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November 2012

PolicyPerspectiveTEXAS PUBLIC POLICY FOUNDATION

Center for Economic Freedom

Executive SummaryTe Production ax Credit (PC), a ederal tax

credit which subsidizes the production o renew-

able energy, is set to expire at the end o 2012.

Te potential loss o the PC is sending shock

waves through the renewable industry; or in-

stance, new construction o wind generation has

slowed to a crawl. Tis shouldnt be surprising

since the PC pays renewable energy generators

as much as $22 per megawatt hour (MWh).

Whatever benets accrue through the PC to

the renewable energy sector, our research shows

that everyone else suers. Te continuation o

the PC will cause disruptions in electricity

markets and impose higher costs on consum-

ers and taxpayers. Te negative consequenceso the PC are particularly apparent in exas,

which has more wind-generated electricity

than any other state.

Te PCs current annual cost in exas is ap-

proximately $567 million. I continued, the cost

o the PC in exas alone would run about $4.1

billion 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 PCare both disrupting and

imposing signicant costs on exas electricity

market. Te PC is one o the major actors

causing concerns about whether exas energy-

only market can provide sufcient levels o re-

source adequacy.

Our research leads us to conclude that because

o the adverse eects renewable subsidies have

on consumers, taxpayers, and the exas elec

tricity market, Congress should allow the PC

to expire.

The Cost of RenewableEnergy Subsidies in TexasTe PC is just one o the subsidies availabl

to renewable energy producers in exas. Othe

subsidies available in exas include Renewabl

Energy Credits (RECs) under the states Re

newable Portolio Standard, ederal grants un

der the 2009 stimulus bill, and access to trans

mission through the Competitive Renewable

Energy Zone (CREZ) program.

As the renewable industry is pushing hard o

Congress to extend the PC, it is worth exam

ining the cost o renewable subsidies in exas

which in 2011 produced a nation leading tota

o 28,295,000 MWh rom wind.1

Since 2006, renewable subsidies in exas have

totaled more than $7.1 billion (see table nex

page). In 2012 alone, the PC is estimated to

cost taxpayers $567 million while RECs are es

timated to increase consumers electricity billby $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 ar

also 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 theederal 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 pag

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The Cost of the Production Tax Credit and Renewable Energy Subsidies in Texas November 2012

2 Texas Public Policy Foundation

eral grants went to wind arms, the production o wind tur-

bine components, or to help exas deal with the increased

amount o wind power on the electrical grid.2

Despite the mature nature o the wind industry, the cost o

renewable subsidies in exas has increased. I the PC is

continued, the 10 year cost o renewable subsidies in exas

should total about $12.9 billion, an average cost o $1.29 bil-

lion a year over the period.

The PTC and Resource Adequacy in TexasTe cost o these direct subsidies, however, is only a portion

o the total eect o renewable energy subsidies in exas.

Additionally, one must consider the costs imposed on the

exas electricity market.

It is well known that exas is undergoing a major debate over

whether price signals are adequate to maintain resource ad-

equacy; less well known is that a signicant portion o the

problem with price signals can be laid directly on the door-

step o subsidies or wind generation.

Te PC allows wind generators to bid electricity into the

market at negative prices. In other words, generators can

use proceeds rom the PC to pay people to take electricity

rom them and still make a prot. When wind-generated

electricity is bid into the market at a negative price, all other

sources o generation must match that price or risk getting

knocked o the grid. Tis decreases the protability o non-

wind generation and gives companies ewer resources and

incentives to invest in new capacity. Over time, this will

serve to degrade the reliability o the exas grid, increasing

the risk o blackouts.

Donna Nelson, chairman o the Public Utility Commission

o exas (PUC) urther explains this:

Federal incentives or renewable energy have distorted

the competitive wholesale market in ERCO. Wind has

been supported by a ederal production tax credit that

provides $22 per MWh o energy generated by a wind

resource. With this substantial incentive, wind resources

can actually bid negative prices into the market and still

make a prot. Weve seen a number o days with a nega-

tive clearing price in the west zone o ERCO where most

o 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.3

Year Renewable Energy Credits Production Tax Credit CREZ Costs Stimulus

Retired Cost Wind MWh Cost To Date/Future Costs

2006 4,200,975 $18,904,388 6,341,451 $126,829,020

2007 5,025,934 $22,616,703 8,732,934 $174,658,6882008 13,618,248 $61,282,116 15,237,876 $304,757,529

2009 15,908,404 $47,725,212 18,522,660 $377,862,256 $482,286,859

2010 20,984,518 $57,707,425 26,225,695 $545,704,266 $381,372,435

2011 24,372,369 $67,024,015 27,146,390 $597,220,589 $766,210,170

2012 25,227,839 $69,376,558 25,802,010 $567,644,211 $2,462,064,014 $21,585,305

2013 26,113,336 $71,811,675 24,385,082 $536,471,800 $4,094,058,032

2014 27,029,914 $74,332,265 22,233,904 $489,145,892

2015 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 2013

represent all uture costs scheduled to be incurred ater 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 or

the PTC.

