Income Taxes'
On with the Wind
For at least three decades now, environmental activists and community leaders have be-
moaned American dependence on foreign oil. The war in Iraq again highlighted the precar-
iousness of relying on an unstable region of the world to produce a major part of our energy
requirements.
One solution to this dilemma is to rely more on renewable sources of
energy,such as solar power and wind.The technologyfor such alternative
energy sources has been around for many years, and most voters seem
to favor more reliance on renewables. If good intentions were all it took,
we'd be getting much of our electricity from windmills.
But, of course, making the transition to greater use of wind power
requires a significantinvestment in infrastructure,especially costly wind
turbines. And few investors are willing to plunk down their money unless
they have a solid expectation of earning a competitivereturn.
Until fairly recently, cost factors kept wind energy from becoming
an attractive investment. As recently as the late 1980s, wind-generated
power cost roughly twice as much to produceas energy from conventional
sources.
In the past few years, however, wind energy has decreased dramatically in price. The
American Wind Energy Association (AWEA) reports that many modem, state-of-the-art
windplantscan nowproducepowerfor less than 5 centsper kilowatt~hour,makingthem.
competitive with conventional sources. Unsurprisingly,investmentin wind power produc-
tion has also increased substantially.
How did this happen? In part, it was driven by advances in wind turbine technology.
But it was helped significantlyby a provision of the federal tax law contained in the Energy
Policy Act of 1992. This statute allowed utilities and other electricity suppliers a "produc-
tion tax credit" of 1.5 cents per kilowatt-hour (later adjusted to 1.7 cents to account for the
effects of inflation).
This was a key incentive to the wind power industry which, like all energy producers,
must expend large sums on capital assets. The tax credit had a dramatic effect on the wind
energy market. During 2001, for instance, energy producers added almost 1700 megawatts
of wind-generating capacity-enough to power nearly half a million homes.
But what the government giveth, the government can take away. When the production
tax credit briefly expired at the end of 2001, an estimated $3 billion worth of wind projects
were suspended, and hundreds of workers were laid off.-
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