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Renewable Energy Tax Credit Extended Again, but Risk of Boom-Bust Cycle in Wind Industry Continues
In one of the last measures taken by the 109th Congress, an important federal policy for promoting the development of renewable energy received a one-year extension. The production tax credit (PTC) provides a 1.9-cent per kilowatt-hour (kWh) benefit for the first ten years of a renewable energy facility's operation. The PTC was set to expire on December 31, 2007, but due to the efforts of a coalition of clean energy supporters—including UCS—it was extended for one year as part of the Tax Relief and Health Care Act of 2006 (H.R. 6408). Strong growth in U.S. wind installations is now projected through 2008.
The legislation extending the PTC provides a one-year extension (through December 31, 2008) of the 1.5-cent/kWh credit for wind, solar, geothermal, and "closed-loop" bioenergy facilities (Adjusted for inflation, the 1.5 cent/kWh tax credit is currently valued at 1.9 cents/kWh). Other technologies, such as "open-loop" biomass, incremental hydropower, small irrigation systems, landfill gas, and municipal solid waste (MSW), receive a lesser value tax credit.
This marks just the second time that the PTC was extended by Congress before it had been allowed to expire. In August 2005, a two-year extension of the PTC was included in a large package of tax incentives in the Energy Policy Act of 2005 (H.R. 6). The PTC was set to expire at the end of 2005, and its extension was one of the few bright spots for renewable energy in this energy bill.
From 1999 until 2004, the PTC had expired on three separate occasions. Originally enacted as part of the Energy Policy Act of 1992, the PTC—then targeted to support just wind and certain bioenergy resources—was first allowed to sunset on June 30, 1999. In December of 1999, again due to the efforts of UCS and other organizations, the credit was extended until December 31, 2001. The PTC expired at the end of 2001, and it was not until March 2002 that the credit was extended for another two years. Congress allowed the PTC to expire for the third time at the end of 2003. From late 2003 through most of 2004 attempts to extend and expand the PTC were held hostage to the fossil-fuel dominated comprehensive energy bill that ultimately failed to pass during the 108th Congress. In early October 2004, a one-year extension (retroactive back to January 1, 2004) of the PTC was included in a larger package of ‘high priority’ tax incentives for businesses signed by President George Bush. A second bill—extending the PTC through 2005 and expanding the list of eligible renewable energy technologies—was enacted just a few weeks later.
Combined with a growing number of states that have adopted renewable electricity standards, the PTC has been a major driver of wind power development over the past six years. Unfortunately, the "on-again/off-again" status that has historically been associated with the PTC contributes to a boom-bust cycle of development that plagues the wind industry (see Figure below). The cycle begins with the wind industry experiencing strong growth in development around the country during the years leading up to the PTC’s expiration. Lapses in the PTC then cause a dramatic slow down in the implementation of planned wind projects. When the PTC is restored, the wind power industry takes time to regain its footing, and then experiences strong growth until the tax credits expire. And so on.
The last lapse in the PTC—at the end of 2003—came on the heels of a strong year in U.S. wind energy capacity growth. In 2003, the wind power industry added 1,687 megawatts (MW) of capacity—a 36 percent annual increase. With no PTC in place for most of 2004, U.S. wind development decreased dramatically to less than 400 MW—a five-year low. With the PTC re-instated, 2005 marked the best year ever for U.S. wind energy development with 2,431 MW of capacity installed—a 43 percent increase over the previous record year established in 2001. With the PTC firmly in place, 2006 was another near record year in the U.S. wind industry. Wind power capacity grew by 2,454 MW—a 27 percent increase. The American Wind Energy Association projects similar growth in 2007.
Extending the PTC through 2008 will allow the wind industry to continue building on previous years’ momentum, but it is insufficient for sustaining the long-term growth of renewable energy. The planning and permitting process for new wind facilities can take up to two years or longer to complete. As a result, many renewable energy developers that depend on the PTC to improve a facility's cost effectiveness may hesitate to start a new project due to the uncertainty that the credit will still be available to them when the project is completed.
UCS is continuing to work with our coalition partners to secure a longer PTC extension that helps boost development of clean renewable electricity, not polluting energy sources. |
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