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A Tax Credit Worth Extending

May 03, 2012 By Will Nissen, Fellow

Two tax breaks are set to expire at the end of this year. One—the Bush tax cuts—will be a divisive November campaign issue, grabbing months-long national headlines. The other will garner much less attention, but will have a significant impact on Minnesota jobs and energy policy.  

Letting the federal wind production tax credit (PTC) expire at the end of this year is a mistake. Last month I wrote a short piece highlighting the negative effects it will have on jobs, rural economic development, and university research.

The federal wind PTC currently stands at 2.2 ¢/kWh, and applies to the first 10 years of operation for qualified wind energy resources that go online before December 31, 2012. This may not seem like much, but when you match it to the cost of building and operating a commercial-size wind farm it gives wind development a sizable economic boost that makes it more competitive with traditional energy sources like coal, natural gas and nuclear.

The U.S. Energy Information Administration indicates that the average total levelized cost (or break even price) for wind farms entering service in 2016 is roughly 97 $/MWh. This includes upfront capital costs, fixed operation and maintenance costs and estimated transmission investments. A 2.2 ¢/kWh tax credit for wind-produced electricity equates to a 22 $/MWh drop in that total cost, bringing it down to 75 $/MWh. This helps make new wind farms more competitive with new natural gas plants (break even price of 66.1 $/MWh), and cheaper to build than new coal (94.8 $/MWh) and nuclear (113.9 $/MWh) power plants.

Wind critics argue that even with the tax credit boost, one of the main factors holding wind back as a primary electricity generation source is its inconsistency: the wind doesn’t blow the same amount all the time, and peak generation hours may not match up with peak demand hours. So even if it is cheaper, wind energy currently can’t support our energy grid as a reliable source of electricity without help from natural gas, coal or nuclear power plants.

However, innovations in energy storage technology are helping wind power overcome these obstacles. A new patent developed by the University of Minnesota utilizes compressed air storage that operates at constant pressures. When installed on turbines these systems would store energy when the wind is blowing but energy may not be needed (like at night), and release a constant level of energy to the grid over a certain time period. This would smooth out the fluctuations of energy generation inherent in wind power design, and make wind energy a more reliable energy source for our grid’s base load.

Along the same lines, storing wind energy with hydropower systems can help smooth out the inconsistencies in wind-produced energy. Pumped hydro storage is used in Europe when wind farms in Denmark store unneeded electricity in hydro systems in Norway (to the benefit of both countries), and Department of Energy Secretary Steven Chu has promoted the development of combined wind-hydro systems here in the U.S.

Combined with energy storage innovations, new turbine technology can increase the efficiency of wind power. Most turbines and wind farms now operate somewhere between 30 and 40 percent of nameplate capacity. In other words, farms actually produce less than half of the energy than they would if the turbines were producing maximum energy levels all the time (for perspective, coal plants operate at around 85 percent of nameplate capacity and conventional natural gas plants around 87 percent). But as turbine and generator designs continue to improve (as they have in recent years) this capacity factor of wind turbines will go up.

Increased efficiency will give wind farms more bang for the buck needed to build them (more energy per wind turbine), a smoother and more reliable energy supply to the grid will make wind energy cheaper for customers, and all this will make wind energy more economically competitive without the need for a PTC. But these and other innovations and emerging technologies have not yet fully developed to support wind without help from the tax credit. Someday the wind industry will be able to walk away from the federal PTC, but it’s not there yet.

Ethanol is a great example of this process. Since 2004 the ethanol industry enjoyed a significant tax break from the Volumetric Ethanol Excise Tax Credit that helped keep the growing industry afloat while improving technology and infrastructure made the industry more and more competitive. But at the end of last year Congress allowed the credit to expire, with the support of an industry ready to stand on its own.

Like ethanol, the wind industry will one day be able to stand on its own. But it needs the PTC now to remain an economically viable and valuable option for developers, rural landowners, utilities and consumers while emerging technologies and innovations develop.

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  • Andrea Lauer says:

    May 8, 2012 at 11:18 am

    As mayor of a small city that has benefited from federal tax credit for an energy project, I see the federal production tax credit is a crucial ecomonic development tool for rural small cities. Companies who build/install wind turbines look for rural areas to install the turbines. This means jobs for people in the area and additional income for families who have turbines on their property. 

    Energy companies have been mandated to have a percentage of its energy production from renewables in the near future and removing the federal tax credit makes this less attainable.

    Andrea Lauer
    Mayor, City of Royalton
    .(JavaScript must be enabled to view this email address)