By: Anthony J. Alexander, Christopher M. Crane and Thad Hill |
Mr. Alexander is president and CEO of FirstEnergy. Mr. Crane is president and CEO of Exelon. Mr. Hill is president and CEO of Calpine.
Last year the U.S. Congress allowed the production tax credit (PTC) for wind power to expire after more than 20 years and numerous extensions. Now some in the wind industry want it resurrected, but it is clear that an extension is not warranted by any measure. As chief executives at some of the nation’s largest coal, natural gas and nuclear companies, we have a deep and abiding commitment to clean and reliable energy, with substantial interests in renewable energy resources including wind, solar, geothermal and hydropower. We believe the PTC has achieved its original purpose, namely shepherding a nascent industry to maturity, and any extension will cost taxpayers and electric consumers billions simply to benefit a handful of vested interests.
While a tax extenders bill pending in the U.S. Senate would reinstate the PTC at a projected cost to taxpayers of $13 billion, it is clear that this tax credit is no longer needed to support the wind industry. Wind power has become a multi-billion dollar business comprised of sophisticated companies and investors from around the globe. Today there is over 60,000 megawatts (MW) of wind capacity in the U.S. with an additional 12,000 MW under construction. In recent years, wind has been the largest source of new electric generation, with a greater share of new capacity than natural gas fired generation. A recent U.S. Department of Energy report found the price of wind turbines has dropped 20 to 40 percent since 2008. In fact, Power Company of Wyoming CEO Bill Miller, who has plans to build the largest onshore wind project in the nation’s history, recently stated that the PTC is not necessary.
A Source of Market Distortion
Even though the wind industry is booming, it receives the lion’s share of federal electricity production subsidies with the PTC making up a significant portion of those subsidies. The subsidy is particularly offensive when one takes into account its value relative to wholesale electricity prices. Wind generators receive a $35 per megawatt-hour (MWH) pre-tax PTC credit ($23 per MWH post-tax) on top of the wholesale price of power, which is approximately $28 per MWH; therefore, wind producers are getting paid, on average, over double the price that other generators receive in the wholesale market. Even worse, the irrational incentives the structure of the PTC creates leads owners of wind power facilities to generate as much as possible, even when the power is not needed because they receive the PTC only when they are generating. They are able to continue operating when power is not needed by paying the market to take their power—this effect is creating negative wholesale prices in some regions of the country during certain periods of time meaning generators of any type have to pay the customer to take their product. The only generators who make money doing this are the subsidized wind generators who get their PTC. Even when these instances of negative prices do not occur, the subsidy distorts power markets by artificially suppressing prices. But don’t just take our word for it—state and federal regulators have also decried the PTC as a source of market distortion. Most recently, Public Utility Commission of Texas Chairwoman Donna Nelson stated that the PTC “ultimately destroys the economic underpinnings of the wholesale competitive electric market.”
The effects of these market distortions are far from academic. They are having a tangible and pronounced impact in the real world. Traditional power plants, fueled by coal, nuclear, and natural gas, are critical to maintain the reliability of our electric system and provide our customers with the 24/7 power they require, yet they are increasingly vulnerable to economic pressure as a result of artificial price suppression by the wind PTC. Several power plants, including the Kewaunee Nuclear Power Station in Wisconsin, which was fully operational, have announced early retirements due in part to economic conditions caused by the PTC. Decisions to build new traditional generation plants are also being deferred. Even hydropower facilities in the Pacific Northwest are threatened by the PTC.
In the long run, these closures and delays are likely to cost electric customers more. Highly reliable baseload power cannot be replaced with intermittent renewable resources alone and the mixture of renewables and new reliable generation needed to back up intermittent renewable power will likely be more expensive than the current mix, resulting in higher prices. Further, shutting down nuclear plants and delaying new gas plants can actually have an adverse impact on air quality.
Dangers of Continued Subsidized Renewable Energy
This is only the beginning of the challenges our sector will face if we continue to subsidize wind. For a sense of what can happen when a country travels too far down the path of subsidized renewable energy, we need look no further than Europe. In Germany, generous subsidies for wind and solar have driven the closure of clean baseload power plants leading to higher prices and growing concerns about whether there is now enough capacity to meet electricity demand. In addition, to fill the vacuum created by the loss of clean baseload power from nuclear and natural gas, there has been a move to burn lignite coal, the most carbon intensive form of coal. The result is emissions that are higher today than they were before Germany began subsidizing renewables. The effects of the German experience in the U.S. would be catastrophic to our economy and our environment.
Fortunately, Congress is beginning to recognize the harmful effects of the PTC and bipartisan opposition to the subsidy is growing. In fact, House Ways and Means Committee Chairman Dave Camp recognizes the need for the PTC to end his—comprehensive tax reform proposal excluded an extension of the PTC as well as reduced the amount of the credit available to currently eligible projects in order to save taxpayers money. By allowing the PTC to expire last year, Congress took an important step in preventing the government from picking winners and losers in electricity markets. In the coming weeks, those who benefit from the credit will grow more vocal in calling for its reinstatement. Congress should consider the real world implications of doing so and ensure that the PTC does not return.