Breaking the wind-power subsidy

Roy Cordato explained recently why it makes sense to consider subsidies and penalties together when considering how government skews the market for various energy sources. Those of you interested in the topic might appreciate Bloomberg Businessweek‘s discussion of an effort to end federal wind power subsidies.

In Texas, the wind tends to blow the hardest in the middle of the night. That’s also when most people are asleep and electricity prices drop, which would be a big problem for the companies that own the state’s 7,690 wind turbines if not for a 20-year-old federal subsidy that effectively pays them a flat rate for making clean energy no matter what time it is. Wind farms, whether privately owned or part of a public utility, receive a $23 tax credit for every megawatt-hour of electricity they generate. (A megawatt-hour is enough juice to power about 1,000 homes for one hour.) This credit, which was worth about $2 billion for all U.S. wind projects in 2013, has helped lower the price of electricity in parts of the country where wind power is prevalent, since wind producers can charge less and still turn a profit. In Texas, the biggest wind-producing state in the U.S., wind farms have occasionally sold electricity for less than zero—that is, they’ve paid to provide power to the grid to undercut the state’s nuclear or coal energy providers.

This sweetheart deal looks to be on its way out, in part because it succeeded in what it set out to do. Over the past five years, wind has accounted for 36 percent of all new electricity generation installed in the U.S., second only to new natural gas installations. Wind now supplies more than 4 percent of the country’s electricity. At about 60,000 megawatts, there’s enough wind energy capacity to power 15.2 million U.S. homes, a more than twentyfold increase since 2000. It’s still tiny compared to fossil fuel: Combined, coal and natural gas supply roughly two-thirds of U.S. electricity. But wind produces about six times more electricity than solar. That’s led Congress to take steps to do away with tax incentives first established in 1992 to help the fledgling industry take root. In December lawmakers allowed the credit to expire.

But don’t expect the cronies in the wind industry to accept the change.

The wind tax credit has expired before, including at the end of 2012, but Congress always renewed it. As the 2013 deadline neared, wind developers rushed to buy equipment and get their projects started before the end of the year. In December, MidAmerican Energy (BRK/A), an Iowa utility that’s majority-owned by Warren Buffett’s Berkshire Hathaway, bought $1 billion of wind turbines from Siemens (SI), the biggest single order for on-shore turbines ever. Mark Albenze, chief executive officer of the Wind Power Americas unit of Siemens Energy, says he now has 18 months of work lined up. After that, business could dry up pretty quickly without the credit as an incentive to build. “I’m already getting itchy,” he says.

Congress may decide to renew the credits as part of the larger, endlessly debated effort to overhaul the tax code. In December, Montana Democrat Max Baucus, chairman of the Senate Finance Committee, took a first crack at it with a proposal to do away with the country’s 42 separate energy subsidies, many of which expire every couple of years, and replace them with two simple tax credits: one for the production of clean electricity, the other for clean transportation fuels.

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