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Economists Weigh in on the PTC Extension


Posted on October 18, 2012 by GREGORY F. JENNER on the Stoel Rives RENEWABLE+LAW blog.

Against the backdrop of election year politics and consideration of extension or elimination of the Production Tax Credits (PTCs), the Congressional Research Service (CRS) issued a report last week entitled, “U.S. Renewable Electricity: How Does the Production Tax Credit (PTC) Impact Wind Markets?” This report examines the possibility of an extension of the PTC, and the potential impacts such an extension (either long- or short-term) would have on the U.S. wind market. Not surprisingly, the conclusions are mixed and layered with uncertainty.

The report trumpets that 2012 will be a record year for the wind industry. Due in large part due to the pending expiration of the PTC, the U.S. wind sector deployed 10-12 GW of wind power this year—an unprecedented amount. However, all indications are that the expiration of the PTC will cause a severe market downturn in 2013 and beyond. No wonder the wind industry has been pushing Congress so hard for an extension. But does an extension make good economic sense?

According to CRS: Maybe. By its lights, a one year extension of the PTC will stimulate short term economic and employment activity, but due to long project development lead times, it may already be too late for a one year extension to have any effect on 2013 projects. Also, near-term projects may reduce future project demand by filling up the Renewable Portfolio Standards (RPS) mandates in the various states that have RPS. Alternatively, a permanent PTC extension may actually reduce the urgency of wind project development activity, which could delay the desired economic benefit. Under this scenario, the report predicts a much lower activity level, peaking at only 4GW per year in 2030. But, the report also recognizes that the price of wind power, and its competitiveness with other forms of electricity may be the real drivers rather than the PTC. Significant factors affecting the wind market include modest projected growth rates for U.S. electricity demand (particularly when compared with China), and low natural gas prices, both of which will have a negative effect on wind development as utilities opt for lowest cost resources.

The CRS report concludes that allowing the PTC to expire could potentially result in a stronger and more robust, although potentially smaller, wind industry that can “directly compete” with all sources of power generation. However, the entire industry is threatened without increased levels of state RPS requirements and continued low natural gas prices.

As all industry observers know, we have been through this cycle before – three times actually. The PTC expired in 2000, 2002 and 2004 and market activity dropped precipitously all of those years. The difference is that the wind industry in 2012 is much bigger and there is much more at stake. In 2011, the wind industry reported that the 407 U.S. facilities manufacturing wind energy equipment supported approximately 30,000 jobs. Another difference is that global competition is now much more intense, raising the possibility that market share lost will not be easily regained in the future.

As this graph shows, regardless of the PTC, the wind energy equipment manufacturing sector will likely continue to be significantly oversupplied.

Decreased U.S. demand for wind equipment, combined with certain local-content requirements and the high cost of exporting large wind turbine equipment, will make it difficult for U.S. manufacturers to compete in the global wind market, and undoubtedly force some U.S. facilities to shut down. In the meantime, the report determines that “[w]ind turbine price declines would contribute to new wind projects becoming more economically competitive with other sources of electricity generation on an unsubsidized basis.” Translation: the oversupply of wind turbines could lower the cost of wind power to at or below grid parity in some places.

The likelihood of an extension of the PTC could ride on the outcome of the Presidential race. President Obama supports an extension of the PTC to support the wind energy industry and the jobs it produces. Governor Romney is opposed to an extension, which may embolden like-minded members of Congress if he is elected. On the other hand, recognizing the strong support for extension among some in Congress, opponents of the PTC could view a Romney win as allowing them to concede a one-year extension. They could defer elimination until 2013 as part of a broader tax reform effort as well as preventing a fight over extension in 2012 from standing in the way of fixing the "Fiscal Cliff." The bottom line is that any debate on the PTC during a lame duck session will be tangled up with broader economic and political issues, and will only be settled as part of a resolution of those broader issues.

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