On Jan. 2, President Barack Obama signed H.R.8, the American Taxpayer Relief Act, into law. While the sweeping legislation helped extend unemployment insurance and make permanent the Bush-era tax cuts, it also extended for one year the wind energy production tax credit (PTC), as well as the investment tax credit (ITC), which is important for offshore and community wind.
Per the legislation, wind energy projects must begin construction by Jan. 1, 2014, in order to receive the $0.022/kWh incentive. Notably, the act amends the “in service” date to a “begin construction” date, which allows for more lead time for developers than would a one-year extension alone.
Although the extension averts a total collapse, wind developers are left to grapple with a host of issues, including what it means for a wind project to begin construction.
According to Keith Martin, partner at law firm Chadbourne & Parke, the Internal Revenue Service (IRS) needs to decipher for the industry what it means for a project to be under construction in order to qualify for the PTC or the ITC. The IRS issued a similar clarification on “begin construction” language after the issuance of the U.S. Department of the Treasury’s Section 1603 cash-grant program.
Martin is hopeful that the IRS will employ the same “begin construction” language that was used for the Treasury cash grants.
“The grant program has an unusually generous definition of what it means to start construction,” he says, noting that the issue for wind farms is that each turbine is considered a separate “facility” for tax purposes.
“Among the issues the IRS will have to decide [on] is whether to give developers the option to treat an entire wind farm as a single facility for this purpose so that the start of construction of one turbine will be considered the start of work on the entire project,” Martin adds.
The IRS has typically taken up to one year to resolve discrepancies. Given that the wind industry only has a one-year extension, the IRS could expedite a ruling within four to six months, Martin says.
However, the government has not exactly been quick to rule on these types of matters. The Section 1603 cash grants were included in the American Recovery and Reinvestment Act of 2009, which Obama signed into law on Feb. 17, 2009. However, it was not until July 9, 2010 – nearly 18 months later – that the Treasury provided guidance relating to the 5% safe harbor for the start of construction.
David Burton, partner at law firm Akin Gump Strauss Hauer & Feld, says the H.R.8’s “begin construction” language may mean incurring 5% of the cost in 2013, which is how the Treasury interpreted the begin-
construction rules for the Section 1603 cash-grant program.
Just the same, the Treasury or the IRS will need to rule on the interpretation, Burton says, adding that the Joint Committee on Taxation, a group of tax lawyers that advise the Senate Finance Committee, could help to clarify the matter soon.
As written, the act does not include an end date, Burton says. Therefore, savvy project developers could theoretically bank tax credits well into the future. For example, a wind farm owner could incur $5 million to purchase wind blades in 2013 and use those blades in a $100 million project that is completed in 2017. As currently written, the wind project would be eligible for 10 years of PTCs beginning in 2017.
According to Burton, if a developer plans well and banks enough 2013 PTC-eligible component parts, it may be able to continue to construct PTC-eligible wind farms indefinitely. However, he cautions, “We do not know yet if the government will permit such an interpretation.”
And without the certainty, wind developers are unlikely to take full advantage of the extension.
“Unfortunately, it still doesn’t provide the long-term clarity that the industry needs,” says Tom Swierczewski, director of development at Midwest Wind Energy. “The feast-or-famine cycle created by short-term PTC extensions is holding the industry back by adding uncertainty to already challenging and risky business decisions.”
Too little, too late?
Many industry watchers predict that even with the PTC extended, development this year will be slower than in 2012, which is likely to be a record year for wind installations. Because wind farms typically need 12 to 18 months for development, it will still be nearly two years before the industry sees a return to the development levels of the last few years.
Just the same, wind developers are thankful for the opportunity to revisit projects that were not expected to be completed before the expiration of the PTC. Boston-based developer First Wind realized that several of its projects were in the latter stages of development and were deemed too important to merely be put on hold, admits Matt Kearns, vice president of development.
