Wind Power - Public Policy

Public Policy

Public policy has played a vital role in encouraging wind power production. Many public policy initiatives, such as a Renewable Portfolio Standard, have proven effective in spurring wind power growth. Financial incentives also play an important role in encouraging wind project development. Traditional generation methods, including coal, natural gas, nuclear, and hydropower, receive substantial government support. As a newer technology, wind must compete with the massive, established infrastructure of these traditional technologies. Offering financial incentives for wind energy can help to level the playing field between wind and existing generation technologies. Financial incentives also serve to account for the benefits of wind power that do not have direct monetary value associated with them, such as the environmental effects of this zero-emission technology

Renewable Portfolio Standard

A Renewable Portfolio Standard (RPS) requires a certain percentage of electric power to be generated by clean, renewable energy sources. Since 1997, 16 states have established RPS policies, the most aggressive being California, requiring 20% renewable energy by 2010. RPS policies differ greatly by state, ranging from requiring 4% to 30% renewable energy over varied time periods.

Though many states have taken their own initiatives to implement RPS policies, no such strategy is in place at the federal level. Though RPS legislation has been passed in Congress a number of times, it has never made it through conference.

The Role of Financial Incentives

Under idealized conditions, a free market produces efficient results. Because real world conditions are not ideal, public policy can play an important role in correcting for these imperfections. For example, markets produce efficient outcome when they are free from externalities . Harmful air emissions are an example of an externality in traditional electricity generation.  The cost paid in health care and environmental problems caused by CO₂ and particulate emissions from burning coal are externalized from the actual cost paid by individuals on their utility bills. When environmental costs are not factored into electricity prices, the impact of renewable energies is less than it would be in a perfect market. A consumer who purchases electricity generated from coal will be equally affected by the air emissions as his neighbor who buys a cleaner form of energy. Likewise, the consumer who buys clean energy and his neighbor who does not will reap the same benefits of reduced harmful air emissions. Public policy should play a role in accounting for these market imperfections.

Production Tax Credit

In the United States, the Energy Policy Act of 1992 established a production tax credit (PTC) for wind power facilities. A PTC provides the turbine owner or investor with an annual tax credit proportional to the amount of electricity generated by the wind system.

Currently, this credit provides 1.9 cents-per-kilowatt-hour generated and is available for the first 10 years of a generator’s operation. It has been approved through 2007. For on-grid and metered systems, PTCs are relatively easy to administer and enforce, and PTCs are generally well understood.

Though PTCs provide a valuable financial incentive for wind energy production, there are also concerns associated with it. The federal PTC is reduced by any grants, tax-exempt bonds, subsidized financing or other credits received. Due to this credit reduction, alternative minimum tax requirements, and because many investors do not have a tax load substantial enough to carry the full tax credit, many wind system owners are unable to fully take advantage of the federal PTC.  Also, PTCs cannot be used to service project debt; therefore, they do not help projects sustain debt. Also, PTCs are not effective for encouraging wind energy development on a small scale (less that 20 kWh) because PTCs require a metered sale, which is uncommon among small systems.

Another major concern associated with the PTC is that in the past they have been allowed to expire. The expiration of the PTC 1999, 2001, and 2003 caused steep drops in new installation, as shown in below.

Net Metering

Net metering allows customers to use their own generation to offset their electricity demand. Over a billing period, the producer is paid for the difference between total generated and consumed electricity. Therefore, it is only excess generation that is sold back to the utility at the fixed or negotiated buy back rate.  Net metering is a widely used and highly effective incentive for promoting wind energy. This method simplifies metering and interconnection requirements for the turbine owner, as well as reduces administrative burden on the utility company.

Though net metering is very effective for small scale systems, it does not offer as much of an incentive for larger projects. Net metering does not directly reduce financing costs, though it does provide stable revenue, which may make financing easier to obtain. We Energies, Wisconsin’s largest utility, offers its customers a group net-metering option for wind energy systems. Under this experimental tariff, up to 25 customers of We Energies are allowed to net meter wind energy systems greater than 20 kW and no greater than 100 kW for a term of 10 years. More data is necessary to determine how effective this strategy is in encouraging wind generation.

Funding for Financial Incentives

Some of the financial incentives to encourage wind system development require the creation of a cash fund. There are three main methods which can be used to raise funds for renewable energy projects. Earmared taxes, electric service wires charge, and voluntary consumer payment programs each offer a unique way to support financial incentives for wind energy.

Earmarked Taxes

Personal and corporate income taxes, sales taxes, gas taxes, and user fees can be earmarked for specific renewable energy development or investment. 

Electric Service Wires Charge

An electric service wire charge is a popular way to fund renewable energy projects. Basically, it is a tax on electricity which can be charged to the electricity supplier or customer. It is most often assessed based on usage, a per kilowatt-hour charge; though, it can be applied as on a fixed-fee basis. The money collected from this service charge can be used to finance incentives to encourage project development.

Voluntary Consumer Payments

Customer-choice programs have been an extremely effective method for supporting wind energy. They have shown that some consumers are willing to pay more to ensure use or development of renewable energy. For example, participants in We Energies’ Energy for Tomorrow (EFT) program pay a 1.37 cents/kWh premium above the cost of their standard electricity bill.  We Energies use this premium to purchase or produce electricity from a renewable source, primarily biomass and wind. Customers have seen this premium fall from 2.04 cents/kWh in response to rising fossil fuel prices. This incentive protects customers from rate adjustments due to fossil-fuel. Xcel Energy, which serves customers in the West and Midwest, signed up 15 times more Windsource customers and added more that 1,100 to a waiting list after receiving publicity that the price of its wind power would dip below that of conventional electricity.  Xcel customers receive a 0.67 cent/kWh credit with their purchase of wind power.  Programs vary, with participants of the LES Renewable Energy Program of Lincoln Electric System paying premiums reaching 4.3 cents/kWh to green power participants actually receiving a credit from companies such as Xcel.