Will Rogers once said, "All government programs have three things in common: a beginning, a muddle and no ending." Perhaps the most pre-eminent example of this in our time is the wind Production Tax Credit, a decades-old subsidy that should end upon its expiration at the end of the year.
I am acutely aware of the Production Tax Credit's malformed tenure, as I was a member of the Senate when the subsidy was enacted more than 20 years ago. The policy — which provides a 2.3-cent credit to wind generators for every kilowatt-hour of energy that's produced — was created as part of the Energy Policy Act of 1992, and was never intended to be permanent.
Rather, the Production Tax Credit was meant to serve as a temporary measure to jump-start the renewable-energy industry. In 1991, the author of the legislation, former Rep. Phil Sharp, declared that the tax credit should have "a sunset provision to ensure that the temporary incentive does not become a permanent subsidy." In the same vein, no one who was a part of the Production Tax Credit's creation envisioned that the subsidy would one day be renewed seven times and give advantage to large multinational corporations in perpetuity.
Naturally, over the course of more than 20 years, the wind industry has advanced. Today, wind is a mature technology that can stand on its own. According to the U.S. Department of Energy, wind accounted for 43.5 percent of all new-capacity additions in 2012, overtaking natural gas as the leading source of new generation. So, while it's safe to say that when the tax credit was created, wind was an infant industry, the industry has grown up since.
We also have to consider that 29 states and the District of Columbia have Renewable Portfolio Standards that have helped to drive this growth. These standards, which mandate that a certain percentage of electricity come from renewable energy, including wind power, will continue to drive renewable-energy expansion after the tax credit expires.
Meanwhile, in the midst of this historic growth, the Production Tax Credit is harming the electricity markets in myriad ways. First, because the tax credit provides a tax benefit for new projects, it incentivizes wind developers to build them regardless of demand. Wind projects are being brought online in great numbers in order to collect the subsidy, despite the fact that demand for power is flat in most of the United States.
Second, and even more alarming, the Production Tax Credit is creating an incentive for wind generators to actually pay the electricity grid to take their power when it's not needed. In other words, because the tax credit is sometimes worth more per kilowatt-hour than the average wholesale price of power, wind producers will pay the market to take their power to collect the subsidy, even when there is not much market demand for it. Imagine if a coffee shop paid a customer $5 to drink a cup of its coffee — even though the customer already has plenty of inexpensive coffee shops in his neighborhood — because the government gave the company $7 for every cup of coffee it served.
As one can imagine, this phenomenon, called "negative pricing," has a real impact on the electricity market and threatens the well-being of other power producers. Not only is it difficult for conventional baseload generators to ramp down their production when unneeded wind power comes online — usually in the middle of the night — it can force them to shut down for long periods of time into the next day, when their power is needed most. Or it can force them to join wind producers in paying the market to take their power to continue running.
For a good example of how negative pricing is adversely impacting conventional generation, look no further than Billings, Mont., where a baseload coal plant owned by PPL Montana recently shut down. In relation to the plant's closure, PPL Montana's Chief Operating Officer Pete Simonich stated, "[w]ind farms can make a profit even in low-demand time of the season because they can pay people to take their electricity."
This brings me to my next point. Congress should not be in the business of picking energy winners and losers by providing wind with an unfair advantage in the form of the Production Tax Credit. Wind should be allowed to compete in the free market just like other types of generation.
Of course, conventional generators aren't the only ones paying a price for the tax credit. Year after year, the tax credit is renewed on the backs of American taxpayers, most recently to the tune of $12 billion for the subsidy's extension in 2013, according to the Joint Committee on Taxation. Disturbingly, this number is only going to grow. Just last month, the committee found that extending the tax credit for another year would cost a whopping $6.1 billion.
The bottom line is that 20-plus years of the Production Tax Credit for wind has been more than enough. Like a responsible bartender, Congress needs to take the bottle away and cut off the over-served wind industry. The tax credit has had its beginning, a long muddle and now it is time to end it.
Don Nickles, a former Republican member of the U.S. Senate from Oklahoma, is chairman and CEO of The Nickles Group, LLC.