If you have driven a considerable distance in West
Texas (and it’s hard not to drive a considerable distance when things are as
far apart as they are out there), you have seen the slightly Martian-looking
sight of a forest of identical white towers, each with a triplet of whirling
blades, covering a good part of the whole visible horizon. Wind energy from huge wind farms has
been one of the big success stories in renewable energy by some measures, and
Texas leads the nation in the amount of installed capacity per state (over
10,000 megawatts ). And according
to a recent article in the Austin
American-Statesman, about 70 firms in Texas supply products or services to
the wind-generation industry. But
all this may hit a serious roadblock January 1 if the federal tax credit that
has encouraged commercial wind-powered generation for two decades comes to an
end, along with a lot of other tax cuts and incentives. This is one effect of the so-called “fiscal
cliff” that will automatically take effect if the U. S. Congress and the
President don’t do something to stop it.
The prospective end of the wind tax credit has important implications
for what some philosophers call engineering “macro-ethics”: the engineering ethics of public policy
and related matters.
The tax credit is substantial: anyone selling wind energy commercially
can qualify for a 2.2 cents-per-kilowatt-hour tax credit from the government
for a period of ten years. This
has led some wind-power producers to give away energy for free on occasion,
just to get the tax credit. And
note that a credit is better than a deduction: a deduction means you pay less tax than you would have
otherwise, but a credit means you get a check straight from the Treasury, even
if you owed no taxes to begin with.
No wonder parts of West Texas look like the Jolly White Giant has
scattered around three-petalled dandelion seeds.
The rationale behind the tax credit, enacted in the
last days of the administration of the elder George Bush in 1992, was that a
strictly free-market approach to wind energy might never get off the ground,
because the vagaries of fossil-fuel prices would discourage private investors
from putting their money into it.
Nobody would want to build a lot of wind generators when fuel prices
were high, only to see their investment turn to nothing when fuel prices fell
and wind became uncompetitive. So
the tax credit gave investors a guaranteed return for ten years, which is a
reasonable payback time for a major investment such as a wind farm.
Viewed just from the standpoint of installed
capacity, the tax credit has been a major success. On one (presumably windy) day in October of this year, wind
accounted for over a fourth of all the electric energy produced in the ERCOT
network (the Electric Reliability Council of Texas, which is the name of Texas’
largely independent transmission network). The growth of wind-related manufacturing and service firms
has been a bright spot in the nationwide economy, and Texas is not the only
state to benefit from the growth of wind farms.
That’s the good news. The bad news is that already, the prospect that the tax
credit might end has hurt bookings of new business at wind-related firms and
caused concern that new construction of wind farms might come to a screeching
halt. And sure enough, another
energy-related technology—“fracking,” which makes abundant new sources of
natural gas available—has caused the price of natural gas to plummet. This means that from a subsidy-free
economic viewpoint, anyone wanting to build new generation capacity would be
crazy to build wind generators when a natural-gas-fired plant would be cheaper
and much more reliable (no wind, no power). In fact, the free market for energy in Texas and many other
states is providing little if any incentive for anyone to build new power
plants, despite the ongoing need and the fact that brownouts on hot summer days
have become uncomfortably common.
The parties involved in this matter are roughly as
follows. There are people who
build and install and own and run wind-generation facilities; there are
consumers of electricity (basically everybody) who have various preferences
about both price and the nature of how electricity is made; there are
government entities, mainly the federal government and the state governments;
and there are investors whose money can come into the game as long as they see
they’ll get a good return on their investment.
If the tax credits go away, most investors will walk
away from future wind farms, at least under the present circumstances of low
natural-gas prices. We will be
stuck with what wind farms we’ve got, though if running the farms becomes
unprofitable their owners will let them stand idle at best, and will tear them
down if things get too bad. As
long as fossil fuel prices stay low, electricity consumers won’t have to pay a
lot more, but they may well run into increasingly serious brownouts and
blackouts if more generation capacity isn’t built, or if serious conservation
efforts are not made. And conservation
isn’t free: the largest users of
electricity have to justify it on a dollars-and-cents basis, not just because
it feels good.
Back in the early days of networked power in the
1920s, the free market reigned because no legislators had given much thought to
the need to regulate electric utilities yet. After notable abuses such as monopolistic practices by
single-owner utilities (among whom was numbered my great-uncle L. L.
Stephenson, who was an ice-plant and electric-power mogul in San Antonio until
he died in 1929), first individual cities, and finally the State of Texas,
decided that electricity was too necessary a thing to be left entirely to the
whims of private firms with no regulation. So in the next couple of decades, the industry came under
the supervision of state public utility commissions, and a kind of deal was
reached. The state commissions had
the authority to set electric rates, but agreed (“colluded with” would be too
strong a term) to allow the utility companies a fixed and reasonable rate of
profit. The best thing about being
regulated from the viewpoint of the utilities was the fact that their fiscal
environment was largely predictable.
This meant planning and investment, which for electric utilities extends
decades into the future, could be made with some reassurance that the plans
would work out and investments would not be wrecked by unexpected changes in
allowable rates and so on.
A number of things conspired to overthrow this
regulatory regime. Both the oil crisis of the 1970s, which introduced
unpredictability into the fuel-cost equation, and a spirit of deregulation that
extended from the airline industry to the telecommunications business led to
the experiment of a free market in electric energy, which has been the case in
Texas for many years now. The
prospective end of the tax credit for wind generation would be yet another step
towards a totally free market in this regard. While I think it is a good thing to generate some power from
wind, we may soon be seeing the harm that comes from relying too much on
legislation that produces artificial incentives for certain kinds of
technologies. But there is also a
harm done when anyone, including a government, breaks a promise such as the
promise of ten years of tax credits.
Let’s hope governments at all levels move toward providing a somewhat
more predictable environment in which to do business, including the business of
making electricity from wind.
Sources: The article “End of Wind?” appeared in
the Dec. 2, 2012 print edition of the Austin
American-Statesman, p. A1 and A10.
I also referred to the Wikipedia article “Wind power in the United
States” for statistics on Texas wind generation.
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