Using the Federal Production Tax Credit to Build a Durable Market for Wind Power in the United States

The United States is endowed with a sizable renewable resource base, and yet only 2.7% of the nation's electricity supply came from non-hydro renewable energy sources in 2006. Other countries have already made significant strides towards using renewable energy. Denmark meets roughly 20% of its electricity needs with wind alone, for example, while Spain is at 9% and Germany and Portugal are at 7%. Despite having a much-more-robust wind resource than any of these countries, the U.S. currently meets less than 1% of its electricity needs with wind power.

Nonetheless, new investments in renewable generating capacity in the United States have been accelerating in recent years. Wind power has been at the forefront of this growth. The year 2006 was the largest on record in the U.S. for wind power capacity additions, with over 2,400 MW of wind added to the grid. And, for the second consecutive year, this made wind power the second largest new resource added to the U.S. electrical grid in capacity terms, well behind new natural gas plants, but ahead of coal. Among the most significant drivers of this recent growth has been the federal production tax credit (PTC) [Section 45 of the Internal Revenue Code], which offers a sizable incentive for investors in wind and other renewable power plants. Impetus has also been provided by a growing number of state renewable energy policies, the rising cost of fossil fuels, improved renewable energy technologies, and the prospect of future carbon regulations. Despite the significance of the PTC for renewable energy, and the fact that Congress is currently considering a longer-term extension of the incentive, relatively little effort has been made to evaluate the impacts and effectiveness of the PTC, or to assess the benefits of a longer-term extension of the policy.1 The purpose of this article is to make some modest strides in this direction by reviewing developments with the PTC over time, assessing its impact on the wind power market, highlighting the potentially positive implications of a longer-term extension of the PTC, and discussing some possible changes to the design of the PTC that might help overcome some of the limitations of the incentive as it is presently structured.