Do production subsidies have a wage incidence in wind power?

Abstract

Employment in electricity generation from renewable resources has expanded rapidly in the US and in Texas during the last decade. Availability of the Production Tax Credit (PTC) has been an important driver of this growth. Using establishment-level employment and payroll data for Texas at the North American Industrial Classification System (NAICS)-6 level, we analyse the differences in average wages between firms generating electricity from fossil fuels and those generating electricity from wind power. We compare relative average wages before and after the rapid expansion of wind power development that followed the ex ante renewal of the PTC in 2006. Our main finding using both the parametric and nonparametric estimation techniques proposed by Racine and Li (2004), is that average payrolls for wind power generators increased relative to fossil fuel-based electricity generators after 2006.

Keywords:

• wages
• production tax credits
• wind energy
• clean energy

JEL Classification::

• J31
• Q20
• Q28

Acknowledgements

The authors would like to thank Andres Vargas, Ian Walker, David Peel and the conference participants at the Western Economic Association International (2010) and International Industrial Organization (2011) for their valuable comments. We are also grateful to the Department of Energy for financial support (Award Number DE-FG36-06GO86092).

Notes

¹ Installed capacity in Texas has increased from 181 MW in 2000 to 6967 MW in 2008.

² Legislation to renew the PTC was enacted in August 2005 (Table 1), prior to the acceleration of fuel prices that began to be observed from the mid-2006 through the summer of 2008. Therefore, the ex ante renewal of the PTC in 2005 could not have any response to rapidly escalating fossil fuel prices.

³ The grid operated by the ERCOT is wholly contained within the state. There are, however, significant portions of the state that are not within the ERCOT grid. Much of the wind resource is located in the South Plains and Panhandle regions of the state which are contained in the Southwest Power Pool. Nevertheless, most of the wind power generated in Texas is delivered to load centers in the ERCOT region. With the construction of significant new transmission capacity to deliver West Texas wind power into ERCOT, beginning as early as 2012, curtailment issues should be mitigated and new opportunities for wind power development will be realized in the Panhandle region.

⁴ RPS is a regulation that requires the increased production of energy from renewable energy sources, such as wind, solar, biomass and geothermal.

⁵ It should be pointed out that the authors obtained these data under an agreement of confidentiality and disclosure of the actual data is subject to certain restrictions. For example, we are not allowed to indicate the number of firms in a given county if there are fewer than four firms in the NAICS code in the county.

⁶ See Lindstrom (2011).

⁷ Also note that it will be ideal to use county fixed effects to control for unobservable regional heterogeneities. Due to limited number of wind energy producers located in few counties, we do not use county fixed effects in the estimation.

⁸ Furthermore, Racine and Li (2004) also note that it is common to encounter situations where the number of cells exceeds the number of observations.

⁹ Hall (1987a, b) notes that this weakness results, in part, from the use of the likelihood cross-validation bandwidth selection process.

¹⁰ Note that they obtain rates of convergence of the smoothing parameters to benchmark optimal values, and establish the asymptotic normality of the estimator.

¹¹ We also conduct a two sample t-test on the predicted conditional densities and results are qualitatively similar to the log density results. We have excluded the table in order to save space and can provide these results upon request.