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The Cost of the Production Tax Credit and Renewable Energy Subsidies in Texas

The Cost of the Production Tax Credit and Renewable Energy Subsidies in Texas

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Published by Texas Watchdog
The Cost of the Production Tax Credit and
Renewable Energy Subsidies in Texas by Texas Public Policy Foundation
The Cost of the Production Tax Credit and
Renewable Energy Subsidies in Texas by Texas Public Policy Foundation

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Categories:Types, Research
Published by: Texas Watchdog on Jan 22, 2013
Copyright:Attribution Non-commercial


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November 2012
Center for Economic Freedom
Executive Summary
Te Production ax Credit (PC), a ederal taxcredit which subsidizes the production o renew-able energy, is set to expire at the end o 2012.Te potential loss o the PC is sending shock waves through the renewable industry; or in-stance, new construction o wind generation hasslowed to a crawl. Tis shouldn’t be surprisingsince the PC pays renewable energy generatorsas much as $22 per megawatt hour (MWh).Whatever benets accrue through the PC tothe renewable energy sector, our research showsthat everyone else suers. Te continuation o the PC will cause disruptions in electricity markets and impose higher costs on consum-ers and taxpayers. Te negative consequenceso the PC are particularly apparent in exas,which has more wind-generated electricity than any other state.Te PC’s current annual cost in exas is ap-proximately $567 million. I continued, the costo the PC in exas alone would run about $4.1billion through the 10 years ending in 2015.aken altogether, renewable energy subsidies inexas will cost taxpayers and consumers about$12.9 billion over that same period.Additionally, renewable energy subsidies—particularly the PC—are both disrupting andimposing signicant costs on exas’ electricity market. Te PC is one o the major actorscausing concerns about whether exas’ energy-only market can provide sufcient levels o re-source adequacy.Our research leads us to conclude that becauseo the adverse eects renewable subsidies haveon consumers, taxpayers, and the exas elec-tricity market, Congress should allow the PCto expire.
The Cost of RenewableEnergy Subsidies in Texas
Te PC is just one o the subsidies availableto renewable energy producers in exas. Othersubsidies available in exas include RenewableEnergy Credits (RECs) under the state’s Re-newable Portolio Standard, ederal grants un-der the 2009 stimulus bill, and access to trans-mission through the Competitive RenewableEnergy Zone (CREZ) program.As the renewable industry is pushing hard orCongress to extend the PC, it is worth exam-ining the cost o renewable subsidies in exas,which in 2011 produced a nation leading totalo 28,295,000 MWh rom wind.
Since 2006, renewable subsidies in exas havetotaled more than $7.1 billion
(see table next  page)
. In 2012 alone, the PC is estimated tocost taxpayers $567 million while RECs are es-timated to increase consumers’ electricity billsby $69 million.CREZ costs to date attributable to wind are ap-proximately $2.45 billion. Te completion o the lines is estimated to cost another $4.1 bil-lion in the years ahead.Subsidies rom the 2009 ederal stimulus arealso sizable. Approximately $1.65 billion in ed-
The Cost of the Production Tax Credit andRenewable Energy Subsidies in Texas
by Bill Peacock & Josiah Neeley
Key Points
Payments under theederal production taxcredit (PTC) in Texaswill total $4.1 billionthrough 2015 i the PTCis extended.
Wind subsidies aredisrupting Texas’ longterm electric reliabilityat a cost o billionso dollars to Texasconsumers.
Congress should allowthe PTC to expire at theend o 2012.
continued on next page
 The Cost of the Production Tax Credit and Renewable Energy Subsidies in Texas
November 2012
 Texas Public Policy Foundation
eral grants went to wind arms, the production o wind tur-bine components, or to help exas deal with the increasedamount o wind power on the electrical grid.
Despite the mature nature o the wind industry, the cost o renewable subsidies in exas has increased. I the PC iscontinued, the 10 year cost o renewable subsidies in exasshould total about $12.9 billion, an average cost o $1.29 bil-lion a year over the period.
The PTC and Resource Adequacy in Texas
