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.

4 comments:

  1. Thank you for an interesting and thought-provoking post on fracking and wind productions. These topics are growing in importance every day and I doubt the discussion will die down anytime soon with wind turbines increasing in size and fracking becoming more abundant.

    Energy production via natural gas and wind are closely linked. Much of the argument is which source is better. They both have pros and cons: both use precious resources from the earth in some way. Rare earth metals and large amounts of land are required for wind turbines, while natural gas takes a finite amount of minerals from the earth. I think the argument should be more about how we can get wind and natural gas to work better together. Where natural gas is a fossil fuel, wind is renewable and where wind is variable, natural gas generation is on demand. Wind has advanced in size to the point where the grid integration of the amount of potential wind power generation we could have in this country is a much larger issue than the ability engineer the turbine better. Without solving the grid integration problem of renewables, all renewable energy points become ineffective.

    To this point, I propose that if the PTC were renewed that one option might be to incentivize the whole energy picture into the policy with a phase out plan to ease the credit out of the market. A wind farm becomes a wind power plant with natural gas generation working hand in hand to provide power as demanded. For example, in the Pacific Northwest, the utilities realize that with the 8,000 MW of power, natural gas peaking plants are vital to their portfolio (1). State RPSs are driving the increase of renewable energy, but cheap gas is driving the increase in natural gas power plants. This is not a bad situation, since the two energy sources work towards a cleaner energy solution together. Management of these power sources on the grid needs to take into account the nature of both energy sources.

    1. "Natural Gas-Electricity Primer." Power and Natural Gas Planning Task Force, Aug. 2012. Web. 25 Nov. 2012. .

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  2. Nice post. Thank you for taking the time to publish this information very useful. Thanks!

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  3. Hi there! great stuff here, I'm glad that I drop by your page and found this very interesting. Thanks for posting. Hoping to read something like this in the future! Keep it up!

    Economies of scale and new manufacturing processes are making alternative energy production more competitive, but until it achieves parity through innovation or regulatory policy, the success of green energy companies may largely depend on their ability to optimize Green Energy and Cleantech tax incentives to attract investors and maintain sustainable balance sheets.

    Wind Energy Tax Credits

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