or air-conditioning. The phenomenon existed before the surge in construction of wind machines, but the new industry is making it worse, some industry participants say, especially for companies with baseload plants that were built to run at a steady rate around the clock.

That is a special problem for Exelon, which runs many nuclear plants in the Midwest; nuclear plants cannot change their output quickly.

Long-time readers may recall that we’ve discussed negative power prices many times before here on Knowledge Problem. This link will execute a search of the KP archives: negative+prices.

Related:

Losing the race to sound conclusions on the Production Tax Credit

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Michael Giberson

When I worked on public policy issues in Washington, DC, I used to read the National Journal. It tended a bit toward Washington-establishment thinking, but at least it gave evidence of thinking. Now much farther from the daily fray, I only occasionally come across the National Journal, and usually just the so-called Energy Experts Blog. I’m less impressed with the National Journal than I used to be.

Recently they’ve posted a bundle of energy “experts” on the production tax credit. I mentioned the other day that one of the “experts” thought the PTC paid $2,200 per megawatt (actually it pays $22 per megawatt-hour). I just noticed another “expert” reporting that the PTC is set to expire at the end of 2013 (oops, off by 365 days). I guess we’re getting raw, unvarnished expertise on the Energy Experts Blog, nothing subjected to the indignities of editorial review.

But worse than these little slip ups is the general lack of depth to many of the arguments. For “Ms. 2013,” who works for the Pew Clean Energy Program, whether or not we continue the Production Tax Credit is apparently about being at the top of the world in building “clean energy.”

Really? This is your policy criteria? Whether we can wear the “#1 Clean Energy Nation” T-shirts and wave the big “We’re #1″ green energy foam fingers? I thought these kinds of public policy decisions should be informed by considerations of costs and benefits, not a bunch of cheesy cheerleading routines.

Quoted, so you can see what I’m talking about:

In 2011, for the first time in several years, the United States led the world by investing more than $48 billion in clean energy. The clean energy sector represents one of the fastest-growing industries globally, with investment increasing more than 600 percent between 2004 and 2011 (excluding research and development).

We’re in danger of losing our place at the top, however. To maintain our lead amid fierce international competition and to continue to attract private capital, there must be policy certainty. While other nations have national policies to encourage the adoption of clean energy, we rely on a patchwork of state policies and cyclical federal tax incentives, one of the most important of which is to end in a year.

The production tax credit (PTC) is an effective tool to keep electricity prices low and encourage the development of proven clean energy projects. While not large–about 2.2 cents per kilowatt hour–it gives American businesses the certainty they need to continue to invest, build, and deploy. But it’s set to expire at the end of 2013. Uncertainty about whether Congress will act to extend the PTC has already resulted in a sharp drop in investments in wind energy production, threatening the livelihoods of the more than 78,000 people nationwide who are in wind-supported jobs.

When Congress has allowed the PTC to expire in the past, wind installations declined by 73 to 93 percent.

“Wind-supported jobs”? Funny phrase, given the context. Apparently they are 73 to 93 percent tax-break supported jobs. The wind-supported jobs are the ones that would be left in the business after the tax break goes away.

Any economic historians in the audience who can spot check this energy development claim?

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Michael Giberson

Please let me know ASAP if you can find any economic historians, energy policy specialists, economists or persons with at least a high school diploma who actually believes the following claim:

For over a century, every major energy source – petroleum, coal, nuclear, natural gas and renewables – has been developed due in large part to favorable federal policy that includes incentives. Without federal assistance of these fuel sources, it is unlikely that our nation would have grown to the economic superpower that it is today.

While the National Journal‘s collection of pro and con Production Tax Credit opinions includes a lot of bullshit, this pair of claims rises to the top. Fully 100 percent USDA prime bullshit, in my opinion.

But prove me wrong, please: find me an interested party with a plausible argument and a grasp on one or two facts that justifies the above claims.

MORE: By the way, the loose thinking and sloppy work isn’t only on the pro-PTC side. Guys arguing that wind power turbines are killing way too many birds slip in the claim that the PTC pays $2,200 per MWh. Um, no, only about $22 per MWh. And, of course, they are focused like a laser beam on the seen dead birds near wind turbines and ignore the unseen dead birds killed by other power production methods.

But thanks for joining us here on the “Let’s Pretend We’re Actually Serious People Doing Serious Thinking” show.

The fraying of support for wind power’s PTC subsidy

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Michael Giberson

The coalition in support of  wind power’s Production Tax Credit has always had a bit of a “Baptists and Bootleggers” flavor: environmentalists making a clean and green argument in favor of wind power and the multinational wind power development corporations funding the political muscle needed to get things done. The coalition has proven durable even as wind power took a few environmental hits, but now the business side of the coalition is beginning to fray. The Production Tax Credit will expire at the end of 2012 unless Congress acts to extend it.