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November 2012 The Cost of the Production Tax Credit and Renewable Energy Subsidies in Texas

www.texaspolicy.com 3

Te Northbridge Group recently published a study con-

rming the distortions in the market caused by the PC.

Te Northbridge study reports that the ve-old increase in

wind 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 rom

2008 to 2011.4

Negative prices cause both short and long term harmul e-

ects. According to Northbridge, negative prices:

Disrupt the operation o physical electricity systems

and markets by sending distorted hourly price signals to

other market participants whose resources are needed to

meet demand reliably and cost eectively.

Distort competitive markets, disrupt normal operation

o 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 levels

extremely expensive as operators must pay not only or

their uel costs, but also just to generate.

Distort the price signals developers and investors rely on

to determine what, when, and where to build generation

and 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.5

Te disruption o the exas electricity market by negative

wind prices is only going to get worse as more transmission

lines are built and requency o negative pricing throughout

the state comes to resemble the West Zone. As the Brattle

Group noted in a recent report:

Wind generation puts downward pressure on energy

prices in all parts o ERCO whenever the wind blows.

However, the eect is greatest in the West Zone, where

more than 70 percent o ERCOs wind capacity is lo-

cated Te CREZ project is primarily designed to

move electricity generated by wind and other renewable

resources rom remote parts o exas (i.e., West exas

and the exas Panhandle) to the more heavily-populated

areas o exas (e.g., Austin, Dallas-Fort Worth, and San

Antonio). Tis transmission expansion will also increase

exas ability to build more wind generation, but may in

the uture erode non-wind generator economics more by

depressing energy prices in the other three zones.6

It is difcult to quantiy the cost o the PCs distortions on

the market. But one method o doing so would be to look at

the 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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PUC Commissioner Ken Anderson recently did some

back o the envelope calculations o the cost o imposing

a PJM-style capacity market on ERCO. He came up with

a cost o over $3.6 billion per year.7 Te portion o this cost

that can be attributed to renewable energy subsidies is de-

batable, but these costs could easily exceed the costs o the

direct subsidies, more than doubling consumer costs.

ConclusionAt a bare minimum, renewable energy subsidies in exas

run on average about $1.3 billion a year, with the PC tak-

ing up almost hal o that cost. Because o the PCs per

megawatt hour subsidy, it causes substantially more distor-

tion to the market than other renewable subsidies. A cred-

ible case could be made that the PC is more responsible

than any other single actor in causing ERCOs resource

adequacy challenges.

Competition is working in exas. It is government interer-

ence with the marketled by the PCthat is causing the

current concerns over reliability. exas need not abandon

wholesale competition and move toward a capacity market.

But there will likely be eorts to do so as long as the PC is

in place. Congress should allow the PC to expire; i not,

consumers, taxpayers, and exas world-class energy-only

electricity market will pay the price.

1 Electric Reliability Council o Texas, Energy by Fuel Type for 2011 (9 Jan. 2012).2 Texas Recovery Act Snapshot, 1603 Program: Payments or Specifed Energy Property in Lieu o Tax Credits, U.S. Department oEnergy.3 Donna Nelson, testimony beore theTexas Senate Natural Resources Committee (6 Sept. 2012).4 Frank Huntowski, Aaron Patterson, and Michael Schnitzer, Negative Electricity Prices and the Production Tax Credit, The NorthbridgeGroup (Sept. 2012) 10.5 Huntowski, et al, Negative Electricity Prices, 15-17.6 Samuel Newell, Kathleen Spees, Johannes Peienberger, Robert Mudge, Michael DeLucia, and Robert Carlton, ERCOT InvestmentIncentives and Resource Adequacy,The Brattle Group (1 June 2012) 20-21.

7 Energy Choice Matters, Anderson: Back o The Envelope Calculation Shows $3.6 Billion in Costs When Applying PJM-Style Capac-ity Market to ERCOT (30 July 2012).

Texas Public Policy Foundation

http://www.treasury.gov/initiatives/recovery/Pages/1603.aspxhttp://www.senate.state.tx.us/avarchive/http://www.ercot.com/content/news/presentations/2012/Brattle%2520ERCOT%2520Resource%2520Adequacy%2520Review%2520-%25202012-06-01.pdfhttp://www.ercot.com/content/news/presentations/2012/Brattle%2520ERCOT%2520Resource%2520Adequacy%2520Review%2520-%25202012-06-01.pdfhttp://www.energychoicematters.com/stories/20120730a.htmlhttp://www.energychoicematters.com/stories/20120730a.htmlhttp://www.energychoicematters.com/stories/20120730a.htmlhttp://www.energychoicematters.com/stories/20120730a.htmlhttp://www.ercot.com/content/news/presentations/2012/Brattle%2520ERCOT%2520Resource%2520Adequacy%2520Review%2520-%25202012-06-01.pdfhttp://www.ercot.com/content/news/presentations/2012/Brattle%2520ERCOT%2520Resource%2520Adequacy%2520Review%2520-%25202012-06-01.pdfhttp://www.senate.state.tx.us/avarchive/http://www.treasury.gov/initiatives/recovery/Pages/1603.aspx