Wind Energy and Tax Reform: It’s Past Time

The IRS flouted Congressional intent …and knowingly transformed the PTC phase-out into a 5-year PTC extension. Without reform, the PTC tax will grow to an additional $32+ billion in the next decade, not including the credits awarded projects already operating.

The multi-national, multi-billion-dollar wind industry and its group-think sycophants in the media blew a collective gasket this month following approval of the U.S. House tax bill (HR 1). It seems that House lawmakers shrugged off 25-years of subsidy lore by daring to rein in the open-ended, unlimited wind-PTC tax that now costs Americans over $5 billion annually. [1]

The House was right to take aim at the wind PTC, and the Senate should follow suit.

Ignoring Congressional Intent

The provision of HR 1 causing the biggest uproar is the “Special Rule for Determination of Beginning of Construction,” which clarifies when a project is considered to have started construction. [2]

Following enactment of the PTC phase-out, and the incremental step-down of the subsidy for projects starting [3] [4] after 2016, Obama’s wind-friendly IRS released guidance that established a four-year development window for eligible facilities. Under the guidance, projects that start construction before the PTC expires in 2020 have four years to be placed in-service before the IRS demands details on whether development advanced in a continuous way. With only modest effort, projects could show they started construction in 2016 and avoid the declining PTC altogether.

In effect, the IRS flouted Congressional intent with its 4-year window, and knowingly transformed the PTC phase-out into a 5-year PTC extension. If anyone doubts this, see Norton Rose Fulbright’s piece declaring a project’s start construction date “irrelevant as long as construction is complete by 2020.”

Safe-harbored turbines under contract in early 2017 ballooned to between 30,000 and 70,000 megawatts (MW) with Bloomberg New Energy Finance projecting 38,000 MW of new wind being placed in service by 2020. Without reform, the PTC tax will grow to an additional $32+ billion in the next decade, [5] not including the credits awarded projects already operating.

Fixing IRS Abuse

HR 1 adopts the same IRS guidance regarding start construction but clarifies PTC-eligibility by incorporating the following language in the bill:

The construction of any facility, modification, improvement, addition, or other property shall not be treated as beginning before any date unless there is a continuous program of construction which begins before such date and ends on the date that such property is placed in service.

Nothing in HR 1 hints at the contrived 4-year development window so any presumption of ‘being continuous’ would be expunged. Projects that moved dirt or safe-harbored turbines on a date certain in 2016, will not be assured full PTC treatment unless they can show continuous construction (or progress) before that date and through to project completion. [6]

AWEA’s Tom Kiernan carped that HR 1 effectively kills half of the wind project pipeline. That may be so, but he shouldn’t be surprised. Big wind tried to game the PTC phase-down and Congress called them on it. It’s that simple.

The Senate Tax Bill

Reaction to the Senate tax bill, also released this month, was more muted. The PTC phase-out was left intact but the bill introduces several provisions that are likely to spoil the appetite for tax-credit investments (i.e., the PTC). Currently, tax equity accounts for up to 60% of the capital cost of a typical wind energy facility.

In particular, the bill introduces a 10% “base erosion” minimum tax that would apply to large multinational companies seeking to reduce their US tax liability by making deductible payments to foreign affiliates. As presented, the provision would act as an alternative minimum tax that in any given year could cancel the benefit of claiming PTCs. It’s conceivable that tax credits may be taken in one year of a multi-year wind deal and lost to the government in the next, thus raising doubts over whether investors will take the risk.

Ending Wind Friendly Tax Policies

Both the House and Senate tax bills lower corporate tax rates that will reduce the need for tax-avoidance investments like wind. HR 1 also takes a direct approach at shutting off the subsidy spigot for wind, which after decades, has never been able to prove its own financial strength. The Senate provisions are more general but will further reduce interest in tax equity investments.

One thing is clear: The big wind giveaway is finally coming to an end.

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[1] HR 1 resets the PTC value back to its 1992 value (1.5¢/kWh) and provides crucial clarification on the timing for when projects qualify for the subsidy.

[2] Under the 2012 American Taxpayer Relief Act (ATRA), PTC eligibility changed so projects need only “start construction” before the expiration date in order to claim the subsidy, rather than having to be placed in service by that date.

[3] The PTC phase-out was introduced with passage of PATH (Protecting Americans from Tax Hikes Act of 2015). The phase-out incrementally reduces the PTC for projects starting in 2017, 2018 and 2019 by 20% in each year after which it is eliminated.

[4] Projects can establish the beginning of construction by either beginning physical work of a significant nature (the ‘‘physical work test’’) or through the safe harbor test which generally requires a project pay or incur a non-refundable amount representing 5% of the total project cost of construction. In all cases, the project must make continuous progress towards completion once construction has begun.

[5] At 2.4¢ per kWh for energy generated during the first ten years of project life, 38000 MW of new wind built by 2020 would reach $32 billion in credits assuming a 40% capacity factor paid out over 10 years (8760 hrs * 38000 mw * $24/mWh * 40% * 10 years)

[6] In a recent case in South Dakota a wind developer ‘moved dirt at several wind-turbine sites’ in order to satisfy the IRS start construction test. The developer was caught acting without the required state permits.