One example: The Chicago Tribune reports that Exelon Corp., a large electric power company that owns a significant amount of wind power and a member of the American Wind Energy Association, is opposing efforts to renew the tax credit (reg. required).

“The (production tax credit) has been in place since 1992, I believe,” Exelon Chief Executive Christopher Crane said in a conference call with investors and analysts Wednesday. “And I think that’s enough time to jump-start an industry, 20 years.”

The economic logic behind Exelon’s position is clear: ”with nearly half of its profits coming from its nuclear fleet and low-cost wind power cutting into its margins, Exelon is in Washington leading a fight to kill a tax credit the wind industry says is crucial to its survival.” Note that “low cost wind power” is referring to the low marginal cost of production, not the total cost per MWh of energy produced. Most of Exelon’s generating assets are in markets with energy prices driven toward the marginal cost of production, and additional wind power in these markets tends to push average prices down.

It isn’t just the nuclear fleet that sees its profitability pushed down, either. Wind on wind competition is also becoming an issue. If additional wind power comes online near existing wind power, it naturally produces more output at the same time that existing wind power plants produce more output. The profit-suppressing effect of new wind is thereby intensified for existing wind assets.

Wind power project owners contemplating PTC extension have to weigh the benefits from anticipated new projects against the price suppressing consequences for their existing wind power and other generation assets. It is a cost-benefit weighing that is increasingly turning against continued support for the PTC among owners of wind power assets. Of course, on the other hand, manufacturers of wind power turbines and towers, and those developers who build but don’t own wind power projects benefit only from the construction of new projects. Wind power coalition dynamics should see these players taking a bigger and bigger role over time.

The Chicago Tribune article contains more good stuff. They found someone willing to claim that wind power needs the subsidy because it is “on the cusp of seeing real price declines,” and “In three to five years wind energy will be cost competitive … without the subsidy.” The claimant doesn’t explain why we shouldn’t just wait three to five years and build wind power when it is actually competitive.

(Research efforts do seem to be making progress in improving wind power productivity. That progress justifies maybe a few million dollars for continued research, not a few billion dollars to build more not-quite-cost-competitive wind power projects now.)

Other Production Tax Credit news and commentary:

 

The WSJ’s awful editorial against the wind power industry

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Michael Giberson

Like the editorial board of the Wall Street Journal, I’d like to see the Production Tax Credit for wind and other renewable energy technologies expire at the end of this year as scheduled. So policy-wise, I’m with them. Still, their editorial against the wind power policy yesterday was awful and it deserves public criticism.

So here are quotes from the WSJ in italics, followed by my comments.

“The renewable energy tax credit—mostly for wind and solar power—started in 1992 as a ‘temporary’ benefit for an infant industry.”

Stick with “mostly for wind.” Other technologies qualify, too, including a variety of hydroelectric technologies and geothermal power, but not currently solar power.

Solar was briefly included in the PTC through the American Jobs Creation Act of 2004, but then was back out at the end of 2005. Solar power benefits from the Investment Tax Credit, and until December 2011 benefited from “Section 1603″ cash grants in lieu of the ITC.

If you’re tempted to argue they said “renewable energy tax credits”, not specifically the PTC, note that they clearly say the renewable energy tax credits that began back in 1992 (in that year’s Energy Policy Act) – they’re talking about the PTC and they get the solar reference wrong.

Details on the PTC, via DSIRE.

“The ’1603 grant program’ pays up to 30% of the construction costs for renewable energy plants …. Wind producers then get the 2.2% tax credit for every kilowatt of electricity generated.”

No. To get the 1603 cash grant a developer has to forgo the Production Tax Credit. One or the other, but not both.

And for crying out loud, it is a 2.2 cents/kwh tax credit, not a “2.2% tax credit.” The Heritage Foundation can get this right, you’d think the WSJ could do as well.

(Or, more precisely, that was last year’s subsidy but the PTC is adjusted annually for the effects of inflation so in 2012 it will be slightly higher.)

… and Senator Jeff Bingaman of New Mexico has introduced a national renewable-energy mandate so consumers will be required to buy wind and solar power no matter how high the cost.

I didn’t notice this problem myself, not having dug through the details of the bill Sen. Bingaman introduced last week, but Richard Caperton and Stephen Lacey at Climate Progress point out that the bill caps the cost increase at 3 cents/kwh.

These sloppy errors don’t mean the WSJ is wrong, only that they’re willing to publish poorly researched opinion pieces.

