Like the wind itself, wind-power rankings are frequently in flux. One state will put in a new wind farm and sprint a few spots ahead in megawatts installed. At the end of 2008, Minnesota was fourth in installed wind capacity, trailing only Texas, Iowa, and California. As a percentage of power coming from wind, Minnesota ranked number 1, at 7.48 percent.
The North Star State’s road to that spot, however, began fourteen years earlier, in 1994. As part of an agreement with Minnesota-based utility Xcel Energy, which wanted some above ground storage for spent nuclear fuel, the state asked that Xcel start developing wind power.
Illustration by Lunchbreath
Minnesota wanted small, locally owned wind power, too, according to state energy program manager Jeremy de Fiebre. In 1999, the state started a program to help provide capital for wind operations that would be too small to take advantage of the federal tax incentives for wind power. As a result, Minnnesota brought 200 MW of small wind projects online. As the state’s wind development outgrew that program, Minnesota began a new effort called Community-Based Energy Development (C-BED). In addition to maintaining the requirement on local ownership, C-BED also allowed utilities to enter into long-term, fixed-price agreements with renewable power providers to help get more projects off the ground.
As is the case with a lot of renewable energy across the United States, much of Minnesota’s effort wouldn’t be possible without subsidies and incentives, especially those at the state, local, and utility level that complement federal tax credits. Besides its small wind subsidies and renewable portfolio standard (RPS)—25 percent by 2025—Minnesota exempts wind energy equipment from sales tax, and prevents wind or photovoltaic installations from adding to a homeowner’s property tax.
All the federal, state, and local subsidies for renewable energy rankle some free-market activists. But the fossil fuels they seek to supplant—and that utilities continue to burn for the vast majority of our electricity—had plenty of help getting off the ground, and continue to enjoy government support today.
FOSSIL FUELS
Standing in front of the United Nations General Assembly on September 22, 2009, President Obama pledged to work with the leaders of the other G-20 nations to phase out fossil fuel subsidies. It won’t be easy: the federal government has been supporting fossil fuel power since the early days of an electrified America. How much federal money goes to propping up our national thirst for fossil fuels depends on what you count.
In a report released in September 2009, the Environmental Law Institute found that, between the years 2002 and 2008, the federal government subsidized fossil fuel development to the tune of $72 billion, compared with only $29 billion for renewable energy sources. According to the Institute, fossil fuel companies saved much of that $72 billion on tax breaks. The report counts everything from production credits and direct spending on research and development to areas that are a bit less clear. For example, the Institute cites the foreign tax credit (FTC) for $15.3 billion. The FTC was lobbied for by oil companies and other multinationals to help them avoid double taxation when working abroad. Although their U.S. tax burden is lower, they are still paying taxes overseas. “The FTC is not intended to be a subsidy to the oil industry or any other industry. It is generally available to all U.S. taxpayers with foreign operations or income. Moreover, the FTC is not intended to result in a company bearing a lower overall tax burden (taking into account both U.S. and foreign taxes) than it would if it operated solely within the United States,” said says Elizabeth Bellis, a tax associate at Debevoise & Plimpton.
The numbers from the Energy Information Administration (EIA) are more conservative but still substantial. Between 1967 and 2007, the government spent $108 billion on excess over cost depletion, and another $54 billion subsidizing exploration and development. In 2007, the EIA registered $5.5 billion in subsidy for fossil fuels compared with $4.8 billion for renewables. These numbers don’t include government support for publicly owned power projects that burn coal, or support for organizations like the Coast Guard that allow energy companies to freely ship fossil fuels, or for other expenditures that some reports lump into their estimates.
RENEWABLES
Federal support for renewable energy finally got serious in the late 1970s amidst panics over the spikes in energy prices caused by the oil crisis. Most of the federal dollars went to ethanol and other biofuels used for transportation, not electricity generation.
The production tax credit, which was created as part of the 1992 Energy Policy Act, has been the lifeblood of emerging wind power in the United States. The tax credit was initially 1.5 cents per kilowatt for the first ten years of operation, and has since been adjusted upward to 2 cents. Solar and geothermal, on the other hand, relied on the investment tax credit, which rewarded up-front technology investment rather than the actual electricity produced.
