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Negative Electricity Prices and the Production Tax Credit: Why wind producers can pay us to take their power – and why that is a bad thing

This study was prepared by members of The NorthBridge Group, Frank Huntowski (Director), Aaron Patterson (Principal), and Michael Schnitzer (Director). The NorthBridge Group is an independent economic and strategic consulting firm serving the electric and natural gas industries, including regulated utilities and companies active in the competitive wholesale and retail markets. NorthBridge has a national practice and long-standing relationships with restructured utilities in Regional Transmission Organization (“RTO”) markets, vertically-integrated utilities in non-RTO markets, and other market participants. Before and throughout the restructuring process of the U.S. electricity industry, the authors have assisted clients with wholesale market design, competitive market analysis. | Negative Electricity Prices and the Production Tax Credit Why wind producers can pay us to take their power - and why that is a bad thing By Frank Huntowski Aaron Patterson and Michael Schnitzer The NorthBridge Group 9 10 2012 The Northbridge Group About the Authors This study was prepared by members of The NorthBridge Group Frank Huntowski Director Aaron Patterson Principal and Michael Schnitzer Director . The NorthBridge Group is an independent economic and strategic consulting firm serving the electric and natural gas industries including regulated utilities and companies active in the competitive wholesale and retail markets. NorthBridge has a national practice and long-standing relationships with restructured utilities in Regional Transmission Organization RTO markets vertically-integrated utilities in non-RTO markets and other market participants. Before and throughout the restructuring process of the U.S. electricity industry the authors have assisted clients with wholesale market design competitive market analysis and strategy regulated power supply procurement state regulatory initiatives and strategy and mergers and acquisitions. THE Northbridge Group 1 Executive Summary As a matter of both economics and public policy no government production tax subsidy should ever be so large that it creates an incentive for a business to actually pay customers to take its product. Yet the federal Production Tax Credit PTC for wind generation is doing just that with increasing frequency in electricity markets across the United States. In some wind-rich regions of the country wind producers are paying grid operators to take their generation during periods of surplus supply. But wind producers more than make up the cost of the negative price payment because they receive a 22 MWH federal production tax credit for every MWH generated. The federal wind Production Tax Credit PTC was originally enacted in 1992 to jumpstart the wind energy industry.1 The PTC has since been .