Production Tax Credit Incentives for Renewable Electricity: Financial Comparison of Selected Policy Options

Under current law, the production tax credit (PTC) incentive for renewable electricity will expire at the end of 2013. Generally, congressional debate about the PTC falls within a spectrum of options. At one end of the spectrum, proposals have been made to eliminate the incentive. At the other end of the spectrum, proposals include making the PTC permanent. Other proposals, such as temporarily extending and phasing out the PTC over time, fall within these two extremes. This report examines selected alternatives for phasing out PTC incentives. During the 2012 debate about the future of the PTC, the concept of phasing out PTCs over a period of time was considered as a potential option. In August 2012 the Senate Committee on Finance reported S. 3521, which expressed the sense of the Senate, regarding tax reform, that " whenever possible, federal energy tax expenditures should be responsibly phased-out in a manner that allows these technologies to function without a reliance on federal subsidies. " This language is not specific to any energy technology, and does not refer to either fossil energy or renewable energy. In December 2012, the American Wind Energy Association published a PTC phase out proposal that would result in the PTC being eliminated by 2019. Debate about energy subsidies is multi-faceted. Different energy sources receive different types of subsidy support over varying time periods. Comparing tax incentives and subsidies across all energy types is beyond the scope of this report. This report examines and considers possible options for renewable electricity PTCs, with a focus on phase-out alternatives. Generally, the goal of a tax credit phase-out approach is to reduce the incentive value over a period of time in order to encourage industry to reduce costs so that certain renewable power technologies might compete on an unsubsidized basis. In general, proponents of technology-promoting legislation aim to reduce the cost or price gap between preferred and conventional technologies. Opponents often view this approach as " picking winners. " If the PTC were extended, Internal Revenue Code Section 45 includes provisions for phasing out the PTC based several parameters. However, a phase-out under current law is unlikely in the near to medium term due to the phase-out design—which is statutorily based on a threshold electricity value that escalates with inflation and a reference price that declines with technology and cost improvements—as well as forecasted electric power market conditions. One phase-out approach under …