The Production Tax Credit — the key federal incentive for wind power — is a success story. Since the PTC was first enacted in 1992, the cost of wind power has fallen 90 percent, 75,000 people now work in the wind industry, and wind power is booming.
Yet, some people still think the PTC should be eliminated. Most interestingly, Exelon — the large Midwestern utility and power plant operator — has made ending the PTC its number one lobbying priority, claiming that the credit distorts markets. This would be scary. Fortunately, it’s not true.
The truth is that Exelon hopes to slow or halt expansion of wind power projects that can affect the bottom line of their nuclear power plants in the Midwest, and to achieve that objective they’re blaming wind and the PTC for market phenomena like negative pricing that are almost always caused by inflexible generation technology and transmission constraints.
This post will summarize Exelon’s position on the PTC, show where it falls short, and then point out that Exelon is more concerned about competition from wind power, in general, than the Production Tax Credit.
Why does Exelon say the PTC is distortionary?
Exelon’s argument hinges on two fundamental ideas. First, that the PTC causes negative prices; and second, that negative prices are bad for wholesale electricity markets.
Digging into this argument requires a little knowledge of how power markets work. In much of the country — including where Exelon’s nuclear plants are located — power is sold in competitive markets, at a “clearing price” set by an auction process. In general, the clearing price is set by the most expensive marginal resource needed to meet demand at a given time. This price is then given to all the generators providing electricity at that time. (For more on this, see Wind Power Helps to Lower Electricity Prices.)
Importantly, all power plants bid prices that reflect not just their fuel expenses and other operating costs, but also forgone revenues. For example, coal plant owners can sell the coal ash for industrial uses, and they take these lost sales into account when deciding how much they should charge for power from the plant. Wind power is exactly the same, only one of its lost benefits is a tax credit.
The Production Tax Credit offers eligible wind generators a tax credit worth $23 per megawatt hour for the electricity they produce. Since the fuel costs for wind power are zero and operational costs are low, wind turbines can theoretically offer to sell their power at a negative price (that is, they can make money even though they’re paying someone to take their power).
Where Exelon goes wrong is when they draw policy conclusions from these facts. Exelon believes that these negative prices are bad for wholesale electricity markets because they discourage investment in new generation. And, because all power plants operating get the same price, a negative price can force nuclear power plant owners to pay someone to take their power.
Where Exelon loses the plot
Exelon’s explanation of negative prices is generally correct, but it’s also incomplete. First, we need to look at how often wind is setting the power price.