The biggest story in the US wind industry is the upcoming expiration of the Production Tax Credit (PTC) on December 31. Industry groups like the American Wind Energy Association are lobbying to have the PTC extended, highlighting the thousands of jobs potentially at stake in the US supply chain.
The PTC is one of a number of incentives provided to wind power by the federal government. Offered through the Treasury Department, it allows the owner of a wind project to claim a tax deduction based on the total energy produced in a year. The tax credit currently stands at 2.2 cents per kilowatt-hour ($22 per megawatt-hour) produced, which effectively lowers the cost of energy of a wind project by that amount. A few pennies might not seem that significant, but a large wind project produces billions of kilowatt-hours in year, which means a single project gets tax benefits in the millions of dollars.
The think tank Climate Policy Initiative has explored the impact of federal subsidies like the PTC on wind in the US. The chart below demonstrates how substantial these subsidies are for most wind projects. Note that CPI’s analysis included other incentives that are not expiring, such as accelerated depreciation. The levelized cost of a wind power project, according to CPI, is between $67-96/MWh, which is generally higher than the market price for electricity in many parts of the US. The PTC helps offset that gap. The economics of wind power are very site-specific, so there are a range of cost profiles. But the PTC often makes projects economically feasible that would otherwise not be developed.
Established in 1992, the PTC has helped drive massive growth in the wind industry, but has had a rocky history. This is far from the first time the PTC has expired – several times in the last decade Congress chose not to renew it, and the impact was immediately apparent. Shipments of turbines fell off drastically in the year after expiration, even when the PTC was subsequently renewed.
AWEA and other advocates of conventional wind expect the same effect in 2013, and in fact a number of suppliers to wind turbine manufacturers have already announced plans to close plants and layoff or furlough employees. The fate of the PTC is tied up in complex debates about energy policy, subsidies, and domestic manufacturing. And there is reason to believe that the impact of losing the PTC may not be as drastic as AWEA claims. But it is clear that these subsidies are necessary if conventional wind power is going to continue to grow in the short and medium term.
We expect that Makani’s AWTs will qualify for the PTC when we reach commercial sales, assuming it is renewed. While we would certainly benefit from a $22/MWh subsidy, we believe that AWTs will be able to generate electricity at a cost below prevailing market prices. That means that, unlike conventional wind technologies today, our projects will be economic without subsidies. We continue to follow the PTC’s fate with great interest – we’re part of the wind industry after all, and want to see it thrive. In the meantime, we’re working hard to get our technology to market, PTC or no PTC.