The US wind production tax credit is a hoary old chestnut by renewable subsidy standards – it’s been around, in one form or another, since 1992. Analysis of the various enactments, expirations and re-enactments of the PTC when set against the growth in established wind capacity shows clearly that the PTC is the major driver of wind capacity expansion in the US.
It also shows a more negative trend – that short term extensions of the PTC, with no certainty as to its continuing application, has led to a boom-and-bust cycle with developers front-loading their development schedule, rushing to finish projects to fit within the PTC timeframes before yet another expiration, and curtailing project size to speed up the development cycle, leading to more expensive generation as economies of scale fail yet again to be realised. The graph above from the Union of Concerned Scientists illustrates this beautifully.
The most recent expiration was scheduled for the end of 2012, and the effect was stark: Bloomberg published data showing that in Q1 2013, no US wind financings took place at all, even though in the same quarter last year, US$3.8 billion of financings took place over 14 projects. This is evidence yet again that developers crowded their deals into 2012, mindful of the fact that the PTC might not exist at all by 2013.
As luck would have it, Congress managed a one-year extension of the PTC in January 2013 – a last-minute Hail Mary for the wind industry for this year. Not only was the PTC extended, but the rules were changed slightly to benefit not only wind installations actually installed and producing, but also projects that are “under construction”.
To meet the “under construction” qualification, developers must be able to demonstrate one of the criteria below:
1) They need to show that “physical work of a significant nature” has begun on their project, either a) at the site, or b) in a third party manufacturer’s factory to which the developer has given a binding order for specially designed equipment. There are examples in a clarification from the IRS issued in April as to exactly what is considered physical work of a significant nature – eg. pouring foundations, excavation etc., or when manufacture of equipment begins in the third party manufacturer’s factory (but not if the equipment is already built and held in inventory).
2) They need to show that at least 5 percent of the total project cost has already been incurred before 1 January 2014. This constitutes a “safe harbour” for developers who have incurred expenditure but cannot show any of the physical work has already begun, or who bought turbines or other equipment that was in the manufacturer’s inventory.
Under the old rules, a facility had to be actually placed in service before January 1, 2014, except for qualified wind facilities, which had to be placed in service before January 1, 2013. Now they just have to meet one of the two “under construction” qualifications. It remains to be seen just how much of an extra boost this gives to turbine manufactures like Vestas and Gamesa, for whom the PTC extension in January came too late to avoid significant slow-downs in production in Q1 of this year.
However, some in the industry are weary of yet another one-year short term cycle. Even before the extension in January 2013, industry sages were calling for an end to the uncertainty caused by continuous expirations and extensions: in December, just before the latest extension, the American Wind Energy Association (AWEA), rather than pleading for longer term extensions or even putting the PTC on a permanent footing, actually wrote to Congress proposing a six-year phase-out of the PTC. While the AWEA have now back-pedalled on this, saying that their proposal was merely a speculative analysis of what the world would look like following a phase out, and whether this would help the industry stand on its own, other organisations like the Bipartisan Policy Centre have joined in the calls for a permanent wind-down of the PTC.
Master limited partnerships (MLPs), used extensively in the fossil fuel industry, could prove to be a solution to the financing problem (and a bill was introduced in April aiming to do just this), but these are costly to the taxpayer. In addition, sentiment in Congress, particularly among the Republican-controlled House, is against allowing the wind industry to access any of the tax benefits of MLPs without enacting a wider package of tax reform which extends the same benefit to other industries.
Fundamentally the question remains – do tax credits and other incentives have a place in the industry on a permanent basis? While many would say that the wind industry should stand on its own two feet, and are eager for investment horizons of longer than 12-18 months thanks to short term extensions of the PTC, we shouldn’t forget that the fossil fuel and agricultural industry are just as supported by a forest of tax breaks and other subsidies like MLPs. If the wind industry loses the PTC – its main support – the oil and gas industry will continue to access tax- free financing in the markets thanks to MLPs and the playing field will be tilted even further.