Wind Energy’s Boom and Bust Cycles

Tim McDonnell has a good, depressing piece on the wind power industry scrambling to extend the production tax credit, and the carnage that will face the industry if they fail. This has been turned into an electoral issue because of the prominence of the industry in swing states like Iowa and Colorado, and because Mitt Romney has taken a rare stand against the tax credit, in contrast to the Obama Administration’s desire for an extension. But I think the more important thing to stress here is how our industrial policy, as it were, particularly on energy, is so detrimental.

The oil and gas industry never worries about any of their tax credits expiring. They may have to fend off those who want to cancel them, but given that the expected state of Congress is a state of gridlock, they benefit when nothing happens. By contrast, the wind industry – and solar as well – has seen these perpetual sunsets on its tax credits. As energy is a space with a considerable amount of long-term planning, this just ruins the business plan. They experience these boom-and-bust cycles that stunt innovation and growth, as can be seen in the above chart. “Every few years the industry has to drop everything for six or nine months and focus exclusively on having the credit passed,” says one industry professional. This is terrible. If certainty matters at all, it matters with long-term projects like shifting the energy mix.

Now there’s a school of thought that says that government should not be in the business of giving tax breaks to any industry, or preferring any industry over another. And that’s fine to say. But the status quo is the worst of all possible worlds: a halting industrial policy for those new industry players with the least power, and a subsidy regime for legacy energy. Whether your tax favorability or subsidy expires depends on the prominence of your lobbyists. Just look at ethanol, which has been crucial in electoral politics since the 1980s, and therefore has permanent mandates that they fight to keep from being overturned, rather than the wind and solar fight to extend their favorability.

You can envision a time where this tax credit could be phased out, and maybe that’s the way to extend it, with conditionality based on market share. But clearly this disrupts the wind energy industry so much that it makes no sense to continue on this path.

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