Tax Credits and Renewable Generation |
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Background Tax incentives have been an important factor in the growth of renewable generation over the past decade, and they could continue to be important in the future. The Energy Tax Act of 1978 (Public Law 95-618) established ITCs for wind, and EPACT92 established the Renewable Electricity Production Credit (more commonly called the PTC) as an incentive to promote certain kinds of renewable generation beyond wind on the basis of production levels. Specifically, the PTC provided an inflation-adjusted tax credit of 1.5 cents per kilowatthour for generation sold from qualifying facilities during the first 10 years of operation. The credit was available initially to wind plants and facilities that used “closed-loop” biomass fuels [75] and were placed in service after passage of the Act and before June 1999.
The 1992 PTC has lapsed periodically, but it has been renewed before or shortly after each expiration date, typically for an additional 1- or 2-year period. In addition, eligibility has been extended to generation from many different renewable resources [76], including poultry litter, geothermal energy [77], certain hydroelectric facilities [78], “open-loop” biomass [79], landfill gas, and, most recently, marine energy resources. Open-loop biomass and landfill gas currently receive one-half the PTC value (1 cent rather than the current inflation-adjusted 2 cents available to other eligible resources). Eligibility of new projects for the PTC was set to expire at the end of 2008, but it was extended to December 31, 2009, for wind capacity and to December 31, 2010, for other eligible renewable facilities [80]. As this publication was being prepared, the PTC was further extended and modified by ARRA2009, which extends eligibility for the PTC to December 31, 2012, for wind projects and to December 31, 2013, for all other eligible renewable resources. In addition, project owners may elect to receive a 30-percent ITC in lieu of the ITC. Project owners electing the grant must commence their projects during 2009 or 2010. These recently passed provisions are not included in AEO2009. The PTC has contributed significantly to the expansion of the wind industry over the past 10 years. Since 1998, wind capacity has grown by an average of more than 25 percent per year (Figure 21). Although some of the more recent growth may be attributable to State programs, especially the mandatory RPS programs now in effect in 28 States and the District of Columbia, the importance of the PTC is evidenced by the growth of wind power installations in States without renewable mandates, either today or at the time the installations were constructed, and by the significant drop in new wind installations during periods when the PTC has been allowed to lapse. Although other renewable generation facilities, such as geothermal or poultry litter plants, have been able to claim the PTC, none has grown as dramatically as wind power. Possible explanations for their slower rate of expansion include longer construction lead times and less favorable economics for some facilities. In addition, some provisions of the PTC may limit its ability to be used fully or efficiently for some projects. For example, project owners that do not pay Federal income taxes (such as municipal utilities and rural electric cooperatives) cannot claim the PTC, even though they may be eligible for other Federal assistance. Also, the owners of for-profit projects must have sufficient tax liability to claim the full PTC, and their eligibility for PTC payments may be limited by the Federal alternative minimum tax law. The wind industry, in particular, has developed several alternative ownership and finance structures to help minimize the impact of the limitations [81]. There is some evidence, however, that the restrictions reduce the value of the PTC to project owners. In addition, the financial crisis of 2008 may exacerbate the problems for some projects [82]. As part of ARRA2009, developers may, for a limited time, convert the PTC into a 30-percent ITC and then into a grant. This provision may lessen the impact of the financial crisis on the ability of wind developers to use the PTC. As noted above, the provisions of ARRA2009 are not included in AEO2009. Future Impacts Because AEO2009 represents only those laws and policies in effect on or before November 4, 2008, the renewable energy PTC is assumed to expire at the end of 2009 for wind and at the end of 2010 for other eligible renewables; however, the program has a long history of renewal and extension, and there is considerable interest, both in Congress and in the renewable energy industry, in keeping the credit available over the longer term, as seen in the recent extension to 2013. To examine the potential impacts of a PTC extension, AEO2009 includes a production tax credit extension case that examines the potential impacts of extending the current credit through 2019. Because EIA does not develop or advocate policy, the PTC extension case is included here only to assess the potential impacts of such an extension and should not be construed as a proposal for, or endorsement of, any legislative action. Aside from the expiration date, no changes in current PTC provisions are assumed in the PTC extension case. The credit is valued at 2 cents per kilowatthour (in 2008 dollars, adjusted for projected inflation rates) for wind, geothermal, and hydroelectric generation and at 1 cent per kilowatthour for biomass and landfill gas [83]. It is assumed that all eligible facilities will receive the credit for the first 10 years of plant operation, and that they will use the credit efficiently and completely, without further modification of the law. The extension is assumed to be continuous over the 10-year period and not subject to the periodic cycle of expiration and renewal that has affected the PTC in the past. For wind power installations, a 10-year extension of the PTC results in significantly more capacity growth than in the reference case (Figure 22). In the near term, capacity increases would be comparable to those seen over the past several years, followed by a period of several years in which the capacity expansion is slower, corresponding to a projected lull in electricity demand growth. Significant additional growth in wind capacity occurs thereafter, before the assumed 2019 expiration date, with total capacity increasing to approximately 50 gigawatts in 2020, as compared with 33 gigawatts in the reference case. Additional capacity expansion occurs after 2020 in both cases, particularly in the reference case, where 11 gigawatts of installed capacity is added from 2020 to 2030 as compared with 2 gigawatts in the PTC extension case. For eligible technologies other than wind, no significant changes in capacity installations are projected in the PTC extension case relative to the reference case. In part, this may be a result of the shorter lead times associated with wind technology: wind plants can be built before the projected slowdown in electricity demand growth after 2010, potentially “crowding out” other PTC-eligible investments. In addition, the economics for wind installations are fundamentally more favorable than for other PTC-eligible resources, and the resource base for wind power is more widespread. Because eligible renewable generation still accounts for a relatively small share of total U.S. electricity generation, the PTC extension case has relatively minor impacts outside the markets for renewable generation. A 10-year extension of the PTC reduces average electricity prices in 2020 by approximately 1 percent relative to the reference case. The extension costs the Federal Government approximately $7.7 billion from 2010 to 2019 (in 2007 dollars) [84], while cumulative savings on electricity expenditures from 2010 to 2019 total about $13 billion in comparison with the reference case. Total electricity generation in 2020 in the PTC extension case is less than 0.5 percent greater than in the reference case. The increase in wind-powered electricity generation in the PTC extension case primarily offsets the use of natural gas in the power sector, reducing natural-gas-fired generation by about 5 percent in 2020 compared to the reference case. Impacts on other generation fuels generally are less than 1 percent. The maximum reduction in CO2 emissions from the electric power sector (occurring before 2020) is about 0.5 percent compared to the reference case.
Contact: Chris Namovicz
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