Sustainable energy subsidies.

• Author: Powers, Melissa

1. INTRODUCTION II. THE IMPORTANCE OF SUBSIDIES IN A DISTORTED MARKET A. Climate Change, Externalities, and Fossil Fuels B. The Flawed Arguments of Subsidy Opponents 1. Fossil Fuel Subsidy Reforms Are Inadequate 2. The Electricity Sector Is Not a Free Market III. THE EFFECTIVE, BUT UNSTABLE, PTC A. The Economic Consequences of the Unstable PTC B. The Political Consequences of the Unstable PTC IV. ALTERNATIVES TO INTERMITTENCY A. A Modified FTC B. Treasury Grants for Production V. CONCLUSION I. INTRODUCTION

   On January 1, 2013, the wind power industry and advocates of renewable energy breathed a sigh of relief when Congress renewed the Production Tax Credit (PTC) for another year. (1) The wind power industry had sought an extension of this critical subsidy for more than a year, without any response from Congress. Midway through 2012, the failure to secure an extension had already adversely affected the industry. (2) By that point, it also appeared that a short-term extension would come too late to do any good, because the existing PTC required facilities to be placed in service to be eligible for tax credits--and wind projects often take more than a year to develop. (3) Congress nevertheless renewed the PTC for another year as part of the grand bargain to prevent the United States from going off the "fiscal cliff." (4) Moreover, Congress modified the eligibility requirements to allow facilities that began construction before 2014 to qualify for production tax credits. (5) At first glance, it appeared that Congress's delay in extending the PTC would not significantly stifle wind power development.

   However, by the middle of February 2013, analysts predicted that the PTC extension would offer little benefit to the wind power industry. In theory, by tying the tax-credit eligibility to the start of construction, rather than its completion, the PTC extension should have given wind developers more breathing room. (6) Yet, uncertainty about how the Internal Revenue Service (IRS) would implement the revised PTC led many wind energy companies to delay investing in new facilities. (7) Even without the uncertainty surrounding the IRS rules, it was unclear whether the revised PTC would promote significant development of new wind farms, given that it can take more than a year to negotiate the deals and secure the permits necessary to begin construction. (8) At most, it seemed likely that a one-year extension of the PTC would benefit companies that began wind projects in (2012) or earlier but, for some reason or another, failed to complete them in time. (9)

   On April 15, 2013, the IRS finally issued its guidance regarding the activities that qualify as the "beginning of construction" to be eligible for the PTC extension. (10) Under the IRS guidance, the commencement of any "physical work of a significant nature" would qualify. (11) More importantly, facilities would also be eligible for the PTC under a "safe harbor" provision available to developers that pay or incur at least 5% of the total cost of a facility before January 1, 2014, and that make "continuous efforts to advance towards completion of the facility." (12) Thus, under the guidance, developers could begin building or investing in wind facilities by the end of 2013 to qualify for the PTC.

   For the wind energy industry, the IRS guidance must have triggered great relief. The safe harbor provision would seemingly afford companies time to design new wind farms, secure permits, and negotiate contracts for turbines and electricity delivery. However, the IRS guidance may also lead to a boom cycle, in which prices spike as developers rush to meet the deadlines. At the end of the day, the IRS guidance will likely only perpetuate the cycle of uncertainty plaguing the wind energy industry.

   Unfortunately, uncertainty has become a recurring problem affecting renewable energy development in the United States. Rather than providing the renewable energy industry with assurance and a clear pathway toward growth, federal policy makers have used intermittent subsidies to support renewables. These on-and-off subsidies inject uncertainty into the industry and constrain renewable energy investment. Intermittency also makes renewable power politically vulnerable because, unlike fossil fuel power producers that benefit from permanent subsidies and the political inertia that allows them to perpetuate, renewable energy companies must regularly petition for affirmative renewals of their intermittent subsidies. These dynamics only exacerbate the uncertainty in the renewable power industry.

