To: Senator Ben Cardin From: Catherine McGrath Title: Wind Power Dont Let it Blow Away Re:

: Wind Power Tax Credit Renewal Date: April 26, 2012 Introduction Wind energy is an up-and-coming renewable energy source in the United States. According to the Department of Energy, wind power could supply up to 20% of the nations energy by 2030. In order for wind power to reach this goal, it is important to renew the current tax credit programs. The primary financial policies for the wind industry, the Production Tax Credit and the 30% Investment Tax Credit, are set to expire on December 31, 2012 (American Wind Energy Association 2011). Without these tax credits, the market for utility-scale turbines will be unpredictable. Wind energy companies will be less likely to invest in large-scale wind energy projects, which will prevent the United States from reaching the full potential of wind production. As a preventative measure, it is essential to draft wind energy legislation and vote for the renewal of the wind energy tax credit. Wind energy will benefit the nation as a whole in addition to local and state economies, especially in the state of Maryland. This memo will explain three options for wind policy renewal of the tax credit, phasing out the tax credit, and no action. Background Wind is considered a form of solar energy the uneven heating of the atmosphere by the sun, the rotation of the earth, and the irregularities of the earths surface each cause wind. Turbines harness the natural kinetic energy of the wind and convert it into mechanical power. The blades of the turbine spin, which rotates a shaft connected to a generator to produce electricity. There are two types of wind turbines:

vertical-axis design, shaped like an eggbeater, and the more common horizontal-axis design. Horizontal-axis turbines are made up of either two or three blades that face into the wind. Utility scale turbines range in size from 100 kilowatts to several megawatts. These larger turbines are usually grouped into wind farms that can produce energy for a utility grid that provides electricity to homes and businesses (U.S. Energy Information Administration 2012). Wind energy has multiple environmental and economic benefits. Wind energy is an emissions-free electricity source. Conversely, the production of non-renewable sources such as oil, natural gas, and coal cause significant emissions of greenhouse gases. For each unit of electricity generated, wind energy emits the equivalent of 1% of coal emissions and 2% of gas emissions. If the United States produced 20% of its electricity from wind energy, annual carbon dioxide emissions would be reduced by 825 million metric tons (National Renewable Energy Laboratory 2008). Additionally, wind energy creates many long-term jobs in component manufacturing, construction and installation, maintenance, marketing, and transportation. The wind energy industry employed 85,000 Americans in 2011 and invested approximately $27 billion in the U.S. economy in 2009 and 2010 (U.S. Department of Energy 2011). The job creation and revenue from this industry will stimulate the economy and decrease the federal deficit. Wind energy is a domestic energy source that can decrease the United States dependence on foreign countries. In 2010, the U.S. imported almost 30% of their total energy (U.S. Census Bureau 2012). By accessing the full potential of wind energy, the United States could significantly reduce the need for imports. Finally, wind energy uses less water than traditional energy generation sources. Thermoelectric power alone constitutes 53% of water consumption in the United States (Long, Judkoff, and Torcellini 2003).

Critics of wind energy argue that environmental impact outweighs the benefits of wind energy. Some environmentalists claim that wind turbines will detrimentally affect bird species. However, wind turbines cause less than 1% of anthropogenic, or human induced, bird mortality. Comparatively, buildings and windows cause 55% of anthropogenic bird mortality. Oil spills, acid rain, and mountaintop mining also cause avian mortality. Thus, wind turbines pose a significantly smaller impact on bird species than current energy sources. Opponents of wind energy also claim that wind turbines are unsightly and loud and therefore cause a decrease in property value. While some might be bothered by the appearance of a wind farm, others find them interesting and even beautiful. Furthermore, the noise caused by a wind turbine is approximately equivalent to the hum of a running kitchen refrigerator. According to the Renewable Energy Policy Project of 2003, property values of homes within 8 km of wind turbines were not adversely affected. In fact, property values rose in some communities located in close proximity to wind projects (National Renewable Energy Laboratory 2008). In 2010, the wind energy industry grew by 15% with the installation of over 5,000 MW of generating capacity enough to supply power to more than 1.2 million homes. 38 states currently have utility scale wind projects. Despite this progress, the United States is still second to China in terms of installed wind capacity (Bolinger and Wiser 2011; American Wind Energy Association 2011). To remain competitive in the global clean energy market, the United States must increase their share of wind capacity. Approximately 10 million MW of energy are available from land-based wind projects, but the United States still relies on non-renewable resources for 90.3% of energy production (Bolinger and Wiser 201l; U.S. Census Bureau 2012). The reliance on nonrenewable sources for the majority of energy production is a hindrance to the

development of the United States. In order to keep pace with the development of other nations, the U.S. must begin to produce more energy from renewable energy sources such as wind power. Wind energy can be appealing to both the Democratic and Republican Party. Democrats are pleased with wind energy because it provides emissions-free electricity and will reduce the consumption of non-renewable and highly polluting resources. Republicans are pleased with the potential to stimulate the economy by creating longterm manufacturing and engineering jobs. This balance of the environment and the economy is palatable for both parties. Because of the extreme bipartisanship in Congress, energy policy legislation must appeal to both ends of the spectrum. Wind energy is an especially salient issue because the Production Tax Credit and the 30% Investment Tax Credit are set to expire on December 31, 2012. The PTC was created under the Energy Policy Act of 1992. It provides an income tax credit of 2.2 cents per kilowatt-hour for the production of electricity from utility-scale wind turbines. The PTC also offers credit for different types of renewable energy such as biomass, geothermal, and hydroelectric at a rate of 1.1 cents per kilowatt-hour. The ITC was developed through Section 1603 of the American Recovery and Reinvestment Act of 2009. Wind project developers can choose the 30% ITC in place of the PTC. Developers can receive a cash payment equivalent to 30% of the investment for projects that began before 2011 and will be completed and in service before 2013. This payment is funded by the Department of Treasury (Database of State Incentives for Renewable Energy and Efficiency 2011). Description of Options/Arguments

