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Issues In Focus. The Renewable Electricity Production Tax Credit In the late 1970s and early 1980s, environmental and energy security concerns were addressed at the Federal level by several key pieces of energy legislation. Among them, the Public Utility Regulatory Policies Act of 1978 (PURPA), P.L. 95-617, required regulated power utilities to purchase alternative electricity generation from qualified generating facilities, including small-scale renewable generators; and the Investment Tax Credit (ITC), P.L. 95-618, part of the Energy Tax Act of 1978, provided a 10-percent Federal tax credit on new investment in capital-intensive wind and solar generation technologies [85]. The Energy Policy Act of 1992 (EPACT) included a provision that addresses problems with the ITC—specifically, the lack of incentives for operation of wind facilities. EPACT introduced the Renewable Electricity Production Tax Credit (PTC), a credit based on annual production of electricity from wind and some biomass resources. The initial tax credit of 1.5 cents per kilowatthour (1992 dollars) for the first 10 years of output from plants entering service by December 31, 1999, has been adjusted for inflation and is currently valued at 1.8 cents per kilowatthour (2002 dollars) [86, 87]. The original PTC applied to generation from tax-paying owners of wind plants and biomass power plants using fuel grown in a “closed-loop” arrangement—crops grown specifically for energy production, as opposed to byproducts of agriculture, forestry, urban landscaping, and other activities. In its early years, the PTC had little discernable effect on the wind and biomass industries it was designed to support. By 1999, however, when the provision was originally set to expire, U.S. wind capacity had begun growing again, and the PTC supported the development of more than 500 megawatts of new wind capacity in California, Iowa, Minnesota, and other States. Wind power development was also encouraged by State-level programs, such as the mandate in Minnesota for 425 megawatts of wind power by 2003 as part of a settlement with Northern States Power (now Xcel Energy) to extend on-site storage of nuclear waste at its nuclear facility [88]. In 1999, the PTC was allowed to expire as scheduled, but within a few months it was retroactively extended through the end of 2001 [89], and poultry litter was added to the list of eligible biomass fuels. Although wind power development slowed significantly in 2000, 2001 was a record year with as much as 1,700 megawatts installed [90]. Again, State and local programs, including a significant renewable portfolio standard (RPS) program in Texas, also supported new wind installations. The PTC was allowed to expire again on December 31, 2001, while Congress worked on a comprehensive new energy policy bill. It was retroactively extended a second time to December 31, 2003, as part of an omnibus package of extended tax credits passed in response to the economic downturn and terrorist attacks of 2001 [91]. Like the 1999 expiration and extension, the extension of the PTC in 2002 was followed by a lull in wind power development. And again, a review of confirmed industry announcements indicates that 2003 will see total new installations of more than 1,600 megawatts of wind capacity. Significantly, while many 2003 builds still rely on multiple incentives (for example, the PTC plus a State program) to achieve economic viability, there are some in Oklahoma and other States that have been developed with little government support beyond the PTC [92]. With reductions in capital costs and increases in capacity factors [93], wind power technology has improved since the introduction of the ITC and subsequent replacement by the PTC. It is likely that the installations spurred by these incentives allowed the industry to “learn by doing” and thus contributed to improvement of the technology. There were, however, other factors that contributed to cost reductions during the period, including government-funded research and development (both domestic and international) and large markets for wind power technology that were created by subsidy programs in other countries, especially, Denmark and Germany. The AEO2004 reference case, assuming no extension of the PTC beyond 2003, projects that the levelized cost of electricity generated by wind plants coming on line in 2006 (over a 20-year financial project life) would range from approximately 4.5 cents per kilowatthour at a site with excellent wind resources [94] to 5.7 cents