“Big wind’s complaint that the language reneges on a previous deal is entirely unfounded. The so-called ‘deal’ AWEA is trying to preserve … was a backroom negotiation between big wind and Obama-era IRS lawyers to craft guidance that went well beyond the statute. Congress is finally taking corrective action.”
“According to the Joint Committee on Taxation, the GOP bill will save taxpayers $12.3 billion in PTC-subsidies over 2018-2027. … [T]he GOP tax bill is headed in the right direction on wind energy development. But if the goal was to simplify tax legislation, the GOP should go further and repeal the PTC altogether.”
The GOP tax bill dropped last Thursday and it sent shock waves through the wind industry. Turbine makers Vestas and Siemens saw notable declines in stock value and the American Wind Energy Association (AWEA) blasted Republicans for reneging on a “tax reform deal” already in place. The complaining was predictable. Big wind always howls when its subsidies are touched. But Congress is on the right track and frankly could go further.
What the Bill Does
The tax bill addresses the wind PTC in two ways.
First, it repeals the inflation adjustment and retains the PTC phase-out already in place. Any cost-of-living increases accumulated since 1992 will be erased and the subsidy reset back to its introductory value of 1.5¢ per kWh. Today, the PTC stands at 2.4¢ per kWh.
As discussed in last week’s post, these inflation adjustments might have made sense back in 1992 when wind development was still in its early stages and project costs were likely to increase rapidly with inflation. But, over 25 years, the wind market has changed. As costs dropped and capacity factors increased, the PTC benefit grew to a level where it now represents a significant portion of total installation cost. This growth was obviously unintended and should have been assessed each time the PTC faced expiration and renewal.
Second, and more significant, the bill provides a critical clarification to the ‘start construction’ definition. In short, it states that construction of any new project will not be considered to have started before any date unless there is a continuous program of construction which begins before such date! This clarification applies to tax years beginning before, on, or after November 2, 2017.
Under current IRS guidance, projects that started construction[1] in 2016 and are placed in service within four years are assured that the IRS will not challenge their PTC-eligibility on grounds that development did not advance in a continuous way. The 4-year clock, an IRS construct not found in the statute, provided developers countless ways to secure the full PTC—and they responded. By the end of 2016, industry reports estimated between 30,000 and 70,000 MW of safe-harbored wind turbines under contract.
The GOP clarification takes direct aim at the IRS’s loose rules by requiring a continuous program of construction. Monetary transactions completed on a date-specific will not meet the test. For example, projects that start in 2016 and sit dormant for a few years before being completed, will fail the bill’s test. This change appears to be a positive attempt at reining in the ballooning project pipeline triggered by the IRS safe harbor guidance.
No Tax Deal
Big wind’s complaint that the language reneges on a previous deal is entirely unfounded. The so-called ‘deal’ AWEA is trying to preserve was never with Congress or the American people. Rather, it was a backroom negotiation between big wind and Obama-era IRS lawyers to craft guidance that went well beyond the statute. Congress is finally taking corrective action. Of course, this new plan, if enacted, will require new IRS guidance. Hopefully, under Secretary Mnuchin, the IRS will do a better job.
According to the Joint Committee on Taxation, the GOP bill will save taxpayers $12.3 billion in PTC-subsidies over 2018-2027. We will be looking at this closely to understand this forecast relative to the wind project pipeline; there is no question, however, that the GOP tax bill is headed in the right direction on wind energy development. But if the goal was to simplify tax legislation, the GOP should go further and repeal the PTC altogether.
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[1] “Start construction” is defined as either beginning physical work of a significant nature, or through the 5 percent safe-harbor rule under which the developer commits a non-refundable 5 percent of project cost (for example, turbine purchases).
Because of the various subsidies, taxpayers and rate payers are forced to pay 1) higher monthly electricity bills, 2) higher prices for goods and services, and 2) taxes to finance various subsidies for wind, solar and other RE producers. Here is a partial list:
– The federal ITC, 30% of the qualified portion of the turnkey capital cost. The federal ITC is an upfront, tax credit that can be applied against any of owner’s taxes.
– The state ITC, usually a percentage of the federal ITC. The state ITC is an upfront, tax credit that can be applied against any of owner’s taxes.
– The federal production tax credit, PTC, of 2.4 c/kWh for the first 10 years of operation, a subsidy of 2.4/5 = 48% of the US average wholesale price. No wonder owners are crowing about underbidding traditional generating plants. For example, in areas with good winds, low construction costs and low operation and maintenance costs (Texas, Great Plains), if an owner’s cost is 7.3 c/kWh and he deducts 2.4 c/kWh as PTC, then his bid price could be 4.9 c/kWh, which is sufficient to get the contract, in most cases, and “competitive” with traditional plants.
– The federal and state tax savings due to rapid depreciation write-offs in about 5 to 6 years, much more rapid than normal utility equipment write-off schedules of 10 to 20 years. Having tax savings earlier, instead of later, is financially more advantageous.
– The exemption of equipment purchases from the state sales tax and from the education property tax.
– Selling wind electricity at generous feed in tariffs of about 9 – 10 c/kWh in areas with high capital costs and low capacity factors (CFs), such as New England.
– Selling solar electricity at generous feed in tariffs of about 13.5 – 14.5 c/kWh in areas with high capital costs and low capacity factors, such as New England.
– Selling renewable energy credits, RECs, which lower the utility purchased RE energy cost by up to 50%.
– Loan guarantees by the federal and state government, which lower the interest rate of the funds borrowed from private entities, because the federal and state government assume the risk of the loans.
NOTE:
Wind ITC and Wind PTC decrease in 2017, 2018, 2019, and expire in 2020.
Solar ITC decreases in 2020, 2021, and expires in 2022.
Wind and Solar a Boon for Multi-Millionaires: Warren Buffett, considered one of the outstanding investors of all-time, has stated: “On wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit”. Buffett has investments in multiple wind sites, as do many other multi-billion dollar entities. Buffett and his cohorts hire tax accountants/lawyers to refine the subsidy-milking art form, as well as PR pros and RE lobbyists to continually increase the milking, via higher RPS targets and renewed subsidy periods.
Wind Subsidies a Boon Foreign Companies: About 85% of renewable energy tax credits, grants and loan guarantees go to foreign companies, such as Iberdrola (Spain), Vestas (Denmark), Siemens (Germany). When the US embarks on offshore wind, foreign companies, as a minimum, likely would:
1) Provide the very large wind turbines, 5 – 10 MW
2) Perform most of the erection work, and
3) Provide future maintenance and replacement parts
4) Foreign companies have the already-built infrastructures and about 30 years of offshore experience
5) As part of world trade strategy, their governments want to push the US into a more expensive energy supply mode to make it even less competitive. The US trade deficit in goods was $752.5 billion in 2016. See URL.