The first wind energy policy option is to renew the Production Tax Credit and the 30% Investment Tax Credit. A ten-year renewal of the Production Tax Credit would provide a 2.2 cent per kilowatt-hour income tax credit until December 31, 2022. A tenyear renewal of the 30% Investment Tax Credit would allow developers to receive a cash payment of 30% of their project investment until December 31, 2022. This option is preferred by the wind industry in order to ensure market consistency. These incentives will cause more investors and developers to begin new wind projects. As a result, these wind projects could help the United States reach the goal of 20% wind power by 2030. The PTC has been successful for the past ten years because it has encouraged the wind industry to grow at a average rate of 32% each year (Bolinger and Wiser 2011). If the wind industry continues to grow, wind energy can meet the United States increasing energy demands without compromising environmental quality. The economy will benefit from the tax credit renewal in multiple ways. Rural landowners will be more likely to invest in wind energy projects and, due to the tax credit, their individual economic prosperity will increase. Additionally, the wind industry can support roughly 500,000 jobs that will boost the national economy (American Wind Energy Association 2011). Finally, energy prices will become increasingly stable because of reduced dependence on foreign fossil fuels. There are drawbacks to the ten-year renewal of the wind energy tax credits. Most importantly, the continuation of funding for ten additional years will strain the national government. The PTC has cost approximately $6 billion dollars over the past 5 years (Natter 2012). Some may question if the money allocated for the tax credits will actually equal the money generated from the new wind projects. Also, if more time, effort, and money are spent to develop wind energy projects, other sources of renewable energy may

be underdeveloped. To maximize energy security, the United States should pursue all promising renewable energy sources, including solar, biomass, geothermal, and hydropower. The next wind energy policy option is a gradual phase out of the tax credit. Instead of renewing the ITC and PTC for an additional ten years, Congress could renew these tax credit policies for approximately four to six years. Congress could also gradually reduce the incentive for each tax credit, perhaps by reducing the PTC by a rate of 0.2 cents per kilowatt-hour each year or by reducing the ITC by 5% every two years. Stakeholders in the wind industry support a gradual phase out because it can provide market security without creating dependence on the tax credit (Natter 2012). Investors and developers would be aware of the tax credit expiration and plan their projects accordingly. After the tax credits expire, the wind industry would be stable enough to maintain production without tax incentives. If not, the minimum value of each tax credit could be maintained until the wind industry becomes stable. This method offers similar benefits to the ten-year tax credit renewal. Partial renewal of the wind energy tax credit will increase clean energy, prosperity of rural landowners, job creation, and stability of energy prices. Because less time, effort, and money are being spent on wind energy, other sources of renewable energy can be developed. This will provide overall energy security for the United States by combining domestic renewable sources with foreign and domestic non-renewable sources, when necessary. The policy option to phase out the tax credit is also slightly flawed. There is a possibility that a partial renewal of the tax credit will not be enough to maintain the wind industry and promote stability. If this is the case, the minimum value of the tax credit can be renewed until the market is stable. Unfortunately, if there is a lapse between the

expiration of the reduced tax credit and its renewal, the market could be detrimentally affected. Lenders may hesitate to invest in new wind projects because the tax credit is uncertain. The final policy option for the wind industry is no action at all. Congress can simply decide not to renew the tax credit and leave the wind industry to develop on its own. This option would allow for more money and effort to be spent on the continued use of fossil fuels and the exploration of other renewable sources. The money that would be used to fund the tax credit could be allocated to different projects (Natter 2012). The no action policy would be very harmful to the wind industry. Increased uncertainty in the wind energy market will cause job layoffs because fewer wind projects will begin. Developers may rush to finish their projects before the December 31, 2012 deadline, causing high production costs from short-term planning mistakes. New investors would be reluctant to commit to new projects because of reduced incentives beginning in 2013. New wind energy projects can be very expensive without the tax credit and, as a result, the wind industry could stall or fail completely with the absence of the PTC and ITC. Recommendations The most effective policy option is to gradually phase out the Production Tax Credit and the Investment Tax Credit. This policy will allow the wind industry to continue to grow and develop without creating economic dependency on the tax credit. Developers and investors will be confident to begin new projects for the remainder of 2012 into 2013 and beyond, but will be aware of the yearly reduction of incentives. One year prior to the expiration of the tax credit, Congress should evaluate the future need of the tax credit. If the wind industry is still unpredictable, if new wind projects are still

expensive, and if developers are still reluctant to begin projects, then Congress should renew the tax credit. If the wind industry is stable and flourishing, there is no need for continuation of the tax credit and Congress can discontinue incentives for wind energy. With the gradual phase out of the tax credit, money can still be allocated towards the development of other renewable resources. This will further decrease the dependence on fossil fuels and allow the United States to have a more comprehensive and stable energy policy. As the wind industry continues to grow to its full potential, greenhouse gas emissions will decrease, leading to a healthier environment for humans and animals. Both the Democratic and Republican parties will be pleased with the results. Democrats will support the pursuit of clean energy and Republicans will favor the creation of new industry jobs. Conclusion Wind energy is a promising and effective source of electricity in the United States. Action must be taken immediately to begin the phase out of the wind energy tax credit. Phasing out the tax credit will protect the wind industry by providing stability and incentives. In turn, the environment and the national economy will benefit significantly. The United States needs the wind industry to revitalize the economy, improve environmental quality, and increase national security. If the wind industry reaches its potential of 20% by 2030, the United States will continue to benefit even years later.