The debate about the future of PTC incentives generally 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. Various other proposals, such as extending and phasing out the PTC over time, fall within these two extremes. This report examines various alternatives for phasing out production tax credits (PTC) for qualified renewable electricity generation. In addition to elimination or permanent extension of the PTC, four different phase-out approaches are examined in this report: (1) phase-out under current law, (2) straight line phase-out over five years, (3) American Wind Energy Association (AWEA) phase-out concept, and (4) a market-linked phase-out policy option. Each alternative is unique in terms of complexity, certainty, and other aspects. It is beyond the scope of this report to holistically examine all phase-out alternatives. This report is focused on production tax credits that are available for renewable electricity generation and potential options for eliminating, extending, or phasing out this financial incentive over a period of time. During the 2012 debate about the future of wind PTC incentives, the concept of phasing out the PTC for wind over a period of time was discussed by both congressional and industry stakeholders. In the 113 th Congress, two bills— H.R. 2081 and H.R. Rationale for phasing out the PTC over time is generally based on the argument that the wind industry would have the opportunity to adapt to a gradual reduction of this federal financial incentive as opposed to adapting to a sudden and drastic elimination of the PTC based on a defined expiration date. As the 2013 expiration of the PTC incentive approaches, Congress may choose to debate the future of wind PTC incentives and may also consider PTC phase-out policy options. This report is designed to inform debate about various policy options for the PTC that have been proposed. The President's FY2014 budget proposes to make the PTC permanent and refundable. Proponents of extending the availability of PTC incentives argue that the temporary nature of PTC incentives creates an investment climate that is uncertain and that other sources of energy have tax incentives that are permanent in nature, thus resulting in unfair treatment across the spectrum of energy sources and technologies. Phase Out the Renewable Electricity PTC: Selected Alternatives

A potential policy alternative to either eliminating or extending the PTC might be an approach that could phase out the incentive over a period of time. Phase-out in Current Law

If it were extended, current law (Section 45 of the Internal Revenue Code), requires that the wind PTC be reduced and phased out when a reference price for wind power (calculated and published annually by the IRS) exceeds an inflation-adjusted threshold value, as discussed in the footnote below. Generally, this proposed approach would reduce the PTC level by 20% of its current (2013) level, each year, for five years. AWEA Phase-out Concept

On December 12, 2012, the American Wind Energy Association (AWEA) sent a letter to the Senate Committee on Finance and the House Committee on Ways and Means that outlined a PTC phase-out concept. 2081 and H.R. 2987 ). Another example is Japan, where FIT rates for renewable power are periodically reviewed and adjusted based on certain market conditions. Variables such as the cost of debt, the cost of equity, leverage ratios, loan terms, and natural gas prices can change over the course of a year and the market-linked approach allows for consideration of these energy and financial market changes, if so desired. PTC value could be capped to not exceed its current level (2.3 cents per kilowatt-hour) and when price parity with NGCC generation is achieved, the PTC incentive is no longer available: The underlying goal of the market-linked phase-out policy option would be to reduce and eventually eliminate federal PTC incentives for wind power projects. This LCOE calculation does not include any production tax credit, renewable energy credit (REC) sales, or other state/federal incentives that might be available to wind projects. Other options may also be possible. This assumption was made as a way to include a policy lever to incentivize the wind industry to continuously reduce costs and improve technology performance in order to become economically viable on an unsubsidized basis.
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 consideration is a linear reduction of PTC incentives each year. For example, the PTC could be reduced from its current level by 20 percentage points each year for five years. After the end of the five-year period, PTCs would no longer be available. This approach is simple conceptually, and may be easy to implement. However, this approach may or may not be effective, depending on market conditions (i.e., electricity prices, wind installation costs, natural gas prices). Alternatively, PTC incentives might also be reduced annually based on a non-linear formulation that incorporates the myriad of market variables that can affect the cost competitiveness of renewable electricity. While this approach is more complex when compared to the straight-line method, it could establish benchmark PTC levels using a comparative metric (e.g., natural gas power). A detailed examination and analysis of this "market-linked" phase-out approach is included in this report. Each phase-out approach differs in terms of complexity, implementation, and potential impacts to renewable electricity deployment.
Various proposals have been introduced in the 113th Congress that would eliminate the renewable electricity PTC (e.g., November 14, 2013, letter to Committee on Ways and Means from more than 50 House members), permanently extend the PTC (e.g., H.R. 2539, and the President's FY2014 budget) or phase out the PTC (e.g., H.R. 2081 and H.R. 2987). If Congress chooses to debate the future of the renewable electricity PTC, background and analysis of various policy alternatives may serve to inform discussions about this federal incentive.