The Dangers of PTC Addiction

 

by Lyn Harrison, Editor, Windpower Monthly

June 5, 2006

Yesterday's whispered exchanges on the perils of the PTC are starting to be voiced out loud today. At least some industry players believe it is time to face up to a future without the tax credit. "It has become an albatross on the whole concept of renewable energy," said a brave conference speaker recently. Refusing to discuss the failings of the PTC market, in the belief that talk of doing without it puts the tax credit at risk, would be a grave mistake. Public debate, on the other hand, will bring innovative and constructive ideas for structuring a better framework in which to do wind business.

The PTC has been in place since 1992. As its name implies, every kilowatt hour produced by a wind plant reduces the tax bill of its owner. Profitable companies with big tax burdens can enjoy big tax savings for ten years ahead by investing in a wind farm. For stimulating a market, tax credits are a familiar concept. For creating a healthy industry, they leave a lot to be desired.

The mechanism's most obvious weakness is the need for politicians to renew it at frequent intervals. Their historic failure to do so has created the infamous stop-start US wind market in which setting up wind turbine manufacture is nigh on impossible. Instead of being allowed to focus on cost reduction through technology advances and business efficiency, wind industry members spend vast amounts of time and money lining up the next PTC-fix and building PTC leverage strategies. The yearly pressure to rush wind turbines into the ground brings its own set of problems. Among them, little time is left to adequately deal with public fears about visual pollution and harm to wildlife.

Other damage is to the financial heart of the wind business. The PTC places artificial constraints on who can own a wind farm, narrowing the field to those seeking to cut their taxes, instead of stimulating a spread of investors competing to offer the cheapest equity capital. Even when new investors arrive, the complexity of PTC deals can scare them off. Those who stay need a veritable army of lawyers and accountants to get a PTC deal done. The result is higher transaction costs in America than in Europe, which contribute to painfully tight profit margins for the industry, before adding to the end price of wind power.

Even if the PTC had none of these failings and was a model instrument always renewed on time, it comes with no guarantees. America last cleaned up its tax code two decades ago. Another clean sweep of the proliferation of tax breaks, concessions, credits and outright gifts is long overdue; a show of fiscal responsibility in the light of America's economic woes is on the cards. If the PTC is at last lifting the industry to a level where the tax credit is doing more harm than good, the timing could be spot on.

A healthy alternative

The PTC is not the only game in town. Beyond the tax credit, the American Wind Energy Association's policy goal is for specific legislation to create markets for trade in renewable energy credits (RECS). Even partially applied, the legislation works. States which have implemented Renewables Portfolio Standards (RPS) are those seeing most wind power activity today.

In its pure form, the RPS is a precise market structure, not to be confused with the more ubiquitous renewable energy standard, or "quota." Leave one element of an RPS out, or start tampering with price caps and floors, and it will fail or only work in part. Yet an RPS has never been implemented in its entirety. Fear of unleashing an expensive monster on ratepayers has prevented the passing of long term legislation for development of the "liquid" and "deep" RECS markets that are a vital element of the RPS mechanism. The unhappy result is a mismatch between short term markets for credit trade and the needs of project developers for long term RECS sales contracts. Legislators need to understand that their fears are unfounded. An RPS is not, as commonly perceived, a mandate requiring citizens to part with their money. It is a political goal, facilitated by credit trading to drive costs down, not up, provided the market is structured correctly.

Efforts by legislators to create robust RECS verification and tracking systems are helping create confidence in the RPS concept. Once more mature RECS markets start pulling in the blocks of speculative capital that all markets thrive on, futures and options will come, making forward trade possible. When a project developer can offer security in the form of RECS sales way into the future, the doors to project financing should burst open, with or without the PTC. Perhaps it is no longer a question of "if" the industry can survive without the tax credit, but when it can happily throw it out of the window.


This column was first published in Windpower Monthly, May 2005, and is reproduced with full permission. Windpower Monthly is the leading news magazine of international wind power development and is published 12 times a year. It is an independent journalistic publication and has been reporting on the global wind power business since 1985. Windpower Monthly's circulation is to paying subscribers and the magazine is widely read in every sector of the wind power development business. Visit Windpower Monthly's Web site at the following link.