Monday, December 03, 2012

Will Wind Power Fall Off the Fiscal Cliff?

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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