Blow off wind-production tax credit

By George Taylor and Tom Tanton Wednesday, December 19, 2012

Wind-energy advocates claim that with just one more extension of the 20-year-old “temporary” wind-production tax credit, wind generation finally could become competitive with conventional sources of electricity. The truth is, it’s never been competitive — and has only appeared to be close because some of its costs have been subsidized and others have been ignored.

Here’s the issue. Wind generation has three unusual indirect costs that no one wants to discuss:

The cost of keeping available the primary fossil-fired plants that must balance wind’s large variations in output, even though adding wind to the system reduces the amount of generation for which they are paid.

The reduced fuel efficiency that wind imposes on those plants.

The cost of long-distance transmission and the losses that come with it.

As The Hidden Costs of Wind Electricity, a report released by American Tradition Institute, shows, adding conservative values for these real but hidden costs to the most recent generation-cost reports from the Energy Information Administration (EIA) and the Office of Energy Efficiency and Renewable Energy would nearly double wind’s projected cost — from 8 cents per kilowatt-hour without them to 15 cents per kwh with them (after backing out a depreciation-related subsidy and an atypical operating lifetime assumption as well).

That 15 cents per kwh is triple the current cost of natural-gas generation and 40 percent to 50 percent more than EIA’s estimates for the cost of new nuclear or coal generation.

It’s also unlikely to be reduced much by either technological advances or further economies of scale because wind is a mature technology, its worldwide market is more than $50 billion per year, and its indirect costs are consequences of two fundamental shortcomings that are independent of the turbines. First, with rare exceptions, wind can operate only as an appendage to either natural-gas or coal-fired generation. Second, its most productive locations are far from major cities.

While the three indirect and infrastructure costs listed above have been acknowledged in research reports, they have not appeared in most generation-cost comparisons. That’s because regulatory authorities have not required wind operators to pay for them, they’ve required consumers to pay for them instead. In an honest, transparent and accountable political system, that should not be an excuse for policymakers to ignore their impact on consumers, jobs and the economy.

How large has that impact been? Based on EIA’s numbers and electric system operators’ conclusions about the amount of conventional generation capacity wind installations can replace, at the current price of natural gas and before counting any extra costs of transmission, wind generation’s cost is at least 6 cents per kwh greater than its benefit — namely, the fossil fuel it can save and the small amount of conventional generation capacity it can replace.

At wind’s current 3.5 percent share of generation, that 6 cents per kilowatt hour translates into an extra $8.5 billion that ratepayers have paid this year and will have to pay every year for as long as existing wind facilities (or their replacements) are kept in operation.

However, that’s not the worst of it. While most existing wind facilities were built in locations that could piggyback on existing transmission infrastructure, as these easier opportunities are used up, wind’s net cost will increase.

Even with an optimistic onshore wind-transmission scenario such as the one described in a widely referenced National Renewable Energy Laboratory report, the gap between wind’s cost and its value would increase to at least 9 cents per kwh.

This means the cost of wind electricity would not break even with the cost of natural-gas-fired electricity unless the delivered price of natural gas were about $20 per million British thermal units, or four to five times today’s price. Stated another way, if we increased wind’s share of all generation to 10 percent and built a transmission system similar to the one the laboratory proposed, wind’s excess cost to consumers would increase to more than $30 billion per year.

Of course, if the price of natural gas went up, wind’s cost gap compared to gas-fired electricity would go down. Yet its gap with nuclear and coal-fired electricity would not. In order to keep wind in operation, system operators would be forced to buy the higher-priced gas electricity or revert to coal because in the absence of energy storage or hydro-generation, wind always must be paired with one or the other.

In sum, there is no reason to think wind electricity will become competitive with conventional sources or replace any meaningful amount of fossil fuel. If we continue expanding it, wind generation will increase the cost of electricity, tie us to fossil fuels indefinitely and require us to build transmission lines that otherwise would be unnecessary. Those are no reasons for shifting any of wind’s cost from ratepayers to taxpayers. Congress should allow the wind-production tax credit to expire, as it always was intended to do.
George Taylor is a research fellow at the American Tradition Institute, where Tom Tanton is the director of science and technology assessment.

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