Friday, February 06, 2009

Wind Power Stimulus

As reported by the American Wind Energy Association, the US added 8,358 MW of new wind power capacity last year, beating the previous year's record additions by 60%. Some of that surge in capacity likely resulted from developers racing to get their projects on-line before December 31, 2008, when the Production Tax Credit (PTC) for wind was due to expire, before it was extended in October for another year. Either way, it's a remarkable effort, and it would be tough to beat, even if the problems in the financial markets weren't undermining the ability of developers to obtain loans and attract investors looking for a stake in the tax credits that wind and other renewable energy projects generate. AWEA and the industry it represents are looking to the pending federal stimulus bill for help. However, because of the way the tax credits for renewable energy are structured, assistance for the wind industry is a microcosm of the issues surrounding the entire stimulus and its speed of delivery.

The US wind power sector faces two key challenges during this recession. First, the PTC for wind power, which after adjustment for inflation is worth 2.1 cents for each kilowatt-hour of electricity generated, is again due to expire at year end. And if that weren't bad enough, it has become much harder to capture the full value of that 2.1 cents, because it is not a cash payment, but rather a non-refundable tax credit against income taxes. If a wind generation company isn't making a big enough profit, some or all of the tax credit could be left on the table. Wind developers have historically gotten around this limitation by transferring their future tax credits to investment banks and other profitable companies with big tax liabilities, in exchange for cash or a stake in the project known as "tax equity." Lehman was a big player in this market, prior to its demise, and the financial crisis and recession have dried up many other sources. That's why the industry has been asking for Congress to make the PTC "refundable"--payable even to firms without any tax liability.

The problem with this is that the PTC lasts for 10 years, once a project that qualifies for it starts up. The current stimulus package, both the House bill that passed last week and the Senate's version, as best I can tell, would confer the PTC on wind projects put into service through the end of 2012--and even longer in the case of other renewable power technologies, such as geothermal, biomass power, and tidal and incremental hydropower. While extending the PTC would certainly increase the amount of new wind capacity added in the next several years, only a small fraction of the federal funds involved would be parceled out this year and next. However, it will reduce federal tax revenue each year until 2022. Even if wind capacity only increased at its 2007 rate of 5,000 MW per year for the next four years, and the PTC was allowed to expire in 2013, this would add around $1 billion to the annual federal budget deficit for up to a decade after the recession ends. As numbing as the long strings of zeroes in the current stimulus figures might be, we will eventually be back in a world in which every billion counts. The justification for taking on such a lasting burden for wind power looks especially shaky, in light of a recent study indicating that up to two-thirds of the "green jobs" associated with new US wind projects would be created offshore.

Instead of making the PTC refundable, the current version of the stimulus bill would allow developers to make an "irrevocable election" to receive a 30% "Section 48" energy investment tax credit (ITC) in lieu of the "Section 45" PTC, for the life of the project. Although the Section 48 credits aren't refundable, either, allowing wind and other technologies to opt for the ITC front loads their tax benefits, compensating for the shrinkage of the tax equity market. They also appear to qualify for the bill's generous "carry-back" provisions. In the process, this front loads the crucial stimulus spending without affecting future federal budgets, other than by the interest payments on the larger debt. I would be even more comfortable with this solution, if the only extension offered for wind power were for projects electing the ITC conversion, with no hangover of lost tax revenue beyond the recession. After all, the purpose of assisting wind power within the stimulus is to create "green jobs" now, and to keep the industry going through a rough patch, not to contribute to the enormous post-recovery budget deficits we must expect. If the Congress wishes to extend the regular PTC, it should do so outside the stimulus and under the "pay-go" rules that would require the cost to be offset elsewhere.

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