per kilowatthour at less favorable sites. To incorporate the effect of the current 1.8-cent tax credit over the 10-year eligibility period for those plants, the projections account for both the tax implications and the time value of the subsidy. As a tax credit, the PTC represents 1.8 cents per kilowatthour of tax-free money to a project owner. If the owner did not receive the tax credit and wanted to recoup that 1.8 cents with taxable revenue from electricity sales, the owner would have to add 2.8 cents to the sales price of each kilowatthour, assuming a 36-percent marginal tax rate. Applying the same assumptions used to derive the 4.5-cent total levelized cost of wind energy over a 20-year project life, the levelized value of the PTC to the project owner is approximately 2 cents per kilowatthour. In the reference case, the levelized cost for electricity from new natural gas combined-cycle plants is 4.7 cents per kilowatthour, and for new coal-fired plants the projected cost in 2007 is 4.9 cents per kilowatthour [95]. Thus, it is easy to see how the PTC could make wind plants an attractive investment in the current electricity market. In addition to generation cost comparisons, the difference between an intermittent resource (wind plants) and a dispatched resource (coal- and gas-fired plants) must also be considered. Dispatched generation provides “value” to the grid because it contributes more to the reliability of the system and is generally available to meet daily and seasonal load requirements. An intermittent resource has only limited ability to contribute to grid reliability and does not necessarily produce energy in a daily or seasonal pattern that matches daily or seasonal load variations. Given the uncertainty regarding both the short-term extension of the PTC and its long-term fate, EIA developed three alternative PTC cases for AEO2004. The cases are not meant to indicate a preferred or even likely policy outcome, but rather to provide a useful range of possible outcomes to provide insight into the effects of the PTC program on future energy markets relative to the reference case forecast, which assumes no new PTC subsidy beyond 2003. The 3-year PTC case assumes that the PTC is extended to December 31, 2006, as provided for in the Energy Bill Conference Report adopted in the House and now before the Senate. The extended program continues to cover wind and currently eligible biomass fuels, and coverage is extended to “open loop” biomass sources (primarily waste or byproducts from other processes) and landfill gas generation, as provided for in the Conference agreement. Otherwise, the structure of the program is assumed to remain the same as under current law. The 9-year PTC case assumes extension of the program to December 31, 2012, as well as the expansion to all biomass and landfill gas resources. All other assumptions remain the same as under current law. This case assumes a single 9-year extension, rather than a series of short-term expirations and reauthorizations [96]. Because the history of the PTC indicates that such a cycle can affect the dynamics of industry expansion, and because the specific tax-liability limitations of project owners are unknown, this case provides upper-end estimates of capacity additions resulting from the PTC with a 9-year extension. The 9-year half PTC case also assumes an extension of the PTC to 2012 and expansion to biomass and landfill gas resources. In this case, however, a modified program is assumed, with the value of the tax credit set at 0.9 cents per kilowatthour (2003 dollars) for the first 10 years of plant operation, indexed to inflation. The assumptions for this case do not reflect any expectation or proposal for the policy but were selected to provide insight into the limitations of the analysis—specifically, uncertainty about the ability of industry to capture the full tax credit value—as well as an indication of program effects if the value of the tax credit were reduced. The reference case does not assume the installation of any planned capacity for which construction is indicated to be dependent on extension of the PTC. Such planned capacity is included in the three sensitivity cases through the assumed final extension date— 2006 in the 3-year PTC case and 2012 in the 9-year PTC case and the 9-year half PTC case. Otherwise, the sensitivity cases follow the reference case assumptions and are based on a fully integrated run of the National Energy Modeling System (NEMS), ensuring that price feedback effects (such as in natural gas markets) are fully accounted for.
