Wind and Solar Tax Credits are Destroying the Grid

Rising power demand is revealing the fatal flaw in the increasing penetration of wind and solar on the grid. It’s time to admit that enough is enough.

Subsidies for these sources throw off the economics of the power grid. They make intermittent sources that do not produce power predictably or more economically than the dispatchable natural gas that is able to ramp up when they fail and the baseload coal, gas, and nuclear that provide reliable power.

The key culprits that are adding more wind and solar to the grid—and upsetting the economics of more reliable power sources—are the Investment Tax Credit (ITC) and the Production Tax Credit (PTC). These credits have been on the books for decades, and have expired and been brought back a number of times.

The Investment Tax Credit (ITC) gives developers back a set percentage of what they invest in building new facilities and applies to wind, solar, and some other green energy technologies. It has been around since 1978 and has ranged from 10 to 30 percent during that time.

The Production Tax Credit (PTC), enacted in 1992, gives companies a per kilowatt hour credit on the electricity that they generate using a qualifying source. At first, it only applied to wind and biomass, but it now covers wind, solar, municipal solid waste, geothermal, tidal, and other things such as energy storage. Though it was initially meant to expire in 1999, the PTC was extended 11 times between its inception and 2018.

Both of these tax credits were revived under the increasingly inaccurately named Inflation Reduction Act (IRA). The act extends the 30 percent ITC and $.0275 per kilowatt hour PTC through 2025 and then rolls them into the new Clean Electricity Investment Tax Credit and Clean Electricity Production Tax Credit. These credits are functionally similar but not technology specific and apply to all power generation and storage facilities that “have an anticipated greenhouse gas emissions rate of zero,” so essentially anything that doesn’t emit at the point of generation. 

The goal of these credits was to support wind, solar, and other “green” technologies as they developed, but they have gone on far longer than anyone at the time could have expected. Instead, these subsidies have helped to undermine the grid by pricing out reliable sources. 

This is especially problematic in parts of the country that get their power from a Regional Transmission Organization (RTO) because the grid operators use auctions to set their clearing prices for electricity and determine which sources will power the grid at any given time. Because wind and solar developers receive the ITC, PTC, and other subsidies, they can often bid in at a price below their costs, sometimes even at a negative price. 

Negative prices might sound nice to consumers, but imagine that your favorite store (coal, natural gas, nuclear) had to charge lower prices or even offer goods for free or with a rebate during certain hours of the day because the heavily subsidized store next door (the wind and solar generators) is selling their product at a negative price. The favorite store loses money on what you buy, but you get your goods free, cheap, or even at a negative price, depending on the price at which the heavily subsidized store was selling. This feels great to the consumer—until the store you like (the reliable power) goes out of business, and all that’s left is the heavily government subsidized store with the inferior goods (intermittent power).

This disrupts the overall economics of the power mix. If the power sources that are reliable and underpinning the grid can’t make money, they will close, leaving an increasingly large portion of intermittent wind and solar on the grid. This cycle continues until an increasingly small percentage of the generation is coming from reliable sources, leaving the grid vulnerable.

The most recent North American Reliability Corporation reliability assessment bears this out. Much of the United States is at high or elevated reliability risk over the next decade, and for the most part the RTOs are faring the worst.

Repealing these subsidies should be a high priority of the new administration. Whether that is achieved through the reconciliation process or as stand-alone legislation, protecting the power system from the threat that these subsidies pose is essential to ensure continued reliability and resilience to extreme weather conditions.

Yet it is not only a question of reliability, but also of fiscal responsibility. These tax credits are a major burden to the federal budget, and form what energy writer Robert Bryce calls a “hockey stick” of increasing spending. It begins gradually, and then the costs begin to skyrocket. Between 2025 and 2034 the expected costs of these subsidies are projected to be a combined $421 billion. That is 21 times the 2015 projected expenditures on the same credits, and seven times more than was expected in 2021, the year before the IRA was passed. In fact, Bryce points out that these subsidies alone will cost more than the $369 billion that President Joe Biden claimed the IRA would “invest.”

These subsidies are not only damaging to the grid, but also incredibly expensive. Removing these incentives to build unreliable capacity would go a long way toward restoring a reliable power system.