Investor Warren Buffet once famously said: “For example, on wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit.” A recent study by one of DOE’s premier National Labs seems to prove his point.
Lawrence Berkeley Laboratory found that U.S. wind farms are producing less power after ten years of production because the loss of the federal production tax credit at the ten-year mark stops maintenance. The Department of Energy Laboratory study looks at how wind turbines across the United States degrade over time. The lab found that after the first 10 years of operation, wind turbines tended to experience an “abrupt decline” in performance that continued as time went on, despite being able to produce more electricity given wind conditions at a specific site. The study explains that since wind farms no longer have access to the production tax credit after ten years of operation, wind farm owners were making the financial decision to do less to protect against equipment wear and tear. After 17 years of operation, the lost energy was equivalent to losing 1 out of every 10 turbines in a wind farm. This finding should make policy makers examine the production tax credit construction carefully since it has many negative consequences—this finding by the laboratory is just one.
The Lawrence Berkeley Laboratory’s study was based on data from 917 wind farms across the United States. It found that output from a typical U.S. wind farm degrades by about 13 percent over 17 years, with most of this decline taking place after the project turns ten years old. The researchers found that output, on average, decreased by only 0.17 percent per year during the first ten years of operation. Increased downtime for maintenance, erosion of blade edges, and increased friction within rotating components contribute to lower output. Wind farm operators have a number of life-prolonging maintenance options at their disposal, including software updates, component replacements and measures that protect blades from erosion.
The study found that newer wind turbines built after 2008 are more resilient during their first decade of life due to longer blades that allow turbines to operate at full capacity under less windy conditions. Interestingly, the study also found that after the 10-year production tax credit elapsed and companies discontinued maintenance activities, the U.S. wind fleet continued to perform fairly well compared with those of other countries.
This acceleration of declining performance after ten years for U.S. wind farms was not found in studies focusing on European wind fleets, where output declined consistently over time, adding to the hypothesis that the production tax credit was the reason for the lapse in U.S. wind farm maintenance after ten years.
Production Tax Credit Issues
The production tax credit provides wind farms with a tax credit for the first 10 years a qualified facility is in operation. In 2013, the production tax credit for wind generation was 2.3 cents per kilowatt hour for the first 10 years of production. Under the phase out of the credit approved by Congress, the tax credit decreased by 20 percent per year from 2017 through 2019. The Taxpayer Certainty and Disaster Tax Relief Act of 2019 extended the production tax credit for facilities beginning construction during 2020 at a rate of 60 percent—higher than the 40 percent rate for 2019. Wind farms that begin construction after the end of 2020 cannot claim the credit.
The production tax credit came about as part of the Energy Policy Act of 1992 and was supposed to be short-lived to spur the deployment of a “young” industry. Despite its 28 years of existence and wind advocates indicating that wind is now cost competitive with traditional generating technologies without the credit, the industry still lobbies for its extension, which has occurred numerous times. But it has several perverse effects.
For one, it disrupts the economics of generation, causing wholesale generating prices to drop below zero and compelling other technologies to accept those prices. Because wind producers are paid by taxpayers to operate, a wind producer can still profit while paying the grid to take its electricity, producing negative prices. When the price becomes negative, electric generators are actually paying the grid to take their electricity. Fundamentally, negative wholesale prices send a distress signal telling markets that the supply and demand balance on the grid is economically unsustainable and suppliers need to reduce their output. But, these market signals do not apply to wind since they are paid by taxpayers to produce electricity whether it is needed or not.
The production tax credit also obscures the true cost of generating electricity by forcing tax payers to subsidize it. The U.S. Treasury estimates that the Production Tax Credit will cost taxpayers $40.12 billion from 2018 to 2027, making it the most expensive energy subsidy under current tax law.
It is also clear that electricity prices have increased during the time that the production tax credit resulted in wind penetrating the market. Between 2009 and 2019, when wind generation increased its share from 2 percent to 7 percent, average residential electricity prices increased by 13 percent.
Under pressure from emissions reduction laws and state renewable energy mandates, power companies in many states are planning on increasing wind’s role in their long-term plans for electricity, even constructing offshore units that are far more costly to build and operate than onshore wind units. Utility regulators and other officials tasked with protecting grid reliability are in some cases pushing wind power. In New England and New York, for example, several states have effectively ended new natural gas pipelines in favor of proposed offshore wind turbines.
The acceleration of declining performance after ten years for U.S. wind farms was not found in studies focusing on European wind fleets. Incentives for wind in European countries were not based on a tax credit for production as in the United States. Those studies of European wind farms found output declined consistently over time, adding to the hypothesis that the production tax credit was the reason for the lapse in U.S. wind farm maintenance and output after ten years.
According to a study by the Lawrence Berkeley National Laboratory, the performance of U.S. wind turbines degrades relatively abruptly after ten years of operation coinciding with the withdrawal of the federal production tax credit. The research suggests that project operators are incentivized to maintain turbines during the first decade by the tax credit because performance fell more acutely after a project no longer received the subsidy.
With wind generating about 7 percent of the nation’s power, overtaking hydropower as the largest generator of renewable electricity, it is time that the production tax credit get reevaluated by policy makers due to its perverse effects. Lawrence Berkeley National Laboratory’s new study is proof that Warren Buffet was right.