Forces Behind Wind Power

The Changing World for Wind Power

In addition to technological improvements in wind turbines, governmental and private efforts to increase the Nation's consumption of renewable-based electricity have grown. Because wind energy is generally the most economically competitive, widely available renewable electricity source other than hydropower, some of these efforts have had their greatest impact on wind power.

Federal Incentives

A wide variety of Government actions can be used to influence energy markets and achieve Government objectives. These actions, broadly called incentives, include taxes, payments, trust funds, insurance, low-cost loans, research and development, and varieties of regulation. For a more detailed discussion of issues surrounding incentives for renewable energy, see the article, "Incentives, Mandates, and Government Programs for Promoting Renewable Energy," contained in this report.

The most significant Federal incentive for wind power is the production tax credit established by the Energy Policy Act of 1992 (EPACT). This credit expired in June 1999, but now has been reinstated and applies to profit wind and closed loop biomass projects in operation by December 31, 2001.⁽⁴³⁾ This type of incentive (when compared to an investment tax credit) rewards energy production and thus supports project performance/success. Eligible projects receive a tax credit of 1.5 cents per kilowatthour of electricity produced, adjusted for inflation, for the first 10 years of the project's life. Even when levelized over the full life of a project, this benefit is significant. Immediately prior to the expiration of the production tax credit, a rush of projects came on line in spring 1999. Since then, development has continued, but at a slower pace. This tax credit was valued at more than $20 million for 1998, virtually all of which was for wind.⁽⁴⁴⁾

EPACT also created the Renewable Energy Production Incentive (REPI). This incentive is paid to wind generation facilities owned by State and local government entities and not-for-profit electric cooperatives that are tax exempt. Qualifying facilities are eligible for annual incentive payments of 1.5 cents per kilowatthour (1993 dollars and indexed for inflation) for the first 10 years of operation subject to the availability of annual appropriations in each Federal fiscal year of operation. REPI payments for fiscal year 1998 production were $4 million, of which wind accounted for about $32,000. The majority of the funds were used for biomass digester gas, wood waste, and landfill methane.

Another Federal incentive is research and development expenditures and efforts. Applied research and development (R&D) activity is considered a support program because, when successful, it reduces the capital and/or operating costs of new products or processes. The mission of the Wind Energy Systems Program is to establish wind energy as a regionally diversified, cost-effective power generation technology, through a coordinated research effort with industry and utilities that will minimize technical and institutional risks for U.S. companies competing in domestic and international markets. In addition to improving existing turbines, DOE and industry are improving particular turbine components. The National Renewable Energy Laboratories (NREL) and Sandia National Laboratories have worked since 1994 with industry on cost-shared projects to develop the cutting-edge wind turbine components needed to create larger, more cost-effective turbines. Already since 1980, the cost of wind generation has declined from 35-40 cents per kilowatthour to a projected 6 cents in 2000.⁽⁴⁵⁾ The DOE Wind Energy Program was funded at around $33 million in fiscal year 2000.⁽⁴⁶⁾

Federal Electric Power Industry Restructuring

Competition in the electric power industry holds promise for more efficient operations at generating facilities and a reduction in costs, which should lead to lower electricity prices. However, concern has arisen that higher cost, but environmentally friendly, energy sources (i.e., renewables) will lose out to less environmentally friendly fuels used for producing electricity having a low short-run marginal cost. To protect the environment, Federal and many State restructuring plans include incentives to promote the use of renewable energy. Hence, competition and the restructuring of the electric power industry, when accompanied by environmental provisions, could be a push for new renewable energy development.

The administration and members of Congress have proposed a number of plans to restructure the electric power industry. Efforts have been expended to get a consensus legislative package out of Congress, but no agreement is forthcoming, because so many differences still remain.⁽⁴⁷⁾ The administration's latest electric industry competition plan, as of April 15, 1999, would provide for phasing in retail competition by 2003 and support for renewable energy through regulatory mechanisms, including a renewable portfolio standard (RPS), public benefit fund (PBF), and net metering.⁽⁴⁸⁾

State Incentives

With Federal legislation promoting electric wholesale competition in place, 25, or just half the States, have comprehensive restructuring policies in effect (Table 5). Many of the States with plans to implement retail competition also have regulatory mechanisms to support renewable energy. As with the Administration's proposed electric competition plan, the most important regulatory mechanisms for support of renewable energy are the RPS, PBF, and net metering. Currently, 10 States (Arizona, Connecticut, Maine, Massachusetts, Nevada, New Jersey, New Mexico, Pennsylvania, Texas, and Wisconsin) have an RPS in place.⁽⁴⁹⁾ Thirteen States (California, Connecticut, Delaware, Illinois, Massachusetts, Montana, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, and Wisconsin) use a system benefits charge (SBC) to support a PBF. The provisions within a State's RPS or SBC to support renewable energy may differ substantially among the States. Net metering is used by a number of States to support relatively small facilities, so it is generally more applicable for solar energy than for wind. All of these activities are documented in detail for each State in Appendix A.

