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Fate of tax break for wind power could have big impact on Texas

By: Laylan Copelin |

Walter Hornaday, the founder of Austin-based Cielo Wind Power, has been developing wind farms for generating electricity for two decades, but he said he’s never seen the industry in such straits.

He is racing to get an Amarillo-area wind farm operational so he can claim a 10-year federal tax credit that will expire Dec. 31 unless Congress and the White House spare it in a last-minute deal.

“We haven’t had a low mark like this for the industry since the mid-1990s; 2013 is already lost,” he said. “If they were to do something now, it takes a year or 18 months to get a project up and running.”

Continuing the tax credit, created in 1992, has become a bargaining chip in the larger debate in Washington, D.C., over the so-called fiscal cliff of tax increases and budget cuts. The outcome has ramifications in Texas, which leads the nation in wind generation, on everything from the economy to the environment to the competitive balance within the power generation industry.

Texas has benefited more than any other state from the federal subsidy, as it is home to seven of the nation’s 10 largest wind farms. About 35 Texas companies manufacture parts for wind turbines, including TECO Westinghouse of Round Rock, which is already seeing a slowdown in its business of assembling wind turbines.

“We built 70 turbines in the past 12 months,” said Richard Fesmire, director of operations. “We expect to build 10 turbines the next 12 months.”

Supporters tout wind generation as clean energy that keeps customers’ electric bills low without tapping the state’s water supply as many other power plants do. But the tax credit’s critics say the federal subsidy allows wind farms to undercut their competition, such as electricity generators that use coal, gas or nuclear energy.

In rare instances, wind farms in West Texas give away power because they only collect federal payments when generating electricity. And one analyst, the Brattle Group advising the Texas Public Utility Commission, warned that wind power is depressing wholesale electricity prices and complicating the state’s attempt to attract investment in new power plants.

Although wind is plentiful and wind generation consistently gets high marks in polls of Texas residents, Gov. Rick Perry didn’t join 28 governors in a letter of support for the tax credit.

“The governor believes government should not be in the business of picking winners and losers and that states are best suited to determine their own energy policies,” Perry spokeswoman Lucy Nashed said. “Tax credits or incentives should always be appropriately limited in scope and duration, and in Texas we have implemented common-sense policies that have enabled us to build a successful wind industry that can thrive on its own.”

Hornaday disagrees that the industry can continue to thrive in Texas without the tax credit that pays 2.2 cents per kilowatt hour.

In today’s market, Hornaday said he can sell electricity at 3 to 4 cents per kilowatt because the tax credit pays about a third of the cost of a turbine. Without the tax credit, Hornaday said his price would increase to 5 or 6 cents a kilowatt, as compared to natural gas’s 3-cent range.

He said prices for natural gas, a leading fuel for electricity generation, would have to more than double for new wind farms to be competitive without the subsidy. He said some forecasts predict natural gas prices will stay low for the next three or four years.

“You could bridge wind industry for those years,” Hornaday said of the choice before Congress, “or pull the plug on the (wind) industry.”

Hornaday said the wind subsidy is at the wrong place at the wrong time in the debate over deficits.

“There are all kind of incentives for natural gas, coal, solar, etc.,” he said. “We are kind of the first caught in the musical chairs of the deficit spending. I’d rather have been the last one out.”

The wind industry subsidy is projected to cost taxpayers $12 billion for a one-year extension.

Supporters of the tax credit say ending the subsidy would eliminate half of the 75,000 jobs nationwide in the wind industry. By one estimate, Texas had about 10,000 jobs in the wind industry in 2010, according to a July 2012 report for the governor’s office.

In Round Rock, TECO Westinghouse is projecting a big drop in demand for wind turbines in 2013, but Fesmire says the company hopes to avoid job cuts by exporting more of its turbines to areas unaffected by the loss of the tax credit. For example, Texas long ago eclipsed its state-mandated minimum for renewable energy, which the Legislature first established in 1999, but wind construction might continue in states that are only now trying to meet their mandated levels. There is also a growing overseas market but an overbuilt manufacturing sector worldwide.

