Federal renewable energy subsidies reduce reliability, hinder the market

By Cutter González|November 2, 2018   
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The coming year could be a watershed moment for energy policy in the United States. The infamous Production Tax Credit (PTC), a federal subsidy for renewable energy, is set to expire, marking a potential step toward more reliable energy, a freer market and a change in the energy production landscape for the better — should we allow it.

The PTC is a $24-per-megawatt-hour credit based on production rather than demand. That means those who produce renewable energy can receive the credit regardless of whether or not that electricity is actually needed. The incentive is so immense that at peak hours of output, wind producers can actually pay retail electric providers, the companies that deliver the energy to homes and businesses, to take their product.

In any other business, paying someone to take your product would never be feasible (let alone reasonable), but that’s exactly what happens when government picks winners and losers.

This “negative pricing” scheme caused by the PTC and other subsidies is having serious consequences. The artificial (government-induced) instability it causes can push out the energy producers that keep the lights on when wind is a no-show, such as natural gas and coal, by forcing them to price their power at levels that aren’t feasible or at a loss because they can’t compete with the subsidies. Without a reliable source of electricity, hot summer days in the South or cold winter days in the North could mean a loss of power.

A proposal from the U.S. Department of Energy would combat this diminished reliability by offering subsidies for coal and nuclear generators. Of course, more subsidies for one fuel to offset subsidies for another fuel are the wrong solution. Yet the problems being caused by the PTC are real.

In Texas, another coal-fired power plant has announced its closure — making it the fifth in the state to close or announce a closure date recently. The federal government should allow Texas markets to work.

Reliability isn’t the only cost of renewable subsidies. Recent research indicates that the PTC imposes huge costs on Americans while benefitting only a few. The report found that the subsidy has already cost taxpayers more than $20 billion since 2008, with a total cost of more than $65 billion to come before the PTC is scheduled to phase out around 2029.

The PTC gets even less savory when we consider who benefits. Just 15 parent companies have received more than three-quarters of all tax credit eligibility under the PTC, according to the research. That means more than $19 billion of eligibility between 2007 and 2016 to those companies alone. NextEra Energy leads the way with $5.7 billion in eligibility. Five other companies have received more than $1 billion in tax credit eligibility, including NRG Energy at $1.1 billion.

Many executives of the companies eligible for tax credits are current board members of the American Wind Energy Association, the national trade association that continues to push for more subsidies for the industry. The PTC has done a lot more to prop up a $14 billion industry than it has to provide “a clean source of electricity for American consumers.”

Whether we are looking at Texas’ exceptional competitive energy market or states like California with heavy-handed regulatory approach, renewable energy subsidies add costs and harm reliability across the national grid. Reliable sources of power are leaving the market while a few big corporations reap the benefits; lawmakers should take note of the policies that made it happen.

President Reagan famously warned us that government programs, once launched, never disappear. In 2019, that will be put to the test. Congress should ensure that the PTC expires so that electricity markets can function and Americans can all have a reliable, affordable supply of energy.

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