What's up with the PTC?

The annual renewable energy policy circus is back in town, and it's far from the greatest show on Earth.

The Senate passed the “Energy Improvement and Extension Act of 2008” (HR 6049), providing about $60 billion intended to foster renewable energy investment, some of the costs of which are to be funded by lessened support for the Fossil Industry. The House meanwhile passed the “Comprehensive American Energy Security and Consumer Protection Act” (HR 6899), which is similar in many respects but has some differences in how (completely) it applies the pay-go rules. The President has complained, of course, about the burdens these bills would place on his favored Fossil Industry, but has not (yet) threatened a veto. It is not clear whether Congress can get a bill done, especially with the impending election recess and the need to complete the Splurge to bail out the credit markets. “This may be the last chance to get these renewable energy incentives passed into law,” said Rep. Edward Markey, D-Mass. “If President Bush and Senate Republicans shoot this package down like they’ve shot down every other clean energy tax package, there may not be another opportunity.”

The Production Tax Credit (PTC) is critical to the renewable energy industry. Yet every year we have to go through all the same arguments and deal with all the same objections and are forced to justify it all over again. Once again, Congress dawdles over renewing the PTC, putting at risk projects, the ability of States and utilities to meet their Renewable Portfolio Standards (RPS) and indeed, the long-term energy security of the United States itself. Why does this happen?

The PTC provides an income tax credit of 2 cents per kilowatt hour for the production of electricity from renewable energy sources. This incentive is available for electricity produced by equipment placed in service before the expiration of the credit, currently December 31, 2008. The credit is a significant component of the overall feasibility of renewable energy projects, particularly those producing wind energy. The PTC was first enacted into law by the Energy Policy Act (EPACT) of 1992 and has been extended repeatedly for one or two years at a time. It was allowed to lapse in three different years: 1999, 2001 and 2003, with predictable results--a steep decline in the development of renewable energy generation. The PTC has been in place since 2005, and this stability has helped nurture the industry.

Similar approaches elsewhere have proven to create sustainable renewable energy capacity, spur technological innovation, and create jobs. I wrote earlier about Portugal. The UK has its Renewables Obligation, and they are creating a global industry by creating incentives and letting entrepreneurs do the rest. Our neighbor to the south, the State of Oregon, has a Business Energy Tax Credit (BETC) that is enticing industry to the state and building an ecosystem of innovation that is gradually turning Oregon into a national leader. There are plenty of other examples that show what works and what doesn't; all we need do is be clear about our policy and go find the best practices others have already pioneered.

The PTC isn't perfect and has had its abusers. A feed-in tariff would be a much better policy, but as always good policy takes a backseat to politics, "the art of the possible." Read one critic's case against the PTC here.

Other criticisms I hear about the PTC have much less merit. The worst is the gripe that the industry ought to be able to stand on its own, and the taxpayer should not be subsidizing an industry that, the argument goes, would not be financially viable without these artificial supports. Some of these critics go further, and argue that, to meet our energy and energy security needs we should make a yet-greater push for domestic oil and gas exploration, captured by the inane slogan: "Drill, baby, drill." I think this is a truly stupid and myopic idea, a great sound bite and a lousy solution that neither lowers the price of gas nor provides energy security for the country even as it contributes to our growing environmental problems.

Government has a critical role to play in energy, but it shouldn't be to try to pick winners. My conservative friends never tire of arguing how the market always does a much better job of identifying the best solution to any need or problem than any government can do, no matter how carefully the lawmakers study or how lofty their intentions. (I've largely come to agree with the viewpoint; however, recent events in the financial arena ought to make everyone question any reflexive belief in the "magic" of the market.) OK, if government should stay out of the markets, why do we provide enormous subsidies to the Fossil Industry? Why does the latest House Bill (HR 6049) provide an 8-year PTC for solar but only one year for wind? The only conclusion I can draw is that policy isn't driving the debate; instead, such laws are an amalgam of favors produced by horse-trading between our Representatives. Maybe this is how government should work, but let's dispense with the facile bromides and recognize that this isn't a coherent policy.

It's sausage factory lawmaking.