Assessing the Wind Production Tax Credit

As part of the recent fiscal cliff deal, Congress authorized a one-year extension for the wind production tax credit (PTC) – welcome news for the industry that was largely overshadowed by the other terms of the bargain. But as The Washington Post writer Brad Plumer points out, “even with the tax credit renewal, the wind industry is still likely to slump in 2013…partly because congressional support for wind is extremely erratic — never steady, and always on the verge of expiration.” Seeing as how the tax credit was first authorized in 1992 and has expired and been reauthorized in fits and starts since then, serious assessment of the policy and consideration of possible reform in Congress is thus long overdue.

Over at MIT Technology Review, Kevin Bullis provides a clear-eyed assessment of the wind PTC’s track record in the 20 years since it was first made available, noting that “there haven’t been radical changes to wind turbines in that time.” Why?

The production tax credit hasn’t stimulated radical innovation because it encourages wind project developers to stick to proven technology that’s likely to produce a steady stream of power and revenue. What’s more, the credit has typically been renewed only for short periods of time. That makes it possible to plan a new project that uses existing technology, but it’s harder to develop and try out new technologies, says Greg Nemet, a professor of public affairs and environmental studies at the University of Wisconsin at Madison.

Clearly, the short-term renewal aspect of the wind PTC has prevented it from functioning effectively as an impetus for substantial technology improvement. In addition to the assessments of Bullis and Plumer, that was also the finding of the recent report by the Breakthrough Institute, Brookings Institution, and World Resources Institute, Beyond Boom and Bust. Thus, that report recommends renewing such subsidies for multiple years but reducing them as clean energy technologies improve in price and performance. A Bloomberg editorial, too, said as much last week: “What’s needed to allow the wind industry some stability is a thoughtful approach for the long term, one that guides wind power gradually toward a subsidy-free future. The tax credit should be ensured, but phased out over five years or more — ideally via a mechanism that accounts for the difference in price between wind power and natural gas-fired power.” Ultimately, the goal of policymakers should be to drive wind technology to cost and performance competitiveness with the conventional alternatives such that subsidies are no longer necessary and can be phased-out.

Of course, as Bullis observes, even a reformed wind PTC may not be enough to empower wind to compete with fossil fuels. What’s more, Bullis writes, “the advances that would make the biggest difference may not be in wind technology per se. More crucial could be innovations in energy storage or in smart-grid technologies that make it easier for utilities to deal with fluctuations in power.” Achieving innovation in either wind or other clean energy technologies, however, will require stakeholders to more thoughtfully tailor policies.