   Opponents of subsidies have argued that these dynamics support elimination of the PTC and other renewable energy subsidies. (13) Their arguments, however, ignore the urgency of climate change. They also are premised on the unfounded notion that fossil fuels receive fewer subsidies than renewable power. (14) While it is true that renewable power facilities have benefitted significantly in recent years from subsidies like the PTC, historical fossil fuel subsidies eclipse recent government support for renewable energy. (15) Perhaps more importantly, the externalized costs of fossil fuels far outweigh the costs of any subsidies renewable energy sources have received. Indeed, although subsidies for renewable power will likely never offset the competitive advantages fossil fuels have received from lax regulation, they at least help to level the playing field and could ease the transition to a more sustainable electricity system.

   This Essay explores the debate surrounding subsidies for renewable energy and focuses particularly on the role the PTC has played in promoting, and sometimes undermining, the wind energy industry. Part II of this Essay explains the essential role subsidies must play in promoting a transition to an electricity system powered by renewable energy sources, and explores why opponents of subsidies have failed to make a convincing case for allowing the "free market" to control energy choices. Having explained why subsidies matter greatly in the modern energy sector, Part III explains how the PTC's intermittency has affected the economic and political viability of the wind energy industry. Part IV then explores some alternatives to intermittent subsidies that could foster sustainability in the wind energy sector while allowing it to become more self-sufficient. Finally, this Essay concludes that, regardless of the particular subsidy mechanism Congress adopts, it must provide stability and certainty for wind power producers. (16)

2. THE IMPORTANCE OF SUBSIDIES IN A DISTORTED MARKET

   The renewable energy industry had a banner year in 2012. Both the wind and solar industries reported record levels of facility installations and growth. By the end of 2012, the wind energy industry reported that it had installed approximately 13,000 megawatts of new capacity, outpacing even the new capacity additions of natural gas. (17) The solar industry was also on pace to have a record number of new facilities, having doubled its rate of installations during the first half of 2012. (18) Based on these figures, it might appear that the renewable energy industry has finally found its footing and that policy makers can ease back from their efforts to promote and support renewable power. In reality though, the massive deployment rates--for wind power, in particular--are a symptom of the uncertainty plaguing the renewable energy industry, as developers regularly find themselves scrambling to qualify for expiring subsidies rather than pursuing long-term growth strategies. (19) Although both wind and solar power have expanded across the United States and become more cost-competitive with fossil fuels, (20) they are still emerging industries that could decline without more consistent policy support.

   Opponents have argued that renewable energy subsidies waste taxpayer money on energy sources that cannot compete on their own with fossil fuels. Of course, that is the whole point of subsidizing renewable energy: if it operated on an equal footing with fossil fuels, subsidies would not be necessary. Advocates of renewable power thus view a lack of competitiveness as the underlying rationale for subsidization. Critics of subsidies, not surprisingly, take the opposite view. In essence, they argue that subsidies distort the market by improperly allowing the government to pick winners and losers. (21) This argument disregards the myriad ways existing policies already favor certain energy producers and thus expressly or implicitly select winners. For example, various policies allow companies to externalize their costs--including their central role in accelerating climate change--on society and thereby maintain artificially low prices. Anti-subsidy critiques are also premised on a fundamental misunderstanding of the role of the market in the electricity sector. As this Part explains, while strategies other than subsidies may correct the flaws in the electricity market, subsidies are among the few strategies that receive support in today's political environment.

   1. Climate Change, Externalities, and Fossil Fuels

      It is no secret that fossil fuels cause significant environmental and public health damage that market prices fail to reflect. Indeed, most studies that attempt to calculate externalized costs fail to consider the full scope of this damage, and thus, likely underestimate the social costs of fossil fuels. Nonetheless, when one considers the harm caused by fossil fuels in the electricity sector, namely by coal and natural gas, it is clear that the extraction, transportation, and combustion of these fuels exact enormous societal costs.

      Coal has rightly earned a notorious reputation for harming people and the environment. Historically, underground mining exacted an enormous human toll. As "one of the few occupations in which a person faced a very real risk of death by all four classical elements," it "was probably the...