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Fraying Support for Windpower: Exelon Does the Math

The coalition in support of wind power’s Production Tax Credit (PTC) has always had a bit of a Bootleggers and Baptists flavor: environmentalists making a clean and green argument in favor of wind power and the multinational wind power development corporations funding the political muscle needed to get things done.

The coalition has proven durable even as wind power took a few environmental hits, but now the business side of the coalition is beginning to fray. The PTC will expire at the end of 2012 unless Congress acts to extend it, and some interesting positions are being advertised as the tax-cliff approaches.

For example, the Chicago Tribune reports that Exelon Corp., a large electric power company that owns a significant amount of wind power and is a member of the American Wind Energy Association, is opposing efforts to renew the tax credit (sub. req.).

“The (production tax credit) has been in place since 1992, I believe,” Exelon Chief Executive Christopher Crane said in a conference call with investors and analysts Wednesday. “And I think that’s enough time to jump-start an industry, 20 years.”

The economic logic behind Exelon’s position is clear: ”with nearly half of its profits coming from its nuclear fleet and low-cost wind power cutting into its margins, Exelon is in Washington leading a fight to kill a tax credit the wind industry says is crucial to its survival.”

Note that “low cost wind power” is referring to the low marginal cost of production, not the total cost per MWh of energy produced. Most of Exelon’s generating assets are in markets with energy prices driven toward the marginal cost of production, and additional wind power in these markets tends to push average prices down.

It isn’t just the nuclear fleet that sees its profitability pushed down, either. Wind-on-wind competition is also becoming an issue. If additional wind power comes online near existing wind power, it naturally produces more output at the same time that existing wind power plants produce more output. The profit-suppressing effect of new wind is thereby intensified for existing wind assets.

Wind power project owners contemplating PTC extension have to weigh the benefits from anticipated new projects against the price suppressing consequences for their existing wind power and other generation assets. It is a cost-benefit weighing that is increasingly turning against continued support for the PTC among owners of wind power assets.

On the other hand, of course, manufacturers of wind power turbines and towers, and those developers who build but don’t own wind power projects benefit only from the construction of new projects. Wind power coalition dynamics should see these players taking a bigger and bigger role over time.

The Chicago Tribune article contains more good stuff. They found someone willing to claim that wind power needs the subsidy because it is “on the cusp of seeing real price declines,” and “In three to five years wind energy will be cost competitive … without the subsidy.” The claimant doesn’t explain why we shouldn’t just wait three to five years and build wind power when it is actually competitive.

(Research efforts do seem to be making progress in improving wind power productivity. That progress justifies maybe a few million dollars for continued research, not a few billion dollars to build more not-quite-cost-competitive wind power projects now.)

Other Production Tax Credit news and commentary:

Expect more, a lot more, in the months ahead.

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Michael Giberson is assistant professor of practice at the Center for Energy Commerce at Texas Tech University’s Rawls College of Business. He blogs on energy economics and other topics at Knowledge Problem, where this piece first appeared.

5 comments

1 An Invisible Hook Q&A, and other items of interest « Knowledge Problem { 08.15.12 at 10:27 am }

[...] MasterResource blog republishes my brief analysis of the fraying coalition in support of the production tax credit for wind power (it first appeared here on KP). Share [...]

2 Michael Giberson: Fraying Support for Windpower: Exelon Does the Math | JunkScience.com { 08.16.12 at 12:24 am }

[...] MasterResource Share this:PrintEmailMoreStumbleUponTwitterFacebookDiggRedditLike this:LikeBe the first to like this. This entry was posted in Clean energy, Economics and tagged really stupid idea, Wind power. Bookmark the permalink. ← Pierre Gosselin: Millennium Cycles: New Paper Reveals Clear Solar Impact On The Climate 9000 – 6000 Years Ago [...]

3 Rolf Westgard { 08.18.12 at 9:41 am }

Wind is the highest, not the lowest, cost fuel in Excelon’s portfolio.

4 mgiberson { 08.18.12 at 5:05 pm }

Considering all-in costs, wind power is rather high costs, but the operating costs of a wind power farm are very low compared to most other kinds of power generation. In the markets that the news article refers to, prices tend to be driven by the marginal operating costs of generators.

5 Weekly Climate and Energy News Roundup | Watts Up With That? { 08.22.12 at 4:20 pm }

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