Category — Production Tax Credit (PTC)

In the final hours of the 2012 fiscal cliff negotiations, the now 20-year old wind production tax credit (PTC) was granted a 1-year extension at the estimated cost of $12 billion. [1] This move was done behind closed doors, without debate or opportunity for amendment and no obligation of the Congress to find a way to pay for it.

With this most recent extension of the PTC, the Congress took no action to address the harmful effects [2] of the PTC on competitive wholesale energy markets.

The PTC is set to expire on December 31st. Until this long postponed day, the legislative opportunity is for the Congress to amend the flawed tax provision to relieve market distortions [3] and promote more reliable, least-cost renewable choices for taxpayers.

Market Signals That Work

Nearly two decades ago, electric energy markets in most of the U.S. were highly regulated. Wholesale electricity prices were determined based on a generator’s cost of installation plus direct production cost, and not on customer demand. Under deregulation, plant ownership shifted to independent power producers which, in turn, brought about competitive wholesale energy markets aimed at meeting consumer energy needs with the most reliable, least cost generation.

Once fully implemented, fossil-fired generators responded to market price signals. New power plants were built to meet peak demand requirements while discouraging construction of excess capacity. Competitive energy pricing dissuaded generators from building power plants long distances from load centers, thus limiting the deployment of costly transmission.

Improved management increased power plant efficiencies, operator profits and grid reliability while keeping retail prices in check. This coupled with air, water and other environmental rules led to U.S. energy resources becoming progressively cheaper, cleaner, safer, and with a smaller footprint.

The correct policy led to the best economic results for consumers. [Read more →]

After 20 years and many extensions, the federal Production Tax Credit (PTC) was scheduled to expire at the end of 2012. Neither the House nor the Senate saw fit to extend this overly generous corporate benefit when it was considered on its own merits, and the PTC did, in fact, expire.

But in the final hours of the fiscal cliff negotiations, a provision in the American Taxpayer Relief Act (P.L. 112-240) surreptitiously added a $12 billion, 1-year extension of the PTC. [1] 

This move was done behind closed doors, without debate, any opportunity for amendment, or obligation of the Congress to find a way to pay for it.

The abuse of the Public Trust did not end there. With this extension, a critical change to the PTC was introduced that relaxed the eligibility requirements for the credit. Renewable energy projects now need only ‘commence construction’ by January 1, 2014, to qualify for the credit, instead of the projects being ‘placed-in-service’ by that date.

IRS Interpretation Forthcoming

Since the law did not define what it means to ‘commence construction’, the Internal Revenue Service (IRS) must determine the intent of the Congress and develop clarifying guidance. [Read more →]

“The Congressional Joint Committee on Taxation, for example, has estimated that the cost of a one-year PTC extension is $12.1 billion. Thus, even accepting the Report’s grossly inflated number of 37,000 wind jobs, the cost to the American taxpayers would be $12.1 billion divided by 37,000, or about $327,000 per job. [But] … the cost for a one-year PTC extension could be as much as a staggering $4,792,079 per direct up-front job added ($12.1 billion ÷ 2,525 jobs).”

An intellectual nail has been driven into the wind-industry-driven Production Tax Credit, a governmental lifeline keeping an inherently flawed industry afloat. The new study, Inflated Numbers; Erroneous Conclusions: The Navigant Wind Jobs Report, was authored by Charles J. Cicchetti, a noted economics consultant and longtime economics professor (now adjunct) at the University of Southern California.

Dr. Cicchetti is also senior advisor to Navigant Consulting, the consulting firm that released the disputed study under review.

The remainder of this post highlights parts of the study (in blue). [Read more →]

It took a last minute change to a highly controversial bill and the last vote of the 112th Congress for Big Wind to eke out one more extension to the Production Tax Credit (PTC). With the dust now settling, it has become clear: President Obama rammed through the extension without debate or compromise.

Initial Negotiations

Following the November 6 presidential election, the wind industry anticipated a quick vote on the PTC that would provide a multi-year extension and remove the issue from the larger fiscal cliff negotiations. That did not happen and with 60+ tax provisions due to expire at the end of 2012 many parties are vying for the same dollars. With December 31 fast approaching, the likelihood of an extension was becoming more uncertain by the day.

On Thursday, December 21, just prior to Christmas and a full six weeks after the election, Speaker Boehner and House Republicans gave up trying to negotiate a fiscal cliff package with the White House and passed a bill that addressed spending cuts sufficient to avoid the sequester. Nothing in the House bill hinted at a PTC extension.

