A case study of production tax credits
in the United States
The United States' production tax credit is available
for wind, closed-loop biomass and poultry waste. The
policy provides a $.015/kWh credit to all operators
of renewable energy facilities" (AWEA).
The credit is ideally set at a level that makes it more
cost effective to produce electricity from renewable
resources than from fossil fuels.
This tax incentive significantly helped boost wind power
development in the last decade. Wind power has always
faced an obstacle in the US because utilities pay artificially
low energy prices to Independent Power Producers (IPP).
Utilities can pay IPPs for their energy to avoid the
cost of producing it themselves. The price of natural
gas, at $0.02 to $0.035 per kWh has been the accepted
amount utilities pay IPPs for energy. The PTC set wind's
price at $0.19 (adjusted for inflation), making wind
development projects economically attractive. In addition,
total project revenue is now $0.05 per kWh, adding to
the profitability of wind projects.
The US energy production tax credit was originally created
in the Energy Policy Act of 1992. The Economic Security
and Recovery Act of 2001 extended the credit until December
31, 2003. The PTC has provided incentive for approximately
$5 billion in capital investments to wind energy projects
in the US and has directly led to major improvements
in equipment reliability. Equipment efficiency and reliability
is perhaps an unintended, yet highly beneficial, result
of the PTC. The most efficient turbines with higher
production capacity and lower management costs are more
likely to be considered for a project utilizing the
PTC This is due to the considerable competition between
manufacturers exists to sell power to utilities and
because manufacturers reimburse the owner for lost revenue
due to inefficiency. Utilities can chose the turbines
that will produce power more of the time. Consequently,
the risk is now minimal for the project finance community.
(World
Link Insurance)
The Union of Concerned Scientists reports that production
tax credits are more effective when they are implemented
in conjunction with policy that creates a market for
renewables. A Renewable Portfolio Standard is one such
policy driver to increase market demand for electricity
generated from renewable energy. The Union of Concerned
Scientists found that wind capacity increased most in
states with a state RPS.
The disadvantage of production tax credits is the uncertainty
as to when the law will be repealed. When there is no
longer a credit, the company doesn't receive compensation,
and it may no longer be profitable to produce electricity
from renewable resources. Therefore, producers can decide
to not get into the market of renewables with the risk
of producing an unprofitable good in the future. (The
Bureau of National Affairs, Inc.) |
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Updated: 2007/07/12
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