The Caperton and Lacey post at the Climate Progress blog mentioned the above errors and raised some additional complaints. Most of their additional complaints concern the relative virtues of oil and gas production when compared to wind power, and who gets how much subsidy. On these points I mostly lean toward the WSJ‘s view. Suffice to say that wind power subsidies are orders of magnitude higher per unit of energy provided to consumers.

But this brings us to one key point they raise: “one justification for the tax credit is to makeup for the fact that taxpayers are bearing the harm from fossil fuels.”

There is, embedded in this idea somewhere, the foundation of an analytically sound justification for policy intervention. My problem with the Production Tax Credit for wind power is that it flows to wind investors for every qualifying kwh of power generated irrespective of any such benefit. The wind power investor gets the same subsidy whether the wind power produced displaces coal-fired electric power or efficient natural gas-fired power or hydropower. Wind would still qualify for a PTC even if its output was displacing solar power while wind turbines chopped up migrating birds.

While there may be an intellectually defensible case for a policy supporting renewable energy because it reduces a harm, the Production Tax Credit bears little resemblance to that policy.

So let’s let the Production Tax Credit die, and get on with the business of developing sound public policy on emissions. (And please, WSJ, stop embarrassing yourself with silly mistakes.)

 

Environmental benefits and the production tax credit for wind power

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Michael Giberson

Wind power has been subsidized by state and federal governments in the United States because it is seen as clean and renewable, and perhaps even because wind power is seen as glamorous. Consumers pay higher electric rates and taxpayers pay higher taxes to support these subsidies, and it is a quite reasonable public policy question to ask whether the benefits are worth the costs. (Of course wind power is not the only energy technology subsidized by government policy.)

The primary external benefits from expanded wind power production comes from emissions avoided due to the reduced use of fossil-fuel fired electric generation, predominantly natural gas and coal. Which fuel is displaced, however, depends in large part on where the wind power project is located and what time of day the wind power is put onto the grid.

Conventionally, an estimate of reduced emissions might be made through an elaborate production cost modeling exercise, comparing overall use of different input fuels against scenarios featuring different levels of installed wind capacity. It is one useful approach, but it would be good as a reality check to test such estimates against actual data. Two recent estimates of fuel displaced by wind power rely on data analysis to get their results.

Monitoring_Analytics-Fuel_displaced_by_wind_power, link to larger view on FlickrA relatively straightforward approach to this estimate was taken by Monitoring Analytics, the external market monitor for the PJM market, in preparing “Estimated Marginal Fuel Displacement By Wind Generation in PJM.” The chart was posted online without accompanying documentation, but folks at Monitoring Analytics tell me their estimate was derived from market data on wind power output by hour combined with data on marginal generation by fuel type by hour. As the chart nearby indicates, about 75 to 80 percent of the wind-produced power in PJM displaced coal-fired power. (Coal is the orange portion of the bars.)

Joseph Cullen took a more data-intensive econometric approach to estimating the fuel displaced and related emission reductions in ERCOT due to wind power. Cullen ran regressions on the output of each non-wind generating unit in the ERCOT market against wind power output to identify the actual responsiveness of each generator to changes in wind power. (I’m over-simplifying his methods. See his paper for details.) In ERCOT, for the time period analyzed, Cullen estimated that about 80 percent of the time wind displaced gas-fired generation and about 20 percent of the time wind displaced coal-fired generation.

One of my policy objections to the production tax credit approach to subsidizing wind power is that it offers the same subsidy per MWh output without respect to the environmental benefits provided (if any). Therefore it tends to be more attractive to the developer to invest where wind power output will be high – i.e. West Texas, among other places – and the external benefits relatively muted – instead of where the external benefits would be high, as in PJM. So much wind power capacity has been added in West Texas, relative to the current grid capability, that wind power capacity in effect just displaces other wind power generation during high output periods.

Why should consumers and taxpayers subsidize that?

From a commercial point of view, it certainly makes sense to build wind power where wind power output will be high. I’m not opposed to smart commercial activity. I don’t see that public policies should subsidize it. Rather, public policy should be oriented at achieving external benefits in a cost-effective manner.

Consumers and taxpayers will end up getting more for their money from policies that put a price on the externality.

Wind power is dispatchable, down

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Michael Giberson

Last week the New York ISO filed proposed tariff changes with the Federal Energy Regulatory Commission to revise how it treats wind power generation in its markets.  Under the NYISO’s current rules, wind power generators are not treated as flexible resources.  When the transmission system is overloaded, other generators can be asked to back down but wind power would not be reduced under most circumstances.  (Under current rules wind power can be backed down in extraordinary cases, via a cumbersome process, and sometimes generators back down voluntarily due to low prices.)