Harry Reid now had two bills on his desk — the bill passed by the House on December 21 and the Senate finance committee tax-extender bill from August that was never scheduled for a floor vote. Reid knew he did not have the votes to pass either bill. He needed to come up with a compromise proposal that would also raise revenue and still pass both Chambers.

By this time, wind lobbyists had parked themselves in the Senate for one last push. And why not? The time and money spent to sway the outcome in the industry’s favor would pay off in billions. [Read more →]

“The sheer ridiculousness of the [six-year, front loaded PTC extension] outraged Congressional members and may well have changed the debate. It’s NO coincidence that within 24-hours of AWEA’s poorly received proposal, Denise Bode bailed. A move that sudden suggests the industry thinks it’s better off without her and probably without AWEA’s inflexible, out-of-touch campaign.”

The American Wind Energy Association’s relentless, year-long lobbying campaign to secure extension of the wind production tax credit (“PTC”) hit major headwinds last week, which precipitated the abrupt resignation of its CEO, Denise Bode.

Branded the “Save USA Wind Jobs,” AWEA’s plan tried to stigmatize Congressional members from Red and windy states with the argument: oppose the PTC, and you oppose American jobs.

But rather than gaining support, resistance intensified to extending the PTC. With only two weeks remaining in 2012, it’s not certain what will happen with the subsidy, but one thing is clear: AWEA’s robotic jobs jab has chilled its effectiveness. Big Bucks cronyism does have its limits.

Changing Market; Inflexible Messaging

Prior to 2008, wind was still a niche resource. Under 15,000 megawatts of installed wind was eligible for the PTC and the price tag for the subsidy, in total for its first 15 years (1992–2007), was under $6 billion and less than $1 billion in any one year. Each time the PTC was up for renewal, Congress complied.

Since then, wind installations in the U.S. ballooned to over 50,000 megawatts, and the carrying cost for a 1-year extension is now projected to be $12 billion.

In today’s economic climate, AWEA’s campaign messaging is withering under challenge. [Read more →]

“AWEA says that Congress should provide a tax credit for high-income earners to pay less than their “fair share,” while middle-class taxpayers borrow $12+ billion from China to subsidize an expensive, unreliable, environmentally destructive, alternative energy source, based on unsubstantiated claims, that will actually result in net job losses! Exactly why is that a good idea?”

Last week, head wind lobbyist, Denise Bode (AWEA), waxed eloquently about why extending the wind Production Tax Credit (PTC) is a splendid scheme that some of our legislators are supposedly supporting.

This immediately brings to mind Upton Sinclair’s insightful observation: “A man cannot be expected to understand something when his income depends on his not understanding it.”

Put another way, when a salesperson says their product is the cat’s meow, be careful that you don’t get caught in the claws.

‘All of the Above’: Caveat emptor

Denise says that an “All of the Above” energy policy is a terrific plan — but is it?

Let’s skip the hype and do some critical thinking about this for a minute, and see if this superficial sound-bite is sensible.

If we use all energy sources, that would include expensive sources — how is that a good idea?
If we use all energy sources, that would include unreliable sources — how is that a good idea?
If we use all energy sources, that would include environmentally destructive sources — how is that a good idea?

If you are connecting the dots here, you can now understand why Denise loves the “All of the Above” slogan — as (surprise!) such a lax directive would qualify her expensive, unreliable and environmentally destructive product to be included in our energy mix! [Read more →]

“The Governors know that the federal PTC disproportionately benefits States with renewable mandates by distributing the high cost of their policies to taxpayers at large. They also understand that eliminating the PTC will impose the full burden of costly renewable mandates squarely on the States who enacted them. If California, New York, and Minnesota mandate large wind development, it’s appropriate they bear the full cost of their energy choices.”

The United States is in the midst of a fiscal crisis. If Congress and the White House are unable to reach agreement on spending by January 1, crushing tax increases and draconian budget cuts will go into effect sending the country’s already weakened economy into another destructive recession.

Against this backdrop, the 23-member Governors’ Wind Energy Coalition put aside their own states’ $2+ trillion deficits[1] to deliver a message to Congress — extend the wind production tax credit (PTC).

The staged media event on Capitol Hill was a modern-day equivalent of Nero fiddling while Rome burned.

The Letter

In their letter, the governors acknowledge the wind industry is not yet competitive with other fuel sources but insist it will be “in the not-so-distant future.” [Read more →]

“The PTC was created in 1992 to get the wind industry off the ground. Yet 20 years later, we have little to show for it.”

When it comes to rent-seeking by business, Concentrated Benefits + Diffused Costs = Government Growth.