Te cost o these direct subsidies, however, is only a portiono the total eect o renewable energy subsidies in exas.Additionally, one must consider the costs imposed on theexas electricity market.It is well known that exas is undergoing a major debate overwhether price signals are adequate to maintain resource ad-equacy; less well known is that a signicant portion o theproblem with price signals can be laid directly on the door-step o subsidies or wind generation.Te PC allows wind generators to bid electricity into themarket at negative prices. In other words, generators canuse proceeds rom the PC to pay people to take electricity rom them and still make a prot. When wind-generatedelectricity is bid into the market at a negative price, all othersources o generation must match that price or risk gettingknocked o the grid. Tis decreases the protability o non-wind generation and gives companies ewer resources andincentives to invest in new capacity. Over time, this willserve to degrade the reliability o the exas grid, increasingthe risk o blackouts.Donna Nelson, chairman o the Public Utility Commissiono exas (PUC) urther explains this:Federal incentives or renewable energy … have distortedthe competitive wholesale market in ERCO. Wind hasbeen supported by a ederal production tax credit thatprovides $22 per MWh o energy generated by a windresource. With this substantial incentive, wind resourcescan actually bid negative prices into the market and stillmake a prot. We’ve seen a number o days with a nega-tive clearing price in the west zone o ERCO where mosto the wind resources are installed. … Te market distor-tions caused by renewable energy incentives are one o theprimary causes I believe o our current resource adequacy issue… []his distortion makes it difcult or other gen-eration types to recover their cost and discourages invest-ment in new generation.
YearRenewable Energy Credits Production Tax Credit CREZ Costs Stimulus
Retired Cost Wind MWh Cost To Date/Future Costs2006 4,200,975 $18,904,388 6,341,451$126,829,0202007 5,025,934 $22,616,703 8,732,934$174,658,6882008 13,618,248 $61,282,116 15,237,876$304,757,5292009 15,908,404 $47,725,212 18,522,660$377,862,256 $482,286,8592010 20,984,518 $57,707,425 26,225,695$545,704,266 $381,372,4352011 24,372,369 $67,024,015 27,146,390$597,220,589 $766,210,1702012 25,227,839 $69,376,558 25,802,010$567,644,211 $2,462,064,014 $21,585,3052013 26,113,336 $71,811,675 24,385,082$536,471,800 $4,094,058,0322014 27,029,914 $74,332,265 22,233,904$489,145,8922015 27,978,664 $76,941,327 19,037,276$418,820,077
Total 190,460,202 $567,721,682 193,665,279$4,139,114,328 $6,556,122,046 $1,651,454,769
Ten Year Cost of Renewable Subsidies in Texas: 2006-2015*Total: $12.91 billion
Sources: ERCOT; U.S. Department of Energy; and calculations by the authors
* CREZ costs listed in 2012 represent all costs incurred rom inception through the July CREZ Progress Report No. 8. Those listed in 2013represent all uture costs scheduled to be incurred ater the July report. We attribute 95 percent o CREZ cost to wind, to allow or somegeneral beneft rom the CREZ lines through reduced congestion on the grid. Wind MWhs is an estimate o wind generation eligible orthe PTC.
November 2012
 The Cost of the Production Tax Credit and Renewable Energy Subsidies in Texas.
Te Northbridge Group recently published a study con-rming the distortions in the market caused by the PC.Te Northbridge study reports that the ve-old increase inwind generation since 2006 parallels an increase in nega-tive pricing. In the ERCO West Zone, negative pricing oc-curred between 8 percent and 13 percent o the time rom2008 to 2011.
 Negative prices cause both short and long term harmul e-ects. According to Northbridge, negative prices:
Disrupt the operation o physical electricity systemsand markets by sending distorted hourly price signals toother market participants whose resources are needed tomeet demand reliably and cost eectively.
Distort competitive markets, disrupt normal operationo the system, raise costs, and imperil reliability.
Undermine essential ossil generation operating at mini-mum levels during low demand periods [because they]make operating ossil generation at minimum levelsextremely expensive as operators must pay not only ortheir uel costs, but also just to generate.
Distort the price signals developers and investors rely onto determine what, when, and where to build generationand transmission [and] lower the expected uture rev-enues or all types o base load and intermediate genera-tion that does not receive production-based subsidies.
 Te disruption o the exas electricity market by negativewind prices is only going to get worse as more transmissionlines are built and requency o negative pricing throughoutthe state comes to resemble the West Zone. As the BrattleGroup noted in a recent report:Wind generation puts downward pressure on energy prices in all parts o ERCO whenever the wind blows.However, the eect is greatest in the West Zone, wheremore than 70 percent o ERCO’s wind capacity is lo-cated … Te CREZ project is primarily designed tomove electricity generated by wind and other renewableresources rom remote parts o exas (i.e., West exasand the exas Panhandle) to the more heavily-populatedareas o exas (e.g., Austin, Dallas-Fort Worth, and SanAntonio). Tis transmission expansion will also increaseexas’ ability to build more wind generation, but may inthe uture erode non-wind generator economics more by depressing energy prices in the other three zones.
 It is difcult to quantiy the cost o the PC’s distortions onthe market. But one method o doing so would be to look atthe cost o solving exas’ resource adequacy challenges.
Source: The Northbridge Group
Percentage of Hours with Negative Real-TimeElectric Energy Prices in ERCOT, 2006-2011

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