02.14.2014 0

Loss of production tax credits brings big wind chill to the cooling subsidy-dependent market

Wind EnergyBy Larry Bell

Unsurprisingly, President Obama didn’t let Congress’s decision to finally end Production Tax Credits (PTCs) let the air out of his breezy wind power subsidy agenda. Speaking at his State of the Union address, he said: “We’ve subsidized oil companies for a century. That’s long enough. It’s time to end the taxpayer giveaways to an industry that rarely has been more profitable, and double down on a clean energy industry that never has been more promising. Pass clean energy tax credits. Create these jobs.”

We can be very certain that Big Wind will be back with gale force attempts to persuade Congress to restore the longstanding PTC ,which was allowed to expire at the end of 2013. This subsidy which has paid producers 2.2 cents per kilowatt-hour for electricity generated was originally pitched as a temporary assistance means to establish a cost-competitive renewable power source. Now, more than 20 years later after having “temporarily” extended the PTC seven times, wind is still substantially more expensive than coal, natural gas, and nuclear power. In fact, taxpayer subsidies can often account for more than one-third of the retail price for electricity.

Between 2009 and 2013, federal revenues lost to wind power developers are estimated to have amounted to about $14 billion, including $6 billion from PTC and another $8 billion from an alternative energy subsidy provided in the Obama stimulus package. Wind and solar each receive more than 50 times more subsidy support per megawatt-hour than conventional coal, and more than 20 times more in terms of average electricity generated by coal and natural gas. According to a 2008 Energy Information Agency (EIA) report, the average 2007 subsidy per megawatt-hour for wind and solar was about $24, compared with an average $1.65 for all others.

Regarding those “Heavily-Subsidized Oil Companies”

Using a very broad definition applied by Oil Change International, the term “subsidies” refers to: “any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers, or lowers the price paid by consumers.” Yet in one form or another, these same advantages are extended to other industries as well, and often with far more generous benefits.

In reality, oil and gas extraction and refining has already been singled out to receive even fewer tax breaks than other industries. Whereas Section 199 of the “American Job Creation Act of 2004” provides a 9 percent deduction from net income for businesses engaged in “qualified production activities,” oil and gas was penalized and limited to a 6 percent deduction. Meanwhile, many manufacturing industries, including farm equipment, appliances, and pharmaceuticals, take advantage of the full Section 199 deduction. Even highly profitable companies like Microsoft and Apple get those breaks, as do some foreign companies that operate factories in the U.S.

Small independent petroleum producers are eligible for resource depletion allowances which are similar to benefits available for all oil well mineral extraction, timber industries, etc., allowing them to pass the depletion on to individual investors. Large integrated corporations haven’t been eligible for these since the mid-1970s.

Oil and gas companies also receive benefits allowing them to write off drilling expenses in the year incurred rather than capitalizing them and writing them off over several years. This affects only timing of the expenses, not the total amounts. In addition, as with all international companies, they receive a tax credit for taxes paid to foreign nations. The purpose is to provide an offset to foreign taxes, often paid as royalties, so that the companies aren’t taxed twice on the same income.

And What About that Other Tax Money Blowing in the Wind?

A 2013 report titled “Assessing Wind Power Cost Estimates,” published by the Institute for Energy Research, found that the 2012 PTC extension alone cost taxpayers $12 billion. It also stated that details of many other wind power costs go unreported in government-funded study groups such as the Energy Laboratory (NREL). It observes that NREL’s estimates exclude key categories such as the cost of transmission and grid balancing for far-away, intermittent wind sources.

Rather than approaching the cost of wind power from the point of view of the wind project developer, the report author, Dr. Giberson, takes a broader view of the cost of wind power to all Americans, including electricity consumers and taxpayers. Such costs include the expense of transmission expansions needed to develop wind power, other grid integration expenses, and added grid reliability expenses. When these costs are accounted for, adding wind power via the PTC cannot reduce the overall cost of power to the economy — it merely shifts costs to taxpayers.

The PTC wind subsidy also creates an economic market distortion called “negative pricing.” So long as projects generate electricity, even during times when that power isn’t needed, producers still collect the tax credit for every kilowatt-hour they generate. We taxpayers pay for that, as do electricity consumers in the form of price rate adjustments.

And those “Green energy” jobs the President promised in his previous State of the Union Address … how’s that working out so far? Navigant Consulting of Chicago estimated that ending the PTC could ultimately cost 37,000 jobs throughout the wind power industry out of about 75,000 presently existing. So what would savings of those jobs through a PTC extension cost? Comparing the taxpayer costs per job for wind vs. the oil and gas sector, Manhattan Institute Senior Fellow Robert Bryce estimates the former to be 15 times more.