In “Regulatory Failure by the Numbers,” a simple hypothetical was given:

“While the benefits of a regulation may be enjoyed by a relative few, the costs are often spread out among many. If the per person cost of a regulation is only a dollar or two, no one has a financial incentive to travel to Washington to lobby against it.”

Economists in the 19th century understood the problem created by this incentive asymmetry, and Michael Giberson found this in a 1935 book explaining the passage of the  Smoot-Hawley Tariff:

“Although . . . theoretically the interests supporting and opposed to [tariff] legislation . . . are approximately equal, the pressures upon Congress are extremely unbalanced. That is to say, the pressures supporting the tariff are made overwhelming by the fact that the opposition is negligible.”

Today, we see examples of business rent-seeking from concentrated benefits-diffused costs all around us. Political capitalism, aka crony capitalism, is the result.

Enter the government-dependent industrial windpower industry, represented by the American Wind Energy Association. The for-profit wind industry–the ‘bootleggers’–is given cover by the “Baptists,” Big Environmentalism.

“Government goes to those who show up.” Big Government Energy–wind power, on-grid solar, ethanol, and battery/EVs–got to Washington first, but there is now opposition from limited-government and taxpayer groups. And in the case of windpower, another important opposing force has mobilized: grassroot environmentalists.

Game on. Yesterday, the following letter from the American Energy Alliance et al was released to Congress on the looming expiration of the renewable Production Tax Credit (PTC). It reads:

Dear United States Senators and Representatives:

The principal federal support for wind energy, the so-called Production Tax Credit (PTC), is scheduled to expire at the end of this year. The undersigned organizations and the millions of Americans we represent stand opposed to extending the wind PTC. This special provision continues the deplorable practice of using the tax code to favor certain groups over others.Whenever the government protects a particular industry, as it has with wind energy production,the industry tends to remain dependent on it. As Nobel laureate economist Milton Friedman noted, “The infant industry argument is a smoke screen. The so-called infants never grow up.”

The wind PTC, like other green energy incentives, is a prime case in point. The PTC was created in 1992 to get the wind industry off the ground. Yet 20 years later, we have little to show for it. [Read more →]

“The federal PTC should expire since it has morphed from an ill-designed temporary subsidy for a purportedly ‘infant industry,’ into an inequitable tax hand-out for what is clearly a well-established industry that distorts markets and allows wind to compete unfairly with both conventional generation resources and even other types of renewables.”

- David Dismukes, “Removing Big Wind’s Training Wheels: The Case for Ending the Federal Production Tax Credit,” November 2012.

The federal wind Production Tax Credit (“PTC”), first enacted in 1992[1] to “jump start” a nascent, but promising industry,[2] provides wind producers with a subsidy of $22 per megawatt hour of electricity generated.[3] The PTC has been extended seven times, [4]but is scheduled to expire under current law on December 31, 2012. Extension of the federal wind PTC has become the “stalking horse” in the debate on government’s role in picking energy “winners and losers.”

Although wind advocates proffer several internally inconsistent rationales[5]for continuing the federal wind PTC, a closer examination of compelling facts and data indicates these purported justifications are not about wind’s continued viability without the PTC. Rather, the wind industry’s arguments supporting a continuation of the federal wind PTC simply represent a classic case of “rent seeking” by an established industry seeking to maintain profits through a generous tax subsidy.

This research finds that the federal wind PTC is an inefficient, expensive, and unsustainable policy mechanism for promoting wind that should be allowed to expire in today’s challenging fiscal environment for the following reasons: [Read more →]

“The infant industry argument is a smoke screen. The so-called infants never grow up.”

- Milton and Rose Friedman, Free to Choose (Harcourt Brace Jovanovich, 1979), p. 5.

The 20-year-old production tax credit (PTC) has not done its work yet, claims the American Wind Energy Association (AWEA). It should be extended …. and extended … and extended.

The credit, now worth about 2.2 cents per kWh, or 40 percent or more of the wholesale average price of power, was first enacted in the Energy Policy Act of 1992, and has been extended six times, sometimes retroactively to cover the entire period without lapse.

What are the key facts regarding this subsidy to qualifying renewable energies, primarily electricity generated from wind and solar? This summary by the Institute for Energy Research (of which I am CEO) provides much good information for the ongoing debate given that the PTC is set to expire at the end of this year.

The PTC Is Costly

· In the past 20 years, taxpayers have paid $20 billion in tax subsidies to support the wind industry. [1]

· Even if Congress allows the PTC to expire this year, the government is still locked in to nearly $10 billion in tax credits for previous, qualifying projects. [2] [Read more →]