Under the proposed rules, wind power generators would be treated as flexible resources by the real time market system for output levels from zero up to the forecasted wind power output level.  The practical effect would be to allow the system to back down wind and non-wind generation in comparable fashion as needed to resolve congestion on the transmission grid.  Wind power generators would submit energy bids into the market like most generators and the ISO market would use the bids to work out the least cost method for resolving congestion.

While the change could result in wind power generators being directed to reduce output more frequently than under current rules, the NYISO said the change would likely increase the overall amount of wind power taken by the system. Under the current, manual procedures for directing reductions in wind power output, it is hard to get just the right amount of power off the system. The NYISO indicated that sometimes more power has been taken off the system for a longer period than was strictly necessary. In addition, even under voluntary curtailment by wind power generators due to low (and sometimes negative) prices, sometimes more power has been taken off the system longer than was needed to resolve the problem.

Both symptoms of the cumbersome approach now used have resulted in more work for the system operator and a less efficient supply of power.  The proposed changes should serve to more finely target any needed reductions in output, allowing a more efficient use of wind power when it is available.

Even with the proposed tariff changes, the NYISO expects that most of the time it will take all of the wind power available to the system. Of course, whether this remains true will depend on the pace of further wind power additions relative to the transmission improvements, if any, needed to support those additions.

The changes represent another step in the direction of the normalization of wind power resources in integrated regional power markets. The rules for wind power will never exactly be the same as the rules for, say, a combined-cycle combustion gas turbine, but then the treatment of that very flexible natural gas unit isn’t exactly the same as the treatment of a less flexible coal-fired steam turbine.

The market design goal should be to maximize the gains from trade produced through the regional power market. The process of adapting rules to the diversity inherent in the generation and demand-side resources available to the system should be undertaken with that goal in mind.

(ASIDE: Elsewhere I have been critical of the way that production tax credits available to wind power generators can distort the efficient operation of power markets. There was some talk about this issue in the recent FERC technical conference on integration of renewable resources, and I suspect I’ll have more to say on the issue in a few days when the transcript is online.

Some critics of current wind power subsidies may object to any normalization of the treatment of wind power so long as the subsidies continue, but I don’t think it desirable to try to fix market rules to compensate for the harmful effects of federal tax policy. Rather, market design should aim to maximize gains from trade given the larger legal and policy framework which the markets must operate in, and opposition to wasteful subsidies in the tax code should be directed to the legislative bodies responsible.)

Negative power prices in ERCOT West – 2009 so far

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Michael Giberson

If you thought power prices in ERCOT’s West region were interesting in 2008, keep an eye on the prices in 2009. (For background see my earlier post on negative prices in ERCOT West for 2008. Note on updated data here.)

Late 2008 saw a few developments of note for the region:

  • Almost 2000 MW of wind power capacity was added to ERCOT from September to December, most of it in ERCOT West.
  • When ERCOT updated its zonal boundaries last Fall, a few dispatchable generators – coal and gas units – were moved from ERCOT West to the ERCOT North region.*
  • Natural gas prices, which ranged above $10 per MMBTU last Summer, are now below $5 per MMBTU.
  • The recession, and particularly the drop in oil and gas prices, will tend to reduce electric power demand throughout the state.

(*There are technical reasons justifying the change in zone boundaries, which wasn’t without controversy, but combined with the first bullet point the practical effect is that the West region prices will be even more reliant on intermittent wind power output.  ERCOT reviews zonal boundaries every year.)

How does this all shake out?  Safe to say that electric power prices in ERCOT generally, and ERCOT West especially, will be much lower this year. Peak prices will be kept down by lower demand and low natural gas prices.  Offpeak prices will be lower and more volatile because of the confluence of all four factors.

The key to producing negative power prices is subsidized wind power output in ERCOT West net of local load, compared to the transmission system’s capability to deliver the excess power out of the area.  Lower load combined with more wind power capacity indicates a more volatile price situation.

Will ERCOT West see more frequent negative prices this year?

Yes.  In fact they already have.

In January 2008, ERCOT West was faced with negative prices about 8.3 percent of the time; in January 2009 the region faced negative prices 12.5 percent of the time.  This increase in the number of negative priced periods resulted despite a drop in average wind speed in the area.  (At the Abilene Regional Airport, near the heart of the wind power in the area, the average wind speed in January 2008 was 12.1 mph, while in January 2009 it was 10.7 mph.)  Less wind, but more frequent negative power prices.  Not surprising given the substantial increase in wind power capacity, and not yet a comparable increase in transmission capacity.

So far, February 2009 has been a little windier than February 2008 at the Abilene Regional Airport.  While I haven’t examined February price data yet, I wouldn’t be at all suprised to see that February 2009 shows even more frequent negative prices than those of February 2008 (negative prices 18.8 percent of the time).