The production tax credit
The renewable electricity production tax credit, or PTC, is the most critical tax incentive for renewable energy projects using wind, geothermal, biomass, and hydroelectric power technologies, among others. I’ll focus on wind here because it’s the most prominent, but investment in all of these resources is important.
The PTC is linked to electricity generation from a project. That is, for each kilowatt-hour of electricity produced, the owner of a project gets a tax credit. “Tax credit” means that the owner of the project gets to reduce their tax bill by a certain amount—currently 2.2 cents per kilowatt hour, or kWh—at the end of the year.
Let’s look at an example. A typical large wind farm has several dozen turbines that can generate 100 megawatts of electricity. Because the wind conditions are only favorable for part of the year, it won’t produce that much power all of the time. Instead, the wind turbines will only spin about 30 percent of the time. This wind farm will generate 262,800,000 kWh each year, which will earn $5,781,600 in tax credits from the PTC.
Let’s be clear: This is a $5 million government investment, but it just happens to have gone through the tax code. This tax credit is economically the same as government spending: The government has less money than they would have without the investment, and the project is more profitable. It is also true that the incentive helped stimulate the investment that made both the income and the tax expenditure possible. In short, this investment helped directly create economic activity and growth.
Since its creation in 1993, the government has invested several billion dollars in wind power through the PTC. These have been smart investments. The PTC is intended to incentivize the deployment of energy sources that are more expensive than fossil-fuel sources and whose cost will come down as more of the technology is deployed. This is also known as driving a technology down its cost curve. Since 1980 the cost of wind power has declined by 90 percent.
Declining costs are critical because they allow for more clean energy to be built, which will improve our environment and diversify our power mix. Indeed, the PTC has led to massive amounts of new growth in the wind industry. Since 1993 more than 40 gigawatts of new capacity have come online.
We know this growth is attributable to the PTC. (see Figure 1)
Since its creation the PTC has only been extended for two years at a time. When it’s not in effect, there’s virtually zero investment. When it is in effect, investment is tremendous. There are also more formal economic studies suggesting the positive outcome of the PTC: Economist Gilbert Metcalf, for example, finds that “[T]he data suggest that much of the current investment in wind can be explained by the production tax credit for wind.” (For more information on how we know the PTC works, see the CAP report, “America’s Hidden Power Bill.”)
The PTC also has real benefits for American workers. At least 85,000 people work in the wind industry. These workers are spread all across our country and throughout the industry. We have people making turbines, installing them, and operating them, all in good-paying jobs.
Unfortunately, we don’t have as many people working in the wind industry as we could. While the wind-manufacturing sector has grown in recent years, it has historically been crippled by the PTC expiring every two years. Manufacturers know that this on-again, off-again cycle for the industry would leave them with virtually no business every other year, so American wind farms use some imported parts.
Indeed, we have more demand for certain turbine parts than we have domestic manufacturing capacity. In particular, U.S. manufacturing capacity is insufficient for gearboxes, generators, bearings, and castings. The lack of consistent policy is clearly contributing to U.S. underinvestment in domestic production of these strategic technologies. Our economic competitors have simultaneously developed robust manufacturing capacity to serve both their growing domestic demand and meet global demand through technology exports. (see Figure 2)
Over the past three years, however, the United States experienced tremendous growth in wind manufacturing, partly because of the relatively stable PTC, which was most recently extended for four years as part of the 2009 American Recovery and Reinvestment Act, known as the stimulus. In that time new manufacturers set up shop across the country and the composition of domestic parts that each turbine made has steadily increased while our wind energy imports declined. This should be a lesson to Congress: A long-term PTC is more valuable than a short-term extension when we look at the overall impact on jobs and growth.
Instead of allowing the PTC to expire this year, it should be extended for at least four more years to give confidence and stability to investors throughout the supply chain. This doesn’t mean, however, that the PTC should be extended indefinitely without review. This is exactly one of the biggest problems with many of the deeply flawed fossil-fuel subsidies. If Congress wants to extend it beyond that timeframe, they should build in a review process to evaluate whether or not the credit should be adjusted in any way.
Congress should review the size of the credit and review whether or not it should be linked to inflation. Ultimately as the industry matures and markets expand, the PTC—like other subsidies that have done their work and grown strong domestic industries—should be allowed to sunset, taking taxpayers off the hook for payments.