Bryce arrived at this number by dividing a PTC $12.18 billion extension by 37,000 jobs purported to be saved per year spread over a decade, amounting to $32,900 per job annually. In contrast, applying March 2012 Congressional Budget Office figures putting tax preferences extended to the fossil fuel sector at a total of about $2.5 billion per year, along with an American Petroleum Institute estimate that the oil and gas sector employs 1.2 million people (not including service stations), that works out to $2,100 per job, per year. And while Bryce admits that this isn’t a perfect apples-to-apples correlation, he believes that it does provide a general sense of comparative tax treatments.

At least one Green energy developer recognizes that these stimulus subsidy programs have a record of doing more harm than good, and he isn’t reluctant to say why. Patrick Jenevein, CEO of the Dallas-based Tang Energy Group, posted a Wall Street Journal article noting that since 2009, wind farm developers like his company have been able to get a cash grant or tax credit covering up to 30 percent of their capital investment in a new project. He argues that as a consequence: “Government subsidies to new wind farms have only made the industry less focused on reducing costs. In turn, the industry produces a product that isn’t as efficient or cheap as it might be if we focused less on working the political system and more on research and development.”

Jenevein points out that: “After the 2009 subsidy became available, wind farms were increasingly built in less-windy locations… The average wind-power project built in 2011 was located in an area with wind conditions 16 percent worse than those of the average… Meanwhile, wind-power prices have increased to an average $54 per megawatt-hour, compared with $37 in 2005.” He continues: “If our communities can’t reasonably afford to purchase and rely upon the wind power we sell, it is difficult to make a moral case for our business, let alone an economic one.”

Important Lessons from Across the Pond

Teachable lessons for America from the Germans are reported by Der Spiegel in an article titled, “Gone With the Wind: Weak Returns Cripple German Renewables.” It emphasizes that rather than returning up to 20 percent annual returns on investment as promised, more often than not such pledges have not only been illusory, but that many of the investors have lost money to boot. Court complaints are mounting from those who haven’t received a dividend disbursement in years, along with investors in wind installations which have gone belly up. Bankruptcies combined with plans recently released by new German Economy Minister Sigmar Gabriel for a reduction in the guaranteed feed-in tariff are scaring off new money.

Particular concern is focused upon numerous projects that are financed by an investment model known as “closed-end funds” —which typically run for a 20-year period and are restricted to a limited number of investors. While such funds are supposed to guarantee annual dividend payments, about half of Germany’s wind enterprises are in such bad shape that many of those investors may not even recover their initial investments after 20 years. And even if they did, inflation will likely have reduced the value of those paybacks below original investment values.

A ten-year review 170 commercial wind company annual reports conducted by the German Wind Energy Association’s Investment Committee presents a sobering picture. Even if returns were to increase dramatically in the coming years — as a possible result of paying down debts, for example — only those projects in the best locations are likely to prove profitable. One-fifth of those with available annual reports dating back more than ten years haven’t ever paid back dividends exceeding 2 percent. This is all the more remarkable given the substantial government renewable energy subsidies provided over the years.

Writing again in the Wall Street Journal, Robert Bryce provides evidence that Europe’s long green energy romance honeymoon is over. Both the EU and German government announced separately last month that they are rolling back aggressive subsidies and mandates for renewables they simply cannot afford.

Such subsidies which now cost German consumers and industry about $32 billion prompted Minister Gabriel to state that his country is risking “dramatic deindustrialization” if it doesn’t reduce energy costs. After spending more than $100 billion subsidizing renewables since 2000, thanks (or no thanks) to a move away from nuclear power following the 2011 Fukushima disaster, Germany’s coal dependency is increasing. An estimated 7,300 megawatts of new coal plants are planned to be brought on line next year.

In Denmark, the wind investment wonderland, there’s little wonder why residential consumers pay more than three times more for electricity than we Americans do. The Center for European Policy Studies, a Brussels-based think tank, reported that European steelmakers pay twice as much four electricity (and four times more for natural gas) than in the U.S.

Subsidies have also blown ill winds in Spain. The economically ravaged country has already racked up a $35 billion “tariff deficit.”

Let these European experiences provide vital instruction for America. So long as this industry’s survival depends upon preferential government handouts and regulatory mandates, two things are clear. Wind is not a “free” or competitive free market source of energy. It is also not a charity we can continue to afford blow more money into.

Committee For A Constructive Tomorrow (CFACT) Advisor Larry Bell heads the graduate program in space architecture at the University of Houston. He founded and directs the Sasakawa International Center for Space Architecture. 

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