“The federal initiatives are still the most significant,” says Alex Klein of Emerging Energy Research, despite the growing subsidies and incentives at the state and local level. Ever since their inception, those federal tax credits have been fraught with uncertainty. While fossil fuels tax breaks remain a permanent part of the tax code, the credits for renewable energy require frequent reauthorization by Congress to stay in effect. As a result, the production tax credit lapsed three times in the last decade before reapproval, and each time wind development slowed dramatically. Last year’s economic stimulus plan extended solar’s investment tax credit until 2016 and wind’s production tax credit until 2012, and this year’s American Recovery and Reinvestment Act provided billions in block grants for renewable projects. “Right now, a big chunk of our world is related to ARRA,” de Fiebre says.
Some additional assistance could be forthcoming. In October, the Department of Energy announced the new Financial Institution Partnership Program, through which it would loan out up to $750 million in stimulus money to large-scale renewable projects. This money will fill part of the void left when the federal government diverted $2 billion from renewable energy loans to fund the Cash For Clunkers program.
FOLLOWING INCENTIVES
Duke Energy, the third-largest emitter of CO2 in the country, has been one of the most vocal utilities in favor of moving toward renewable energy sources, and it has wind farms popping up in Pennsylvania, Wyoming, and elsewhere. Duke, however, isn’t the electric utility in those states; it sells the wind energy to local power companies. Spokesperson Greg Efthimiou says that none of the 733 MW of wind power that Duke will have online by the end of the year will go to customers in its own power districts located in Indiana, North Carolina, South Carolina, Ohio, and Kentucky.
It’s a matter of economics, Efthimiou says—if investing to build wind power in those states isn’t viable, Duke builds someplace else. Part of it comes down to incentives and policy. This year, North Carolina voted to ban large wind turbines from mountaintops, essentially halting any wind development in the western part of the state. The National Resources Defense Council released a report in October concluding that Indiana, with its wind resources and location closer to major metropolitan areas than Nebraska or Iowa, was ideally situated to become a wind power broker. Yet the Hoosier State still gets 95 percent of its power from coal, and only 1.5 percent from renewables.
However, renewables are finally coming to Duke Energy’s power districts. North Carolina and Ohio both enacted a state RPS. Duke announced in October that it would fund a pilot offshore wind project in North Carolina to get wind operations started there, and it has put out a call for proposals for renewable projects to meet Ohio’s RPS. Duke also has a GoGreen program in which it sells power at a premium to customers who choose to sponsor renewable energy.
The fact that each state sets its own rules and subsidies leads to conflicts between states and private utilities, but it can also lead to cooperation between states. When Minnesota put its aggressive RPS in place, Rathbun says, it helped to spur wind development in neighboring states because the Midwest Independent Transmission System Operator links them together. Scott Thomsen, spokesperson for the public power district Seattle City Light, said the State of Washington’s RPS did this on purpose: it mandated an extension of renewable energy beyond the state’s already existing hydroelectric industry not only to further reduce the state’s fossil fuel use, but also to reduce it in neighboring states by selling them renewable-generated electricity.
But controversies crop up. Most notably, not everyone is keen to buy renewable power if it’s made in another state, since part of the impetus for green energy is to spur local job creation. The interstate commerce controversy struck California this fall: Governor Arnold Schwarzenegger and the state legislature agreed on an ambitious RPS of 33 percent renewables by 2020, but couldn’t agree on how much could come from power generated in neighboring states, or how many out-of-state renewable energy credits a utility could purchase. Unable to compromise with the legislature, Schwarzenegger passed the RPS through executive order and nixed the out-of-state restrictions.
INERTIA
Because wind, solar, geothermal, and other renewable energy technologies are still nascent in the national energy market, per-megawatt spending far outpaces that of more heavily used fossil fuels. According to the EIA’s figures, the federal government alone spent between $23 and $25 per megawatt to support solar and wind in 2007. Fossil fuels clocked in at less than $1. Of course, other dollars are involved besides the government’s energy subsidies. EIA’s totals exclude many externalities that some other studies incorporate, such as purchases by the Strategic Petroleum Reserve, military spending that makes overseas development possible, and the Rural Utility Service program.
