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Will Federal Policy Help Wind Compete with Fossil Fuels?

The production tax credit doesn’t promote radical innovation, but maybe that’s okay.
January 3, 2013

When Congress extended the production tax credit for wind power this week, it certainly came as good news for jobs in the wind industry. Whether it will help make wind power competitive with fossil fuels remains a far more difficult question to answer, especially since the tax credit does not necessarily encourage radical innovation in wind technology. Still, experience has shown that it does promote incremental improvements by increasing deployment of existing technology, and that may be enough to help wind reduce carbon dioxide emissions by displacing fossil fuels.

The production tax credit gives wind producers 2.2 cents per kilowatt-hour of power generated, an incentive that’s helped drive a tenfold increase in wind capacity in the United States over the last five years. Since the credit became law in 1992 (it has expired and been reinstated a few times since then), the cost of wind power has declined by about 60 percent, to 6.5 cents per kilowatt-hour.

There haven’t been radical changes to wind turbines in that time—aside from their size, they still look very much as they did in the 1990s. We haven’t seen massive 10-megawatt superconducting turbines, and there’s been no large-scale deployment of floating turbines that can be installed out of sight far offshore, where winds are strong and steady (see “DOE Grants Try to Crack the Code on Offshore Wind”). Instead, the cost reductions were driven by economies of scale, accumulated experience in manufacturing and operation, and some modest technological improvements, such as making blades bigger and towers taller to better capture low-speed wind.

The production tax credit hasn’t stimulated radical innovation because it encourages wind project developers to stick to proven technology that’s likely to produce a steady stream of power and revenue. What’s more, the credit has typically been renewed only for short periods of time. That makes it possible to plan a new project that uses existing technology, but it’s harder to develop and try out new technologies, says Greg Nemet, a professor of public affairs and environmental studies at the University of Wisconsin at Madison.

Adds Armond Cohen, executive director of the nonprofit Clean Air Task Force: “The production tax credit was not designed to induce high levels of technical and conceptual innovation. It was designed to get a lot megawatts built.”

At 6.5 cents per kilowatt-hour, wind power now costs no more than electricity from a new natural-gas power plant averaged over its lifetime, according to estimates by the U.S. Energy Information Administration. But this isn’t enough for wind to compete with natural gas. For one thing, wind power is intermittent, so it’s less valuable to utilities than natural-gas power plants, which can run steadily in all weather. The cost of accommodating the intermittency of wind will vary from location to location, depending in part on how much wind power is on the grid. The future price of natural gas could also have a big impact on the competitiveness of wind. Wind needs to get cheaper to take on fossil fuels without subsidies, but just how much cheaper is unclear.

“I don’t think a massive breakthrough is needed for wind to flourish in the U.S. But it is also hard to determine, as it depends on market and policy activities and decisions that will occur outside the wind industry,” says Ryan Wiser, deputy group leader of the Electricity Markets and Policy Group at the Lawrence Berkeley National Laboratory in Berkeley, California.

For example, the EIA estimate for new natural-gas plants assumes that natural-gas prices will not stay at their recent lows (see “Drilling for Shale Gas”). If they do, “then basically all other electricity generation technologies are in trouble,” he says. “Coal, in fact, would need a technology breakthrough to succeed in the U.S. long-term, as would wind, as would nuclear, as would solar.”

If breakthroughs are needed, the production tax credit won’t be enough to bring them to market. Policies such as renewable portfolio standards would be needed to encourage companies to do longer-term research. Some such policies are already in place around the world, which may help explain why companies like GE and Siemens are conducting research on some radical changes to wind turbines (see “GE Hopes to Make Its Cloth Wind Turbine Idea Fly”).

The new technologies might also need some direct support, Nemet says; for example, portfolio standards might have to require the use of advanced technologies. Current biofuels mandates do something similar in requiring advanced biofuels.

Given how close wind is to fossil fuels in terms of cost, however, the advances that would make the biggest difference may not be in wind technology per se. More crucial could be innovations in energy storage or in smart-grid technologies that make it easier for utilities to deal with fluctuations in power. And it may be that simply gaining experience with large amounts of wind on the grid will go a long way to help utilities accommodate it. Here the production tax credit, by helping to spur increased wind capacity, may be just what’s needed.

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