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Impact of public policy uncertainty on renewable energy investment: Wind power and the production tax credit

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  • Barradale, Merrill Jones
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    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 US. 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 often 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 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 policy instruments are compared in terms of their perceived stability for supporting long-term investment.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 38 (2010)
    Issue (Month): 12 (December)
    Pages: 7698-7709

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    Handle: RePEc:eee:enepol:v:38:y:2010:i:12:p:7698-7709

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    Web page: http://www.elsevier.com/locate/enpol

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    Keywords: Regulatory uncertainty Wind energy policy Power purchase agreement;

    References

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    1. Agnolucci, Paolo, 2006. "Use of economic instruments in the German renewable electricity policy," Energy Policy, Elsevier, vol. 34(18), pages 3538-3548, December.
    2. Meyer, Niels I. & Koefoed, Anne Louise, 2003. "Danish energy reform: policy implications for renewables," Energy Policy, Elsevier, vol. 31(7), pages 597-607, June.
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    Cited by:
    1. Lüthi, Sonja & Prässler, Thomas, 2011. "Analyzing policy support instruments and regulatory risk factors for wind energy deployment--A developers' perspective," Energy Policy, Elsevier, vol. 39(9), pages 4876-4892, September.
    2. Gosens, Jorrit & Lu, Yonglong, 2014. "Prospects for global market expansion of China’s wind turbine manufacturing industry," Energy Policy, Elsevier, vol. 67(C), pages 301-318.
    3. Abolhosseini, Shahrouz & Heshmati, Almas, 2014. "The Main Support Mechanisms to Finance Renewable Energy Development," IZA Discussion Papers 8182, Institute for the Study of Labor (IZA).
    4. Shrimali, Gireesh & Nelson, David & Goel, Shobhit & Konda, Charith & Kumar, Raj, 2013. "Renewable deployment in India: Financing costs and implications for policy," Energy Policy, Elsevier, vol. 62(C), pages 28-43.
    5. Shirley, Rebekah & Kammen, Daniel, 2013. "Renewable energy sector development in the Caribbean: Current trends and lessons from history," Energy Policy, Elsevier, vol. 57(C), pages 244-252.
    6. Ming, Zeng & Ximei, Liu & Yulong, Li & Lilin, Peng, 2014. "Review of renewable energy investment and financing in China: Status, mode, issues and countermeasures," Renewable and Sustainable Energy Reviews, Elsevier, vol. 31(C), pages 23-37.
    7. Lu, Xi & Tchou, Jeremy & McElroy, Michael B. & Nielsen, Chris P., 2011. "The impact of Production Tax Credits on the profitable production of electricity from wind in the U.S," Energy Policy, Elsevier, vol. 39(7), pages 4207-4214, July.
    8. Gillenwater, Michael, 2013. "Probabilistic decision model of wind power investment and influence of green power market," Energy Policy, Elsevier, vol. 63(C), pages 1111-1125.
    9. Bergek, Anna & Mignon, Ingrid & Sundberg, Gunnel, 2013. "Who invests in renewable electricity production? Empirical evidence and suggestions for further research," Energy Policy, Elsevier, vol. 56(C), pages 568-581.

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