Wind developers could be in for a tax bill surprise.
The Senate’s tax plan would reduce the number of years developers can claim the wind production tax credit (PTC), effectively reducing its value, renewable advocates say.
Particularly vexing for wind developers: The provision could be applied retroactively to existing projects.
“It’s a bad precedent for Congress to be sending to any investor,” said Dylan Reed, head of congressional affairs at Advanced Energy Economy, a trade group. “You pass laws; businesses go out and spend based on those laws. And then, five years later, Congress goes back and changes that law and undermines the market.”
The Senate bill represents a blow to wind and solar alike. Both sectors have boomed in recent years, aided in large part by federal tax incentives passed by Congress in 2015. Solar projects now receive a 30 percent investment tax credit. The PTC for wind projects is 2.3 cents per kilowatt-hour. Both gradually decline over time, and the PTC is phased out altogether by 2020.
The Senate’s plan threatens corporate investment in renewables, a key driver in the market. In 2016, the tax equity market for renewable projects was estimated at $11 billion, according to consulting firm CohnReznick LLP.
But that market would be effectively reduced by two provisions in the Senate plan.
The first is known as the Base Erosion Anti-Abuse Tax, or BEAT, provision. It is designed to discourage U.S. companies from outsourcing jobs and investment overseas. Overseas expenses are counted toward a company’s overall tax liability under the provision.
The problem for renewable developers is that many of their investors are multinational companies and investment houses. To the extent that their foreign expenses are counted toward their tax liability, it reduces and potentially negates the credit they receive for financing renewable energy projects in the United States.
“Certainly the majority of the projects built in the U.S. right now are supported by tax equity investment. The magnitude varies from project to project,” said Elias Hinckley, an energy and tax attorney at law firm K&L Gates LLP. “I think we will see some investors drop out because they think they’ll be subject to the tax given the structure of their operations. There will be others that take a wait-and-see approach.”
Replacing large institutional investors figures to be a challenge for both wind and solar, said Jigar Shah, the founder of solar firm SunEdison and a pioneer in renewable finance.
He expressed confidence that solar could adapt but said wind faces a tougher road, thanks to a second provision in the Senate tax plan and the way the PTC is structured.
In their proposal, Senate Republicans included an alternative minimum tax for corporations. It sets corporations’ minimum tax rate at 20 percent. Under the alternative minimum tax, companies are only allowed to count tax credits for four years before they are applied to their overall liability.
The PTC is paid out over 10 years, meaning the amount of time over which wind developers can claim the credit is reduced by six years, Shah said.
“That could destroy the value of a deal done last year,” he said. “That’s only supposed to happen in a banana republic.”
The influx of utility-scale wind projects has made the PTC a target of coal interests and some conservatives. The House tax plan called for reducing tax incentives for wind projects.
The pair of provisions included in the Senate version appears to be an unintentional consequence of the upper chamber’s attempts to find additional revenue for its tax plan, industry observers said.
Renewable advocates are placing much of their hope on Sen. Chuck Grassley of Iowa — an influential Republican who vocally opposed the House’s proposal to reduce the PTC — to secure changes when the House and Senate bills are reconciled in conference committee.
Grassley, in a statement yesterday, said he was aware of the potential problem but stopped short of promising a fix.
“As the father of the wind energy production tax credit, I’ve fought for renewable energies like wind power that diversify our energy supply and create good-paying jobs,” Grassley said. “I’m aware of the argument that the provision could negatively impact some renewable energy projects. I’m currently looking into the matter further.”
Wind developers’ future taxes may depend on what Grassley finds.