Table 18 compares the key results of the three PTC sensitivity cases with the reference case. The 3-year PTC case, with an expiration date of December 2006, results in an additional 7.9 gigawatts of new wind capacity by 2010 compared to the reference case. By 2025, however, new wind capacity in the 3-year PTC case is only 7.8 gigawatts higher than in the reference case. Between 2007 (after the PTC expires) and 2025, 13.5 gigawatts of new wind capacity is constructed in the 3-year PTC case, compared with 8.6 gigawatts in the reference case for the same period. After 2010, the 3-year PTC case does not project additional wind capacity builds beyond those in the reference case. Compared with the reference case, no additional construction of new biomass facilities by 2010 is projected in the 3-year PTC case. Biomass facilities require longer construction lead times than the 3-year extension and therefore are not able to take advantage of the 3-year extension. The 3-year PTC case projects the cumulative cost to the U.S. Treasury from the 3-year extension to be $1.7 billion (2002 dollars), using a 7 percent real discount rate [97]. This represents the tax revenue not recovered from the tax-paying owners of all wind and dedicated biomass facilities placed in service from the beginning of 2004 to December 31, 2006. It does not include lost revenue from existing facilities (placed in service before December 31, 2003) but does include facilities already planned or committed to be built after 2003. The 9-year PTC case, with an expiration date of December 2012, results in an additional 32.3 gigawatts of new wind capacity by 2010 compared to the reference case. By 2015, that has increased to 54.7 gigawatts over the reference case, but by 2025, the 9-year PTC case only has an additional 49.4 gigawatts over the reference case. The cumulative cost to the U.S. Treasury for a 9-year, full value extension is $33 billion, compared to the reference case with no extension. The extension to 2012 also provides an opportunity for new biomass facilities to be constructed to take advantage of the tax credit. By 2010, an additional 2.2 gigawatts of operating biomass capacity is projected in the 9-year PTC case relative to the reference case, increasing to 8.5 gigawatts over the reference case in 2015 and 10 gigawatts in 2025. In 2025, the 13.7 gigawatts of installed biomass capacity in the 9-year PTC case is projected to generate 91 billion kilowatthours, in addition to 230 billion kilowatthours of projected generation from 65.4 gigawatts of installed wind capacity. Although the additional biomass capacity projected in the 9-year PTC case relative to the reference case is only 21 percent of the wind capacity added by 2025, because of its higher relative capacity factor, the projected generation from the additional biomass capacity is almost 40 percent of that from the additional wind capacity. Almost 6.3 billion kilowatthours of biomass co-firing (that is, biomass fuel burned with coal in existing coal-fired plants) is projected in the reference case by 2025. In the 9-year PTC case, no co-fired generation is expected by 2025, largely because the more efficient new dedicated biomass facilities would be able to pay feedstock suppliers higher fuel premiums than the less efficient existing coal facilities retrofitted with co-firing equipment. Total biomass generation (dedicated plus co-firing) in the 9-year PTC case is more than triple total biomass generation in the reference case (91 billion kilowatthours and 29 billion kilowatthours, respectively). In the 9-year half PTC case, substantial projected increases in wind capacity relative to the reference case projection reflect wind power costs that are, without subsidy, very close to being competitive. Although the 9-year half PTC case projects 27 gigawatts less installed wind capacity in 2025 than the 9-year PTC case, it projects almost 23 gigawatts more than in the reference case. Like the 9-year PTC case, the 9-year half PTC case projects significant leveling off of new wind installations after 2012, when eligibility for the subsidy ends. Between 2015 and 2025, wind capacity in the 9-year half PTC case increases by only 1.1 gigawatts, compared with 5.5 gigawatts of capacity growth in the reference case. Although by 2015 the basic unsubsidized levelized cost [98] of wind energy is reduced by about 0.5 cents per kilowatthour below the reference case for the same year, fewer low-cost resources are available once the subsidy has expired (having already been developed with the subsidy in place), and fewer attractive resources are available for development. The cumulative cost of the PTC extension to the U.S. Treasury in the 9-year half PTC case is projected to be $16 billion. The projection for dedicated biomass capacity in 2025 in the 9-year half PTC case is 4.3 gigawatts higher than in the reference case. Although the additional capacity is sufficient to draw substantial biomass feedstock from the co-firing market, it does not completely eliminate it. Co-firing in 2025 in the 9-year half PTC case is only about 0.8 billion kilowatthours below the reference case projection of 6.3 billion kilowatthours.
Released: January 2004 |
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