1. What is the wind production tax credit (PTC)?
The wind PTC was first established under the Energy Policy Act of 1992 to stimulate the construction of renewable technologies for power generation by providing a production-based credit for the first 10 years of project operations. The PTC provides a way for Congress to encourage private investment in wind energy facilities. By pre-selling the tax credits, developers can secure a significant percentage of their project capital costs. In return, investors are able to lower their future tax debt. The wind energy, in turn, can be sold at a lower price than if tax equity were not involved. Initially set at 1.5¢/kWh, the credit is adjusted annually for inflation. Today the full PTC stands at 2.5¢/kWh.
2. What is the Phase-down and how was it implemented?
In 2015, Congress took steps to finally phase-out the PTC. After 23-years, many argued that it was time for the wind industry to function without continued public support. Under PATH (Protecting Americans from Tax Hikes Act of 2015, Pub. L. No. 114-113, Div. Q, 129 Stat. 2242), wind facilities that began construction before January 1, 2017 were eligible to receive 100% of the PTC. After that, projects that started construction in 2017, 2018 and 2019 could receive 80%, 60% and 40% of the wind PTC respectively, after which the PTC was to be eliminated.
3. What does it mean to 'begin construction'?
When Congress passed the 2012 American Taxpayer Relief Act (ATRA), the wind industry won a critical concession from Congress with the introduction of the “begin construction” provision. With this change, wind projects need only begin construction before the PTC expiration date in order to claim the subsidy, rather than having to be placed in service by that date.
Under the IRS guidance, developers could show they began construction in one of two ways. They could either begin actual physical work of a significant nature by the deadline or, alternatively, they could incur a non-refundable expenditure representing 5% of the facility’s total cost (safe-harbor definition). In either case, once construction begins developers are required to show “continuous progress” towards completion as a backstop to ensure projects were not delayed for indefinite periods and still try to claim the subsidy.
4. Why did the IRS create the 4-year window?
In a clarifying notice issued in September 2013 the IRS stated it would not closely scrutinize development schedules or monetary outlays to confirm compliance with the continuous progress test so long as projects were placed in-service by January 1, 2016 which was the next date the PTC was to expire prior to the phase-down being adopted. The 2-year window was later extended to 4-years after the PTC phase-down was enacted.
5. Is the “continuous progress” test still required?
Yes. In fact, the continuous progress test is arguably the only test that matters. Under IRS guidance, developers were expected to earnestly start construction by a date certain (ex: end of 2016) and maintain records that showed they were actively working toward completing the project. The 4-year window relieved developers of having to closely track and report their progress to the IRS in order to prove progress was ongoing. The development window also provided developers with some certainty in the event of a challenge to their progress claims. If a project is placed in service within the 4-year window, the PTC would be awarded with no questions asked.
6. What happens if a developer misses the 4-year window?
For developers that maintain their paperwork and are able to demonstrate continuous progress toward the in-service date, the IRS would likely still grant the PTC even if the project takes longer than 4 years. However, developers that start projects in 2016 (either under the physical work test or safe-harbor test) and back-burner those projects for a period before restarting construction should not be able to pass the continuous progress test. In those cases, they would miss the 4-year window and earn a reduced PTC. The IRS rules allow for excused delays relating to events outside a developer’s control including weather conditions, natural disasters, and delays in obtaining permits or licenses from federal, state, local, or Indian tribal governments.
7. It is now 2020. Has the PTC fully expired?
No. And there is no certainty that it will ever expire. Under the phase-out, 2019 was supposed to be the last year wind projects could qualify for the PTC. Projects that started construction in 2019 and are placed in service within four years would earn 40% of the PTC or 1¢/kwh during the first 10-years of operation. But during the final hours before the December 2019 holiday break Congress voted for a 1-year extension of the PTC through to 2020 and increased its value to 60% or 1.5¢/kwh. Projects that started construction in 2019 would still earn the 40% of PTC. Projects that start construction in 2020 earn 60% of the full PTC.
8. Have there been any other concessions for wind developers?
Yes. Less than 3 months after Congress extended the PTC for another year and increased its value to 60% of the full subsidy, the wind industry sought preferred treatment again as part of the March 2020 COVID-19 stimulus bill negotiations. The industry made three costly requests of Congress:
- Extend the PTC development window from four to six years for ALL projects commencing construction after December 31, 2015,
- Secure a direct pay provision equal to 100% of the PTC value to address potential decreases in the availability of tax equity; and
- Extend the PTC beyond the 2020 expiration date.
The effort stalled in the Senate after Republicans argued that other industries including hospitality, entertainment and the airlines were experiencing more severe impacts from the virus. When Congress was unable to enact the changes legislatively, pressure was placed on the IRS to extend the development window and the IRS complied.
In May 2020 the IRS issued Notice 2020-41 wherein it granted a 5-year development window (up from 4-years) for projects that started construction in 2016 or 2017. Projects that started after 2017 received no Covid concession from the IRS.