Other State financial incentives support wind energy:

• Net Metering. Provisions vary by State and utility, but usually apply only to very small generators that typically use solar or wind energy. This system usually permits a customer operating a small generator to purchase extra electricity when needed. Also, any excess power at the end of the month can be sold back to the utility. Pricing schemes vary by individual utility circumstances.
  
  
• Accelerated Depreciation. For example, in Minnesota this incentive is modeled after the Federal income tax Modified Accelerated Cost Recovery Schedule (MACRS) schedule for depreciation of equipment, thus improving the owner/operator's tax position.⁽⁵⁰⁾
  
  
• Sales Tax Exemption. This type of incentive may exempt from sales tax all of the cost of wind energy equipment and all materials used to construct wind energy systems. Alternatively, the sales of wind power itself may be exempt from sales tax.
  
  
• Property Tax Exemption. This incentive excludes from property taxation all or part of the value added by wind energy systems.
  
  
• Special Grants. These grants may be given for research and development of wind energy resources or technology.
  
  
• Loans. States may offer low interest loans under certain conditions to wind project developers. However, frequently these loans are restricted to small projects, so the benefit is limited.
  
  

Some of these provisions have been in place a number of years, while others have recently been enacted. In the early years, investment tax credits were popular but later found flawed as they rewarded development, not performance.

Other Support

Green pricing/marketing, which lets renewables compete on a basis of consumer demand, also provides support for development of renewable energy, including wind power. Proponents of this type of support argue that as consumer awareness of the benefits of renewable energy is raised, they may choose to consume more renewable energy even if it requires paying a small premium to do so. So far, these programs can be characterized as lively, if small in impact. By the end of 1999, 50 utility green pricing programs were in place across the United States.⁽⁵¹⁾ Premiums for wind power range from a low of 1 cent per kilowatthour to upwards of 5 cents per kilowatthour in a handful of cases.⁽⁵²⁾ According to data compiled by the National Renewable Energy Laboratory, green pricing/marketing activities resulted in the addition of nearly 100 MW of new wind capacity by July 2000.⁽⁵³⁾

Developments

What developments have these incentive and electric power industry restructuring policies spawned? Industry sources estimate that more than 900 MW of new or repowered wind capacity was constructed in 1999 (Table 1). Where and why did this development take place? States with new capacity include Alaska, California, Colorado, Iowa, Kansas, Minnesota, Nebraska, New Mexico, Texas, Wisconsin, and Wyoming (See Appendix A.). Capacity additions in these States vary in significance. Iowa, Minnesota, and Texas had the most capacity added, States, followed by Colorado, Wisconsin and the others, including California, which has a significant repowering program.

Together, Iowa and Minnesota installed two large wind projects in 1999: Storm Lake, Iowa (193 MW), and Lake Benton II, Minnesota (104 MW).⁽⁵⁴⁾ Neither of these States has yet passed restructuring legislation. Thus, several primary factors influenced the projects:

• Availability of good wind resources and land
  
  
• Improved wind technology
  
  
• Federal production tax credits
  
  
• Presence of a State law mandating development of renewable and/or wind capacity
  
  
• Various State incentives examples, of which are tax advantages (accelerated depreciation, property and sales tax exemptions), low interest loans, grants, access laws, net metering, and green pricing. These incentives currently are available in Minnesota and/or Iowa.

Texas has several moderately sized projects that together add up to more than 140 MW of added new capacity. These projects include McCamey, Texas (75 MW), Culberson County, Texas (30 MW), and Big Spring, Texas (35 MW). Projects were constructed using the federal production tax credit and in response to the demand from green pricing programs. Since the time commitments to these projects were made, Texas passed restructuring (with retail competition to begin in 2002) and also a renewable portfolio standard, both of which will affect the future. Other States, such as California, Colorado, Oregon, and Wisconsin, are in the process of developing projects at least in part as a result of green pricing programs.

Conclusions

Although the economics of wind energy have improved over the last decade, wind energy is generally not yet competitive with traditional fossil fuel technologies.⁽⁵⁵⁾ Enactment of State electric restructuring legislation that includes support for renewable energy and the reinstatement of the federal production tax credit will provide an impetus for wind energy. Until wind energy is competitive, the future for wind energy is likely to be in those States providing additional support to renewable energy. This support may take the form of financial incentives, regulatory programs (such as a renewable portfolio standard or system benefits charge), or green pricing, in which wind will be competing for benefits with other renewable energy sources. Electric retail competition, without the State's support of renewable energy, could be a setback to the penetration of wind energy. Commitments such as those evident in Minnesota and Texas should continue to support wind energy. Further advances in technology and performance are expected to lower costs and improve project economics, making wind more competitive with other energy sources, renewable and nonrenewable.

55. For analysis of issues related to integrating renewable energy and wind power into the U.S. energy supply, see Energy Information Administration, Annual Energy Outlook 2000, DOE/EIA-383(2000) (Washington, DC, December 1999).

Table of Contents

Incentives, Mandates, and Government Programs for Promoting Renewable Energy

"Technology, Manufacturing, and Market Trends in the U.S. and International Photovoltaics Industry"

"The Impact of Environmental Regulation on Capital Costs of Municipal Waste Combustion Facilities: 1960-1998"

"Forces Behind Wind Power" Page 1, Page 2, Appendix A

Glossary