“By anticipating an extension, we took a little bit of a risk,” he admits. Fortunately for First Wind, the PTC was extended, and it appears the developer’s gamble paid off.
“By continuing to develop projects – when others stopped – we are well positioned to grow,” Kearns says, adding that First Wind expects to begin construction on 500 MW this year and plans to grow its portfolio 50% in the future.
Nonetheless, 2012 was marked by tough decisions, Kearns admits. “Based on a business case, we had to make these hard choices,” he recalls. “These projects could have been put into cold storage.”
The PTC extension means First Wind’s two Maine wind farms will begin construction this year. In addition, the company could break ground on late-stage projects in Oregon, Washington, Idaho, Utah and Hawaii by year-end.
Houston-based EDP Renewables (formerly Horizon Wind Energy) will resume latter-stage wind projects, located in Kansas and New York, that were put on hold because of the tax-credit deadline, says company spokesperson Adam Renz.
Meanwhile, Midwest Wind Energy’s Swierczewski reports that the company’s 75 MW Broken Bow II project, located in Custer County, Neb. – which is construction-ready and includes an off-taker for the output – will most likely begin construction this year, after being put on hold due to PTC uncertainty.
Other developers, such as Edina, Minn.-based Geronimo Wind, which gambled on the PTC being extended, are likely to reap the benefits.
“We continued to invest in our most commercially viable projects throughout 2012, with the belief that the PTC would be extended and customer interest would be renewed,” says Blake E. Nixon, Geronimo Wind’s president. “We’re already hearing from utility and commercial customers looking to lock in low-cost wind energy in 2013. This renewed customer demand will drive the construction of new projects that are ready and able to meet the market’s needs.”
Although the PTC extension benefits wind developers, turbine makers are less likely to reap the same rewards. For instance, a spokesperson for Siemens, who wished not to be named, says many bankable projects being developed for 2013 were pushed into 2012 to qualify for the tax incentive.
“Many wind project developers had already advanced their orders due to the pending expiration, making 2012 a record year in terms of installations,” she says. “Therefore, we are currently evaluating the potential impact the extension of the PTC will have in the short term.”
Many manufacturers spent the last 12 months trimming staff and reducing operations in preparation for what was thought to be a bare market. For instance, Gamesa laid off 300 workers between its Fairless Hills, Pa.-based nacelle plant and its Ebensburg, Pa.-based blade facility. Currently, there is “no change in status” for those employees, says David Rosenberg, vice president of marketing for Gamesa North America.
The situation is similar at Vestas, which sounded one of the first distress calls last January, when it laid off over 2,300 employees and warned it would lay off another 1,600 U.S. employees if the tax credit were allowed to expire. The extension of the PTC does not affect Vestas’ projections to deliver about 5 GW this year and to employ about 16,000 people by the end of 2013, company spokesperson Andrew Longeteig says, adding that the late timing of the extension will result in a significant reduction in 2013 installations relative to previous years.
While developers and suppliers seek ways to monetize the tax credit, it is likely that legislators will begin the process of ramping down the PTC, which could happen as early as this summer, when Congress is expected to rework the tax code.
“Look for the phase-out discussion to begin as Congress starts considering major tax legislation this summer,” says Frank Maisano, energy policy analyst at Bracewell Giuliani. He adds that the wind industry has already stated its approval of the tax credit’s being phased out over a six-year period. “However, even wind supporters in the Senate see the ramp-down period as less,” Maisano says.
For his part, Midwest Wind Energy’s Swierczewski says Congress should pass one last extension of the PTC at the current level for an additional year or two and then proceed with a gradual reduction down to zero by 2017.
“The industry could then plan for the long term without fear of having the rug pulled out from under it while also allowing sufficient time to complete its maturation process so it can stand on its own in the near future,” he says. w
Industry At Large: Federal Policy
Can PTC Extension Lift Wind Industry Over Time?
By Mark Del Franco
The wind energy production tax credit has been extended, but has the damage already been done?
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