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January 03, 2013

What the Passage of the Wind Production Tax Credit Means for 2013 and Beyond

Wind turbinesAt 10:30 PM on New Year's Day, the House of Representatives passed the bill negotiated between Senate Republicans and the White House to address the "fiscal cliff." That package contained a one-year extension of the Production Tax Credit (PTC) for electricity generation from renewable energy sources that has helped specifically to sustain rapid growth of the wind energy industry over the past few years.  The PTC pays 2.2 cents per kilowatt hour to wind producers for the first ten years of operation.

Securing the PTC extension is a critical part of the effort to retire coal plants and slash carbon pollution. Wind had its best year ever in 2012, with more megawatts installed than any other generation, including coal, gas and nuclear. Wind, along with energy efficiency, low natural gas prices, and rising coal costs are the four reasons why in 2012 we averaged the retirement/announced retirement of one coal plant each week. Wind is the most cost-competitive generation option, and with the PTC it is cheaper than new coal or new gas in most places.

Wind undermines coal in two ways:
1) it displaces coal generation directly, and
2) it lowers wholesale prices such that coal with its high fixed costs and rising fuel prices cannot compete (same with nuclear plants). 

As developers continue to install ever more efficient turbines, wind prices should continue to fall in the coming years, and at some point wind will be able to outcompete gas and coal without the PTC.

The explosion of wind is concentrated in states that have renewable energy standards and have made a strong commitment to capturing the jobs associated with the manufacturing and installation of turbines. Today more than ten states get at least 10 percent of their electricity from wind, including Texas, and at least two states are upwards of 20 percent, including Iowa and South Dakota. For wind to meet 20 percent of the U.S. electricity demand, we need to install about 10,000MW annually. In 2012 we installed a little over of 12,000MW.

While the PTC provision was only a one-year extension, a critical rule change makes it easier for wind projects to qualify for the credit. Rather than the traditional regime which required projects to be putting power onto transmission lines in order to qualify, for 2013 a wind project needs only to start construction and the project will qualify for the PTC. It still must be producing electricity in order to receive money from the U.S. government, but the "commence construction" provision allows developers to complete projects more deliberately. 

This change is particularly important because of the normal 18-month business cycle of the wind industry between ordering turbines nd beginning operation. A simple one-year extension of the old rules would have locked the industry into prolonged paralysis as the Congress lurched to another expiration date in a year. The ability to qualify at the commencement of construction essentially means that turbine manufacturers -- so hard hit by the uncertainty surrounding the 12/31/2012 deadline -- will be able to begin rehiring laid off workers and begin filling orders almost immediately.

Opening up the eligibility of the credit also creates new opportunities for the wind industry to better consider wildlife, habitat, and other environmental impacts when beginning new projects. The PTC extension allows the industry to continue working towards solutions that minimize the impacts of wind energy on wildlife, but developing these processes and siting wind turbines where they will do the least damage require time, resources, and robust scientific data. The Sierra Club will continue its work to improve federal and state policies that protect wildlife; work with developers and agencies to improve siting, operation and monitoring of wind projects; and on occasion continue to oppose those projects that fail to follow the law or will have unacceptably high impacts on wildlife. The wind industry's credibility on conservation issues is only as good as its worst actor, so it must continue to police itself as new projects break ground.

This extension of the PTC does not, of course, provide long term stability for wind energy. The pointed opposition from fossil interests and conservatives that the Sierra Club and others set out to overcome will continue. We assume that the anger of the Koch brothers over the inclusion of a PTC extension in the fiscal cliff bill is behind House Government Oversight Committee chair Darrell Issa's pledge yesterday to "investigate" the provision contained in the bill that was voted for by 85 members of the House Republican Caucus and 40 GOP Senators. Additionally, Koch tentacles like the American Legislative Exchange Council (ALEC) are gearing up in 2013 to attempt the repeal of state renewable electricity standards and other pro-clean energy measures that have also been responsible for wind growth over the last decade. 

While the new provision salvages 2013, we will come up against another expiration deadline in a year. Further, energy subsidies broadly and the PTC specifically could re-emerge in the context of broad tax reform conversations that will potentially take place in Congress this year. Under pressure from House Republicans, AWEA was compelled to issue a five-year phase-out plan for the PTC that they could live with. The Sierra Club strongly opposes abandoning renewable energy tax credits while leaving largess for oil, gas, coal, and nuclear energy in the tax code and other federal law untouched.

No matter how that shakes out, the January 1 action was a clear victory in the face of significant opposition. It leaves the wind industry stronger and the prospects for continued growth and development of clean energy in much better shape.

-- Dave Hamilton, director of the Clean Energy Program for the Sierra Club's Beyond Coal Campaign


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