Production Tax Credit for Renewable Energy
The Production Tax Credit (PTC) is a federal incentive that provides financial support for the development of renewable energy facilities.
Companies that generate electricity from wind, geothermal, and “closed-loop” bioenergy (using dedicated energy crops) are eligible for a federal PTC, which provides a 2.3-cent per kilowatt-hour (kWh) incentive for the first ten years of a renewable energy facility's operation.
Other technologies, such as "open-loop" biomass (using farm and forest wastes rather than dedicated energy crops), efficiency upgrades and capacity additions for existing hydroelectric facilities, small irrigation systems, landfill gas, and municipal solid waste (MSW), receive a lesser value tax credit of 1.1 cents per kWh.
The production tax credit for wind and other renewable energy technologies expired at the end of 2013. However, an important new provision was included in the American Taxpayer Relief Act of 2012 (enacted in January 2013) allowing eligible projects that were under construction before January 1, 2014 to qualify for the PTC. The IRS issued guidelines in April 2013, and again in September 2013, clarifying several issues around what is needed to qualify as under construction.
The PTC and Wind
Combined with state renewable electricity standards, the PTC has been a major driver of wind power development in the United States. This development has resulted in significant economic benefits, according to the U.S. Department of Energy:
- Between 2007 and 2012, U.S. wind capacity more than tripled, representing an annual average investment of $18 billion.
- More than 550 manufacturing facilities located in 44 states produce 72 percent of the wind turbines and components installed in the United States, up from 25 percent in 2006.
- The cost of generating electricity from wind has fallen by more than 40 percent over the past three years.
But Congress has repeatedly gone back and forth between expiring and extending the PTC, which has wreaked havoc on the wind industry.
Originally enacted as part of the Energy Policy Act of 1992, Congress has extended the provision five times and has allowed it to expire on five occasions. This "on-again/off-again" status has resulted in a boom-bust cycle of development. In the years following expiration, installations dropped between 76 and 93 percent, with corresponding job losses (see Figure below).
Sources: Compiled by UCS based on data from DOE 2013 and AWEA 2014
The cycle begins with the industry experiencing strong growth in development around the country while the PTC is firmly in place, and in the years leading up to the PTC's expiration. Lapses in the PTC then cause a dramatic slowdown in the implementation of planned wind projects and layoffs at wind companies and manufacturing facilities. Upon restoration, the wind power industry takes time to regain its footing, and then experiences strong growth until the tax credits expire. And so on.
Short-term extensions of the PTC are insufficient for sustaining the long-term growth of renewable energy. The planning and permitting process for new wind facilities can take up to two years or longer to complete. As a result, many renewable energy developers that depend on the PTC to improve a facility's cost effectiveness may hesitate to start a new project due to the uncertainty that the credit will still be available to them when the project is completed.
Last-minute PTC extensions don’t serve anyone well either. The pending uncertainty threatens access to financing and stalls plans for development, jeopardizing the tens of thousands of jobs in the industry. This uncertainty was clearly evident in 2013 when the PTC was extended two days after the 2012 expiration date and U.S. wind development hit its lowest level since 2004. However, a recent study by the American Wind Energy Association (AWEA) shows that at least 12,000 MW of wind capacity is currently under construction and 5,200 MW of capacity that signed power purchase agreements in 2013 could be eligible for the PTC under the new IRS guidelines.
A long-term extension of the PTC is needed to bring more stability to the wind industry, and help level the playing field with fossil fuels and nuclear power — industries that have received far greater taxpayer support for decades.
But most importantly, the PTC works. With it in place, wind power has dramatically increased, reducing our reliance on fossil fuels, driving innovation and economic development, lowering costs, and providing important environmental benefits — including carbon reductions.