Ryan Wiser and Mark Bolinger, Berkeley Lab
Although dramatic cost reductions have allowed wind power to become the least-cost energy option in some regions of the United States, state policies still play an essential role in stimulating wind power development in most areas. The range of available policy options for large-scale wind projects is broad. Some of the prominent state-level approaches used in the past to promote wind power include renewable energy purchase mandates, renewable energy funds, tax incentives, resource planning, and environmental credit markets. Each of these options, along with its advantages and disadvantages, is briefly described below.
Renewable Energy Purchase Mandates
Renewable energy purchase mandates include traditional set asides directed at individual utilities in a regulated setting and renewables portfolio standards (RPS) that require all retail suppliers to serve a minimum portion or their load with eligible renewable energy. Examples of traditional purchase mandates can be found in Iowa and Minnesota. In Iowa, certain in-state investor-owned utilities are required to develop 105 average megawatts (MW) of eligible renewables. In Minnesota, Northern States Power (now Xcel Energy) is required to develop 425 MW of wind by 2002 and another 400 MW by 2012 as part of a radioactive waste settlement agreement. Meanwhile, 11 states—Arizona, California, Connecticut, Maine, Massachusetts, New Jersey, New Mexico, Nevada, Pennsylvania, Texas, and Wisconsin—have enacted some form of RPS. Of all the state policy types discussed here, renewable energy purchase mandates will likely have the largest impact on wind development. Set-asides and RPS policies are attractive in some states because they create a strong demand for wind generated electricity, offer incentives for wind power cost minimization through a competitive process, can be used in regulated and restructured market settings, and rely on the private market to make renewable energy investment decisions. In other states, however, political considerations make purchase mandates difficult to implement in legislatures. In states where politics allow the creation of RPS policies, the policies must be designed carefully to have the desired effect. Experience shows that effective RPS policies in restructured markets require a strong level of political support and regulatory commitment, clear and well-thought-out renewable energy eligibility rules, predictable long-term renewable energy targets that ensure new wind power supply, standards that are achievable given permitting and transmission challenges, credible and automatic enforcement, and credit-worthy electricity suppliers that are in a position to enter into long-term contracts with renewable energy generators. Texas is typically identified as the “model” for an effective RPS. The design of an RPS policy is typically easier in a regulated setting than in a competitive setting. The key issues should focus on utility cost recovery and standardized power-purchase contract terms.
Renewable Energy Funds
Most often funded through system-benefits charges (a small surcharge on electricity rates) but occasionally through regulatory or merger settlements, state renewable energy funds provide major support for utility-scale wind development. Present in 15 states (most are restructured), these funds are expected to generate $3.5 billion for the development of renewables from 1998 through 2012. Production incentives (cents/kWh supplemental financial payments) are the most common form of incentive employed by renewable energy funds in support of utility-scale wind power, although up-front grants, forgivable loans, and subordinated debt have also been used. To date, nine states have obligated $160 million to support 1,630 MW of new wind power. As of the date of this publication, 148 MW had been installed. Several lessons have been learned from experience with renewable energy funds. First, certain types of state support— such as up-front grants and subsidized financing—appear to trigger the “double-dipping” provisions of the federal production tax credit (PTC), thereby reducing the value of the PTC. Second, receipt of a state incentive does not guarantee that a wind project will secure financing; renewable energy fund administrators must remain mindful of the need for a project to secure a long-term power purchase agreement as well. Despite some limitations, renewable energy funds can provide useful supplemental income to wind power projects, providing essential cash flow for project development.
Tax Incentives
Various types of tax incentives have been used at the state level in support of utility-scale wind projects. Whereas investment tax credits were common in the past, property and sales tax reductions and exemptions are now most common, with state production tax credits also gaining popularity. As with other types of incentives, tax incentives can reduce the cost of wind power. However, state tax incentives alone have seldom been sufficient to stimulate significant wind power development. Tax incentives can provide a useful supplemental revenue stream to wind plant owners. States contemplating tax incentives for wind, however, might keep several considerations in mind. First, although far from clear, state tax incentives might trigger the “double-dipping” provisions of the federal PTC, thereby reducing the value of the PTC to the wind project. Second, a wind developer or project owner may not have sufficient in-state tax liability to take full advantage of a state income tax incentive (note that this concern only applies to income tax credits, not to sales and property tax incentives). Allowing wind plant owners to carry forward the incentive into future tax years or to trade the incentive to other in-state taxable entities would address this issue. Finally, granting wind projects a property tax exemption could result in a lower level of local community support for wind power.
Resource Planning
In some parts of the United States, the cost of wind power is arguably competitive with the cost of fossil-fueled generation. In areas of the Pacific Northwest, the Midwest, and Texas, wind projects are selling their output at 3 cents/kWh or less. In such cases—particularly in regulated states—wind should be considered as a potential least-cost resource within an integrated resource planning (IRP) framework. Fairly treating wind power in utility resource planning involves fully considering the costs (e.g., cost of firming) and benefits (e.g., price stability and environmental benefits) of wind power within an integrated planning context, which typically occurs within public utilities commission proceedings. In one such IRP proceeding in Colorado, regulators deemed a wind plant to be the least-cost supply option, given the volatility of natural gas prices, and ordered the local utility to add wind power instead of gas-fired generation. As was the case in Colorado, however, such regulatory battles will typically be hard-fought and controversial because utilities are often inclined to resist wind power. Wind energy integration issues and forecasts of future natural gas prices are common areas of debate.
Environmental Credit Markets
If designed properly, state and regional policies that limit the emissions of pollutants such as NOx could present opportunities for wind power. In most permit trading programs, however, credits or permits are allocated only to polluting forms of generation, thereby denying the ability of nonpolluting forms to directly benefit. Several states, including Indiana, Maryland, Massachusetts, New Jersey, and New York have designed emissions trading programs to include limited set-asides for eligible renewable forms of generation. These programs can offer a modest additional revenue stream to wind projects.
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