Environmental Benefits and the Production Tax Credit for Wind Power

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.

A 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.