Practical inertia is also a problem. Brian Parsons, wind integration specialist at the National Renewable Energy Laboratory, says integrating renewable energy into the power portfolio is still a formidable challenge for America’s grid operators. “These guys operate the most complicated machine in the world,” he says. But because of the complexity and the constant demands of keeping power on the grid, they don’t like to stray from routine. “Something new causes anxiety,” he says.
U.S. grid operators inherited a system founded on coal and gas plants designed for base load, which restricts how much renewable power the grid can integrate, according to Tom Imbler, vice president of commercial operations at Xcel. If wind levels fluctuate quickly either up or down, he says, coal plants must be able to ramp up or down in a hurry to compensate for the loss, or in the case of too much wind, keep from overloading the grid. Most of our coal plants, though, are made from a mix of metals that expand and contract at different rates, so rapid cooling or heating damages them, says Imbler.
Better wind forecasting will allow grid operators to be more comfortable in knowing how much backup they need for renewable power, Imbler says. And more comfortable grid operators will be more likely to integrate more renewable sources. In the meantime, however, he says he has no idea how much renewable energy Xcel could reasonably integrate into its portfolio. They plan to keep growing until they hit a wall.
COMPETITIVE?
The bottom line, according to de Fiebre, is that states don’t have bottomless pockets. They can put in place policies, rebates, tax credits, and other benefits to drive renewable development, but eventually, he says, “there needs to be a cost competitiveness without subsidy.”
In many places, a new wind farm is competitive with new plants of other kinds, like natural gas or coal. Even without the 2-cent production tax credit, it’s close. But with their up-front capital costs, wind and solar can’t compete sans subsidies with entrenched coal plants that have long since paid off their capital costs and are grandfathered into EPA rules on emissions.
Subsidy isn’t usually the deciding factor for whether to go ahead with a development or not, Speerschneider says. The price of electricity in a particular market, combined with the amount of wind or sun a location receives, matters the most. Then there’s capital cost: wind turbine prices are coming down, and solar is getting cheaper, precipitously so with the downturn in the market.
But it’s hard to see renewables keeping up their growth without the government support. In the three years this decade that Congress allowed the production tax credit for wind to lapse, development slowed drastically. Researchers at the Lawrence Berkeley National Laboratory concluded in 2007 that extending the production tax credit would dramatically ramp up wind installation in the United States, while growth would be stagnant or uncertain without government assistance. Power prices at already-operating wind farms rose when the production tax credit lapsed, too, thanks to market uncertainties.
To reach greater market penetration for renewables, the United States will have to confront and probably subsidize solutions to the variability and transmission problems that already plague states and utilities integrating a lot of renewable energy. Specifically, Imbler says, someone will have to pay for transmission improvement to take solar or wind power from the rural locations where it’s gathered to major metropolitan areas, and de Fiebre says states don’t have the budget for projects on that scale.
Renewable projects and power probably will come down in cost, according to de Fiebre, as better or more efficient technology comes out, or especially if the federal government enacts stringent climate laws rather than leaving them to the states. A national RPS and a price on carbon under a cap-and-trade scheme would both help, he says.
But energy policy expert Richard Morse of Stanford University says even that might not be enough to overcome entrenched fossil fuels. Morse, who just published an article on the unavoidability of coal, says that even if you doubled the EPA’s estimate for a carbon price under Waxman-Markey (about $13 to $15 per ton), coal would still be attractive thanks to its abundance and reliability, and you could still make a lot of money burning it.
Although Duke Energy CEO Jim Rogers advocates a carbon cap, he simultaneously says that, in the near future, Duke and other utilities have no choice but to keep burning coal. Renewable energy relies on the government to see it as a worthwhile alternative and support it through subsidy and legislation. And its doubters could be correct—it could be a long time before the industry can stand without government support. However, it certainly wouldn’t be alone: total self-reliance is something that the fossil fuel industries never achieved in a century of operation.