Section 45 Credit for Electricity Produced from Certain Sources

Section 1302 of the CEB would extend eligibility for the inflation-adjusted, 1.8-cent-per-kilowatthour PTC for wind and “closed-loop” biomass facilities under Section 45 of Title 26 U.S. Code for plants coming online from January 1, 2004, to December 31, 2006, for an additional 10-year period. It also expands the program to include renewable electricity generated from geothermal, solar, “open-loop” biomass, municipal solid waste, and landfill gas resources.⁴ This provision would allow some of the newly eligible technologies to claim only two-thirds of the value of the PTC for wind and closed-loop biomass (that is, 1.2 cents), and limits each of these program additions to a 5-year payment period. Since the provision specifies no earliest in-service date for plants utilizing open-loop biomass fuel, existing plants that co-fire with biomass fuel can claim the credit.

Table 1 presents the impacts of the renewable PTC, without considering the impacts of the other CEB provisions on the electricity markets served by renewable resources. The renewable PTC extension and expansion supports significant growth in generation from wind and biomass co-firing, which is more than double the generation in the Reference Case in 2010. Some of the additional wind generation is due to the accelerated construction of units that would have occurred later in the Reference Case. By 2025, the level of wind generation with the PTC extension is 50 percent above the Reference Case. Other provisions of the CEB, such as the nuclear PTC, could claim a share of the electric power market that, in the case shown in Table 1, is served by wind power. Also, other provisions in the CEB could reduce the price of natural gas, a key fuel for electric power generation, thus eroding the competitiveness of wind generation.

Table 1 shows that significant increases in biomass co-firing at existing coal facilities occur when existing plants are allowed to claim the PTC for burning “open-loop” biomass. Some coal facilities are able to quickly modify operations, while others may take a couple of years to make the capital investments (about $200 per kilowatt) necessary to take advantage of this provision. At the peak PTC-eligibility year of 2008, 84 billion kilowatthours of biomass generation from co-fired facilities are projected, compared to only 9 billion kilowatthours in the same year for the Reference Case. However, once the 5-year PTC payment period has ended, the effective fuel cost of the biomass returns to pre-PTC levels, and it is no longer economic to utilize the incremental amount of biomass fuel. At this point, co-firing operations are greatly reduced, although they remain somewhat higher than in the Reference Case throughout the projection period as some facilities have already invested in the capital costs to take advantage of the PTC. Because of the near-term nature of the co-firing PTC, the level of biomass consumption for co-firing is similar after 2011.

Other renewables, such as geothermal and landfill gas, are expected to see relatively small increases in generation due to the extension and expansion of the renewable PTC. There are a limited number of economical geothermal facilities, and it takes several years to develop them. The relatively short 3-year extension of the renewable PTC limits the amount of geothermal that can take advantage of the credit. Most large landfill facilities, which produce high levels of methane where generation options might be attractive, have already been developed. The impact on net petroleum imports is negligible because petroleum is not a widely used fuel in electric power generation.

The loss of revenue to the U.S. Treasury resulting from the extension and expansion of the PTC is concentrated in the first 6 years of the program. This reflects the large tax credit claimed for biomass co-firing during this period. There is an additional 5-year period of significant loss of revenue, as the wind industry continues to claim the credit for 10 years beyond the last PTC-eligible installation in 2006. After 2016, the annual cost to the Treasury becomes zero.

Table 2 shows the cost to the Treasury and the incremental impact on renewable capacity and generation compared to the Reference Case. The total cumulative lost tax revenue for the program is $6.7 billion through 2013 and slightly over $7 billion through 2025. The total cumulative lost tax revenue for the program in real discounted dollars is $4 billion (real 2002 dollars, using a 7-percent discount rate), after all tax credits have been claimed.

EIA estimates of the tax revenue impact of the renewable PTC extension and expansion contained in the CEB differ significantly from the scoring of the renewable PTC provision released by the JCT. Through 2013, EIA estimates a tax revenue loss of $6.7 billion, while the JCT estimates $3.0 billion. The primary source of the difference between the two estimates appears to be the inclusion of biomass co-firing in the EIA estimate and the exclusion of biomass co-firing in the JCT estimate.

Tables

Notes and Sources