The production of wind and solar power has long been subsidized by the federal government through two tax credit programs. One is the Renewable Energy Production Tax Credit, which was originally enacted in 1992. This provides a credit per kilowatt-hour to wind operators for electricity produced during the first ten years of operation. It was set to expire in 1999, but has been extended 12 times, and will currently expire at the end of 2020 unless it is extended again.
The other major tax credit is the Solar Investment Tax Credit. This was enacted in 2006 and was extended in 2015. It is currently a 26% credit for solar systems on residential or commercial properties. The credit is scheduled to drop to 22% for projects that begin construction in 2021 and afterwards the credit ends for residential projects and drops to 10% for commercial projects.
The tax credits were originally justified as a mechanism to advance an infant technology to compete with conventional sources and result in a cleaner environment. Clearly the technology has advanced sufficiently that the credits are no longer serving this purpose and are costly to taxpayers. It is time to let them expire.
The Energy Information Administration (EIA) estimates solar and wind combined account for about 8% of electricity generation. The Pew Research Center has found that over the past decade, solar power, while still a minor share of total power production, has experienced the largest percentage growth of any U.S. energy source, with an increase of more than 45 times.
The cost of producing wind and solar power have declined substantially. A recent Lazard study estimates that the unsubsidized cost of wind power is an average of $41 per megawatt-hour, and utility solar is $37 per megawatt-hour. Natural gas, which also has been falling substantially in price, averages $56 per megawatt-hour.
The most recent EIA Annual Energy Outlook estimates that, assuming the phase-outs of the credits, wind and solar generation will increase their market share from 8% today to 14% by 2025, and 23% by 2050. Wind and solar generation together are expected to supply more power in 2050 than either coal or nuclear power.
The Joint Committee on Taxation estimates that the tax expenditure of the production tax credit was $5.1 billion in 2019. The U.S. Treasury estimates that the production tax credits that remain available to those firms that began construction within the prior time limit will cost taxpayers more than $40 billion from 2018 to 2027. Extending the credit will increase these costs without further advancing the technology.
There are a number of problems with integrating wind and solar power into the grid. The primary one is the problem of intermittent production, in that solar power is not generated at night nor is wind power generated when the wind is not blowing.
However, grid reliability requires that power be available at night or in the calm. Thus, there is a need for other forms of electricity production to be available when intermittent sources fail to produce, or for advancement in storage technology. Continuing tax credits for the production of intermittent energy sources will likely increase these problems rather than act to solve them.
In addition, wind and solar power have small marginal cost of production, that is, once the wind or solar facility is constructed the cost of producing an additional unit of electricity is very small. The production tax credit subsidies can be sufficiently large that a wind producer can actually pay the grid to take its electricity and still make a profit. This can result in negative wholesale prices for electricity at certain times of the day, disrupting markets and distorting the mix of generating facilities.
The advancement in the technology of producing wind and solar power has had a positive effect on the energy industry and benefited the environment. However, continuing these subsidies will not only cost taxpayers billions of dollars, but will distort the electricity market and do little to further advance the technology of renewable energy.
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Gary Wolfram is the William Simon Professor of Economics at Hillsdale College.
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