Sustainable Energy Subsidies

Article excerpt

I.   INTRODUCTION
II.  THE IMPORTANCE OF SUBSIDIES IN A DISTORTED MARKET
     A. Climate Change, Externalities, and Fossil Fuels
     B. The Flawed Arguments of Subsidy Opponents
        1. Fossil Fuel Subsidy Reforms Are Inadequate
        2. The Electricity Sector Is Not a Free Market
III. THE EFFECTIVE, BUT UNSTABLE, PTC
     A. The Economic Consequences of the Unstable PTC
     B. The Political Consequences of the Unstable PTC
IV.  ALTERNATIVES TO INTERMITTENCY
     A. A Modified FTC
     B. Treasury Grants for Production
V.   CONCLUSION

I. INTRODUCTION

On January 1, 2013, the wind power industry and advocates of renewable energy breathed a sigh of relief when Congress renewed the Production Tax Credit (PTC) for another year. (1) The wind power industry had sought an extension of this critical subsidy for more than a year, without any response from Congress. Midway through 2012, the failure to secure an extension had already adversely affected the industry. (2) By that point, it also appeared that a short-term extension would come too late to do any good, because the existing PTC required facilities to be placed in service to be eligible for tax credits--and wind projects often take more than a year to develop. (3) Congress nevertheless renewed the PTC for another year as part of the grand bargain to prevent the United States from going off the "fiscal cliff." (4) Moreover, Congress modified the eligibility requirements to allow facilities that began construction before 2014 to qualify for production tax credits. (5) At first glance, it appeared that Congress's delay in extending the PTC would not significantly stifle wind power development.

However, by the middle of February 2013, analysts predicted that the PTC extension would offer little benefit to the wind power industry. In theory, by tying the tax-credit eligibility to the start of construction, rather than its completion, the PTC extension should have given wind developers more breathing room. (6) Yet, uncertainty about how the Internal Revenue Service (IRS) would implement the revised PTC led many wind energy companies to delay investing in new facilities. (7) Even without the uncertainty surrounding the IRS rules, it was unclear whether the revised PTC would promote significant development of new wind farms, given that it can take more than a year to negotiate the deals and secure the permits necessary to begin construction. (8) At most, it seemed likely that a one-year extension of the PTC would benefit companies that began wind projects in (2012) or earlier but, for some reason or another, failed to complete them in time. (9)

On April 15, 2013, the IRS finally issued its guidance regarding the activities that qualify as the "beginning of construction" to be eligible for the PTC extension. (10) Under the IRS guidance, the commencement of any "physical work of a significant nature" would qualify. (11) More importantly, facilities would also be eligible for the PTC under a "safe harbor" provision available to developers that pay or incur at least 5% of the total cost of a facility before January 1, 2014, and that make "continuous efforts to advance towards completion of the facility." (12) Thus, under the guidance, developers could begin building or investing in wind facilities by the end of 2013 to qualify for the PTC.

For the wind energy industry, the IRS guidance must have triggered great relief. The safe harbor provision would seemingly afford companies time to design new wind farms, secure permits, and negotiate contracts for turbines and electricity delivery. However, the IRS guidance may also lead to a boom cycle, in which prices spike as developers rush to meet the deadlines. At the end of the day, the IRS guidance will likely only perpetuate the cycle of uncertainty plaguing the wind energy industry.

Unfortunately, uncertainty has become a recurring problem affecting renewable energy development in the United States. …