Crux of PTC phaseout plan — cost — proves elusive

Source: Nick Juliano, E&E reporter • Posted: Monday, December 17, 2012

The wind industry last week proposed phasing out its prized tax credit in response to concerns from deficit hawks on Capitol Hill who say the government can no longer afford to subsidize wind turbine construction. But it is proving difficult to come up with a reliable estimate of how much the proposal would cost.

Wind advocates say the production tax credit effectively costs taxpayers nothing because the $1 billion-plus per year that the government spends on the credit is more than recouped through federal, state and local taxes paid throughout the construction and operation of the wind farm. Wind detractors, meanwhile, are using some different math to put an inflated price tag on the industry’s proposal.

Neither assertion is entirely accurate when measured against the most important metric that members of Congress will consider as they determine the PTC’s fate: the 10-year budget score assigned by the Joint Committee on Taxation (JCT) or Congressional Budget Office.

Economists in those offices rely on a variety of economic projections and expectations of how various industries would behave in response to incentives to come up with cost estimates. The process is as precise as it can be, but there is a healthy amount of guesswork involved, as with any effort to predict the future.

“To a certain extent, you just have to make them up,” a former House Budget Committee staffer said. That’s not a critique of the scorers, the former staffer emphasized, just a recognition of the nature of the process.

Further complicating matters, the phaseout proposed by the American Wind Energy Association so far exists publicly as just a two-page letter, which budget-scorers can’t evaluate. Industry and congressional sources say similar proposals have been evaluated by budget scorers and received estimates in the range of $10 billion to $14 billion over a decade.

The PTC was first implemented in 1992 and provides wind developers with an inflation adjustment credit of 2.2 cents for every kilowatt-hour of electricity they produce for the first 10 years of a wind farm’s life.

AWEA calls for the PTC to be immediately extended to projects that begin construction by the end of next year, in line with legislation endorsed by the Senate Finance Committee. Beyond that, it says the credit should be reduced 10 percent per year to 2017, be maintained at 60 percent of its initial value in 2018 and end the following year.

An estimate prepared for E&E Daily by Amy Grace, a wind industry analyst with Bloomberg New Energy Finance, puts the cost of AWEA’s proposal at $21.5 billion over the 16 total years developers would be able to claim the credit. That assessment assumed 4,000 megawatts of wind would be installed next year and 8,000 MW in years 2014-2018. Grace stressed that those installation figures are not the firm’s forecast of wind installations under the phaseout policy but an assumption selected to estimate the cost of the proposal.

JCT analyzed the Finance Committee’s version of a one-year extension and put its costs at about $12 billion over the next decade.

Wind critics including the American Energy Alliance and Sen. Lamar Alexander (R-Tenn.) used that figure as the basis for a back-of-the-envelope calculation to arrive at a range of $50 billion to $60 billion that AWEA’s phaseout proposal would commit the government to spend through the tax code.

An aide to Alexander acknowledged that the figure he cited when speaking with reporters last week was “based on an early, rough” estimate but said that Alexander would oppose any extension of the credit beyond this year, regardless of cost.

President Obama in his fiscal 2013 budget proposed making the PTC permanent, and CBO scored that proposal at $14 billion over a decade. And lawmakers have requested that JCT score other internal proposals, including a five-year phaseout that the committee estimated would cost around $10 billion over a decade and a straight, four-year extension mirroring H.R. 3307 that JCT estimated at $13.6 billion, according to staffers and industry sources who have been tracking the issue.

As much as half of the $12 billion JCT score for the Finance Committee proposal was the result of the underlying change to the milestone renewable energy developers must meet to claim the credit, which also is available for biomass, geothermal, hydropower and waste-to-energy facilities.

Current law requires projects to be complete and producing electricity before they can claim the credit, but the Finance Committee opened it up to projects that simply begin construction before the end of next year. That change will allow far more projects to qualify than would under a simple extension of current law, and it is seen as especially beneficial for the non-wind industries that operate on longer construction time frames (E&E Daily, Dec. 12).

JCT in scoring the Finance Committee proposal did not release much detail beyond the top-line cost estimate for the PTC and other “tax extenders” included in the package, so it is difficult to parse how much of the credit would go to each particular source.

Earlier this year, JCT produced its annual estimate of tax expenditures for fiscal 2011-2015, based on current law projections. It estimated wind would receive $6.8 billion over that period, making it by far the largest PTC beneficiary; open-loop biomass came in behind with $1.7 billion over five years, while other sources eligible for the PTC would receive around $100 million apiece in that time frame.

Many variables go into the various estimates, including the particulars of how a credit would be structured and expectations of how many new wind or other projects would come online over the given time frame — projections that are themselves affected by a variety of factors including state-level renewable energy policies, the price of natural gas and trends in electricity markets.

“The estimate you get is going to depend a lot on how much new investment you think is going to occur,” said Joshua Linn, a fellow with Resources for the Future, a think tank focused on energy and environment policy.

For example, a short-term extension typically would cause a relative front-loading of costs as developers race to complete their projects before the credit expires, while a longer-term phaseout may spur a relatively similar amount of overall activity spread out over a longer period of time, sources familiar with the industry say.

Furthermore, the design of an eventual phaseout would affect how it is scored. AWEA’s proposal to reduce the amount of credit developers receive in each successive year is not the only idea that has been circulating as industry lobbyists and policy experts have been thinking about the phaseout idea over the last year or so.

Another option that has been floated would leave the credit’s value unchanged but would reduce the amount of time during which developers can recoup the credit, which currently is available for the first 10 years a wind farm is operational. Under this approach, that horizon would progressively shrink to nine years of eligibility, followed by eight, then seven and so on.

Under the vagaries of the budget scoring process, reducing the time frame would produce an identical 10-year cost estimate as a permanent extension to the credit, according to sources familiar with the process. But a proposal using AWEA’s model pushes more of the costs outside of the budget window.

Budget scoring does not account for every single consequence of a particular policy and focuses primarily on effects on government outlays. Wind advocates say that misses part of the picture because it does not account for payroll and income taxes paid by wind farm employees or other benefits. An analysis performed by NextEra Energy and frequently cited by AWEA argues that the PTC actually provides a net benefit to the government because federal, state and local taxes exceed the cost of the credit.