Impact of Policy Uncertainty on Renewable Energy Investment: Wind Power and PTC

Abstract

It is generally understood that the pattern of repeated expiration and short-term renewal of the federal production tax credit (PTC) causes a boom-bust cycle in wind power plant investment in the U.S. This on-off pattern is detrimental to the wind industry, since ramp-up and ramp-down costs are high, and players are deterred from making long-term investments. It is widely assumed that the severe downturn in investment during off years implies that wind power is unviable without the PTC. This assumption turns out to be unsubstantiated: this paper demonstrates that it is not the absence of the PTC that causes the investment downturn during off years, but rather the uncertainty over its return. Specifically, it is the dynamic of power purchase agreement (PPA) negotiations in the face of PTC renewal uncertainty that drives investment volatility. With contract negotiations prevalent in the renewable energy industry, this finding suggests that reducing regulatory uncertainty is a crucial component of effective renewable energy policy. The PTC as currently structured is not the only means, existing or potential, for encouraging wind power investment. Using data from a survey of energy professionals, various alternative policy incentives are considered and compared in terms of their perceived reliability for supporting long-term investment.