Thursday, September 06, 2012
Fracking Wind Energy and the Production Tax Credit
OK, now that I’ve got your attention… you can’t possibly have a heartbeat and not be aware of ongoing disputes concerning two important energy sources: the expiring Production Tax Credit (PTC) for wind energy and concerns over natural gas well hydraulic fracturing or fracking. Aside from the fact that both of these issues have become highly politicized, what may be less obvious to many folks is just how closely related these two issues really are.
Wind energy proponents argue that without an extension of the PTC (which presently provides a tax credit of $22 per MWh produced for the first 10 years of a project’s life) new wind projects will come to a halt and jobs will be lost. Hold that thought for a moment but reserve judgment. On the other hand, the fracking discussion is dominated by environmental concerns with drilling and, in particular, how close drilling should be permitted to residential communities. Back in June, I penned a guest commentary in The Denver Post concerning the apparent inconsistency in how these two energy sources were treated from a regulatory standpoint (click here for that column). To wit, the state appears totally disinterested in the proximity of one type of industrial activity (wind) to your back door while claiming primacy in regulating the other.
What is getting lost in this conversation is the fact that the development of wind energy is dependent more on the price of natural gas than on the PTC. When utilities, such as Xcel, make the case for a new wind energy development, it is based on a comparison to an equivalent amount of electrical generation from gas-fired generators. While the PTC helps tilt that comparison toward wind, low natural gas prices shift the balance back in favor of gas generators. And, what is keeping natural gas prices so low? The development of previously unrecoverable shale gas resources using horizontal drilling and, yes, fracking.
On the one hand stands a more than 20-year-old energy industry (wind) that claims that it still needs a public subsidy “head start” to compete, and on the other we have an even older energy resource that owes its resurgence to technological advance. Wind is among the least dense energy sources that we have, contributes to energy sprawl covering thousands of acres, and typically produces the most when demand is the least (i.e., the middle of the night). Natural gas generators, in contrast, are relatively compact, flexible, and produce when demand is high. The drilling, however, leads to its own kind of sprawl. Importantly, as evidenced in recent Energy Information Agency reports, it is the increase in natural gas-fired generation that is primarily responsible for recent reductions in CO2 emissions from electrical generation.
Jobs are at stake with both energy sources so that argument is weak. At what point in time does wind energy get weaned off the public subsidy – whether it be production tax credits or higher ratepayer costs that result from the Renewable Energy Standard? Discussing the pros and cons of solar would consume more electrons than can be allotted to this post, so I won’t even begin to get into that, other than to say that there are both pros and cons there too. The Administration’s all-of-the-above strategy is nonsense. What is needed is an all-that-is-smart approach.
Environmental concerns with fracking are not totally without merit. However, they emanate more from poor well completions and near surface drilling contamination than from what occurs deep underground. And, I don’t believe that arguments calling for greater setbacks of drilling activity from residential communities are misplaced either. Hence, Governor Hickenlooper’s recent suggestion that additional changes to the oil and gas drilling rules may be in order is well taken. On the wind energy side, it is well past time that this industry got its costs in line so that it can compete head to head with other energy sources. Cutting off the PTC cold turkey may not be in the public interest, but phasing it out over a few years may well be. Wind needs to focus more on real engineering and less on financial engineering. Both sources of energy will be important to the future development of sustainable clean energy generation.