Only large companies, such as TECO Westinghouse, or those subsidized by their foreign governments might survive.

Ostensibly, the debate in Washington splits between conservatives who oppose taxpayers subsidizing renewable energy and liberals who argue that renewables need a leg up to replace fossil fuels, particularly coal. But support for the subsidy is bipartisan because many officials from wind-energy states, including Republicans, favor either continuing the tax credit or phasing it out as opposed to immediately ending it.

Generally speaking, all sectors of the power generation industry get some kind of federal subsidy. A study by the Energy Information Administration said renewable energy, including wind, got 55 percent of the subsidies in 2010, but generated only 10 percent of the nation’s electricity. Fossil fuels, by comparison, got 16 percent of the subsidies and produced 70 percent of the nation’s electricity.

On the economic front, the fight over the wind energy subsidy pits different industry sectors battling for market share.

In Texas, natural gas, which has edged coal as the most used fuel for generation, drives the wholesale price of electricity that generating companies can charge. But the price of natural gas nose-dived from a high of $13.32 BTU in 2008 to below $2 BTU earlier this year, making it difficult for other fuels, including wind, to compete.

Texas was an early player in wind energy because of politics, not economics. In 1999, the Legislature mandated renewable energy standards on the power generation industry in exchange for deregulation. The federal production tax credit fueled the expansion of wind power in Texas.

Today, 13 percent of the installed generating capacity is wind-driven in the Electric Reliability Council of Texas, the operator of the grid that serves three-fourths of the state, including Central Texas.

But wind can be fickle.

Last month, wind power set a daily record, accounting for about 26 percent of all generation in ERCOT. But those records tend to occur at night or during the spring and fall when it is windy in West Texas.

Over 2011, wind generation only accounted for 8.5 percent of the total energy produced. Furthermore, wind seldom blows in West Texas on hot summer afternoons, the time that power demand peaks in Texas. However, coastal winds, which are involved in about one-fifth of all installed wind capacity in Texas, tend to blow during the summer and are providing a more reliable resource for the peak demand.

The state has made a large investment in building transmission lines, which will become operational over the next two years, to bring more of the West Texas wind to the power-hungry parts of the state, including Central Texas. In the future, ratepayers will see a surcharge of $5 or so on their monthly bills to pay the almost $7 billion invested in those transmission lines.

Against this backdrop, the state is projecting shortages during periods of peak demand within three years or so because low wholesale prices for electricity are depressing investment in new power plants.

Natural gas prices are forecast to stay low for years because fracking technology is bringing so much gas to market.

Opponents to wind’s tax credit argue that wind generation is adding to the problem.

An example is Exelon Corporation, a major utility holding company. It is the largest nuclear power generator in the U.S. and owns gas-fired and coal-fired generation along with 38 wind farms in nine states, including Texas.

But it opposes continuing the wind tax credit.

Nuclear power generation, as well as coal-fired plants, isn’t meant to be ramped up or down quickly. But when wind is plentiful, usually at night in West Texas, Exelon faces the choice of meeting wind power’s prices or slowing down the plant.

“It’s hard to compete with someone giving away their product,” said David Brown, Exelon’s senior vice president for federal government affairs. “You drive out existing, predictable generation.”

Jeff Clark with the Wind Coalition, an Austin-based advocacy group, disagrees.

He said negative pricing — when wind generators give away power — is extraordinarily rare and should occur less once the new transmission lines can move power from West Texas to power-hungry customers elsewhere in the state.

He also said low natural gas prices — not wind power — are creating the possibility of power shortages.

Furthermore, Clark said, wind is a clean power source that doesn’t make the demands on the state’s water supply that fossil fuels do.

One-third of the state’s wind farms have exhausted their 10-year tax credit and are operating without it, according to Clark.

“Once it’s built, I can tell you what the price of wind is going to be in 20 years,” Clark said. “I don’t have to worry about fuel prices or EPA regulations.”