A new way to visualize the wind energy tax credit

Guest blog by Jason Dedrick, Associate Professor, Syracuse University

The question of whether the federal government should support wind energy has been debated since the Production Tax Credit (PTC) was created in 1992. The credit has been allowed to expire five times, most recently at the end of 2013. This year, President Obama’s proposed budget calls for permanently extending the PTC, while some in Congress have called for its elimination.

Greg Linden of UC Berkeley, Kenneth L. Kraemer of UC Irvine and I have developed a new approach to compare the major private and social costs for wind energy with its closest rival, natural gas-fired electricity. We developed a metric that we call the Adjusted Levelized Cost of Electricity (ALCOE). Further details can be found in a brief working paper available at http://ischool.syr.edu/media/documents/2014/3/PTC32514.pdf

Source: Dedrick, Kraemer, & Linden (2014), based on research supported by the Alfred P. Sloan Foundation.

Our starting point is the DOE estimate of the lifetime “levelized” cost of electricity from a new wind farm and from an advanced combined cycle gas plant. The national average estimates are 8.7 cents per kilowatt-hour (kWh) for wind and 6.6 cents for gas.

To the price of gas, we add the future costs of carbon dioxide emissions, which we estimated using the most recent Interagency Working Group average of $43 per metric ton. This translates to a cost of 1.6 cents per kWh of electricity.  

To the price of wind, we add the cost utilities must pay to accommodate the variability of wind power, (for instance, by storing energy or by having another plant ready to take up the slack). This cost is estimated at 0.5 cents per kWh.

Finally, we add the cost of stabilizing the price of natural gas for 20 years into the future using existing futures prices. We estimate the cost of price volatility for gas at 0.65 cents per kWh.

Adding these costs together, we find that the ALCOE for wind is 9.2 cents per kWh, versus 8.85 cents per kWh for gas.  Given the ranges of the estimates for each of the costs involved, we can say that the full cost of electricity from wind power and natural gas are effectively equal. Yet, because the cost of carbon emissions is not included in the market price of gas, wind is not competitive in much of the U.S. without government support.  One response would be to create a pricing mechanism for carbon emissions, either through a carbon tax or cap-and-trade scheme. However, neither of those options is considered likely in the current U.S. political environment.

This brings us back to the PTC. The credit, currently worth 2.3 cents per kWh for ten years, works out to about 1.6 cents per kWh when levelized over the 20-year life of a typical wind contract. This happens to be very close to the average estimated cost of carbon from a natural gas plant. Thus, a long-term extension of the PTC would have a similar effect to a carbon tax in terms of the relative price of electricity from wind and gas.

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