Is the Answer Blowing in the Wind? Or in Government Energy Subsidies?

Is the Answer Blowing in the Wind? Or in Government Energy Subsidies?

Over the last decade, wind energy capacity in the United States has been increasing at a rapid rate. This surge is partly influenced by the attractive “green” aspects of wind energy, namely that it is carbon-free and nearly limitless. Something else, however, is also driving the surge in capacity – tax breaks to wind energy producers. These subsidies make it difficult to know if, or when, this industry will be able to stand on its own.

Wind energy producers currently receive a 1.9 cents per kilowatt hour (kWh) tax credit for the first 10 years of a turbine’s operation against the corporate taxes owed by electric utilities. In most locations, this tax break, along with voluntary premiums for green energy and increasingly, renewable energy portfolio mandates in a number of states, is what keeps the wind industry cost-competitive. But the subsidy is set to expire at the end of this year, and extending it involves no minor expense. Last year alone, the wind industry added 5,244 megawatts of capacity – more than twice the total wind capacity of 0the United States in 1999. Extending the subsidy another year, through 2009, would cost $3 billion.

Proponents of wind argue that every energy technology is supported by the federal government and that wind should be no exception. In the current system, the wind industry receives higher per-unit energy subsidization than more traditional energy sources, but because of the industry’s still relatively small size, the overall dollar amount is lower. A recent study by the Energy Information Administration looked at federal support per unit of energy production. According to this analysis, “refined coal, solar power, and wind power received the biggest subsidies, between $23 and $30 per megawatt hour. Subsidies for more established forms of energy like traditional coal, natural gas and petroleum liquids ranged from $0.25 to $0.44 per megawatt hour.”

This reveals the bigger problem – the energy industry as a whole has been both heavily subsidized and heavily taxed, in a variety of complex arrangements. Even when subsidies are intended to get a potentially promising technology off its feet in order to be competitive, the subsidy quickly becomes a way of life for the industry. History has shown that eventual phasing out of the subsidies, while desirable, is difficult to accomplish.

Thus, because of their inevitable longevity, these subsidies build a historical legacy into today’s economic analyses, meaning that the current costs reflect the often short-term social benefits of the past. This obscures the signals that would otherwise compel energy technologies to compete in the marketplace on their own merits.

Supporters of wind power should note that the subsidies often cost more than they are worth. According to a report by the United Nations Environment Programme and the International Energy Agency, “the overall social and environmental benefits of [energy] subsidies are unlikely to be higher [than their total costs] and could, in any case, be achieved at lower cost in ways that do not involve subsidizing energy.”

The report goes on to point out that subsidies “act as a drain on government finances and reduce the incentive to use energy efficiently.” At this time of concern over energy sources and consumption, sound policies are needed to promote energy efficiency in general and efficient technologies in particular. Subsidies, in many cases, do the exact opposite, and while the subsidy issue plays out, wind power faces other obstacles.

Wealthy residents of Cape Cod oppose a wind farm on Nantucket Sound on aesthetic grounds, a struggle chronicled in Cape Wind: Money, Celebrity, Class Politics, and the Battle for Our Energy Future on Nantucket Sound, by Wendy Williams and Robert Whitcomb. Like the subsidy issue, these struggles show that the path to clean renewable energy will involve hard decisions and tradeoffs, just like conventional sources.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.