10. Why is it a problem to extend the 4-year window?
The development window was a construct created by the IRS in order to ease reporting requirements. The duration of the window (4 years) was established based on industry data showing that it would typically take between 2-4 years for renewable energy projects to be placed in service. Increasing the 4-year window ignores the underlying intent that developers were required to demonstrate continuously progress toward completion of their projects. Industry analysts have openly admitted that the industry largely dismissed the continuous progress test and relied on the more concrete 4-year window timeframe.
Developers seeking full-PTC benefits had from 2016 until the end of 2020 to reach commercial operation. Projects started in 2017 have until the end of 2021 to earn 80% PTC, and so on. Developers are now looking back at the stockpile of turbines they knew would likely miss the 2020/2021 deadlines and see another chance at full or 80% PTC benefits. A one-year extension to the development window makes this possible. In effect, the IRS is rewarding those developers who essentially ignored the guidance.
11. But the wind PTC is now at 60% of the full subsidy or 1.5¢/kwh. Doesn't that mean developers reduced their reliance on the subsidy?
Not really. Since 1992 when the wind PTC was first enacted, cost of living adjustments increased the value of the wind PTC from the original 1.5¢/kWh to 2.5¢/kWh today. Projects that are eligible for 60% of the PTC earn 1.5¢/kWh which is the base value before inflation adjustments. However, in recent years, wind energy development costs have dropped while capacity factors increased dramatically. As such, the benefit to developers of the adjusted PTC is staggering.
Consider a 1000 kW project built in 1992 at an assumed installed cost of $2200 per kilowatt and a 22% capacity factor. Over ten years, the project would produce 19,272,000 kWh of electricity and receive production tax credits valued at $289,080 (19,272,000 kWh x 1.5¢/kWh). The subsidy would contribute about 13% to the total cost of installation.
That same 1000 kW project can be installed today at about $1400/kW. Assuming a 45% capacity factor and full PTC benefit of 2.5¢/kWh subsidy, the turbine would produce 40,000,000 kWh of electricity and receive $1,000,000 in tax credits over ten years. In other words, U.S. taxpayers at large would pay 71% of the total project capital cost. At 60% of the PTC, the subsidy still represents a substantial 41% of capital costs. If you add in generous depreciation policies, the total tax equity available to project owners is greater still. (These figures are not exact and are illustrative only. The present value of the tax credits which are earned over a 10 year period is not accounted for.)
12. Can the wind industry survive without the PTC?
The industry can no-longer claim to be a nascent industry. There are more megawatts of wind installed in the US than nuclear power and 10’s of 1000s more megawatts in the development stages.
For nearly a decade the wind industry has touted that it was ready (or nearly ready) to move off the wind PTC and grow on its own without public assistance. The phase-down was intended to provide the industry with a glide path to traditional sources of construction financing. But in 2020, federal subsidies still represent between 50-65% of project costs.
The industry used the phase-down as a six-year extension of the tax credit. In the period from 2016 to 2020, developers made no apparent effort to reduce reliance on the subsidy. Instead, they focused solely on beginning construction of as many wind megawatts as possible, especially in the years 2016 and 2017 when the subsidy had the greatest value.
It is unlikely the industry will ever be able to make up for the loss of the PTC using traditional construction financing. It is for this reason that the wind industry no longer discusses weaning itself off the subsidy.
13. Regardless of cost, isn’t it important to support wind/solar to reduce carbon emissions?
Any climate change policy must first assess the impacts of specific actions against the perceived benefits. Wind energy is an intermittent energy source that can only be produced when the wind is blowing. Even with over 100,000 megawatts operating in the U.S. very little of the capacity is relied on to meet critical peak periods. This is particularly true during hot summer afternoons when demand is highest. Despite the rhetoric that the United States can be powered 100% by wind energy, the reality is much different. There are other, more efficient ways of producing clean energy that can reliably meet demand that do not require billions in public subsidies.
It is also important to recognize the environmental impacts of renewable energy. Wind and solar have low power densities and thus require substantially more land than traditional sources of generation. Placement of the turbines requires tens of thousands of acres in order that the operation of one turbine does not interfere with others within the same project. The land moving and excavation necessary to accommodate turbine foundations and many miles of new access roads alters the landscape permanently despite allowing portions of the area to revegetate. This is especially true in virgin areas of the desert and on ridgelines. When considering the noise emitted from the turbines, the habitat is further disrupted.
Utility-scale solar projects concentrate sunlight that kills birds flying over, burning them to a crisp. Migrating waterfowl looking at large expanses of solar panels dive into them, thinking they are lakes, and are not able to regain flight. Large solar facilities often include perimeter fencing which prohibits free movement of migrating land animals. Square miles of land covered with solar panels lock out wildlife and destroy plant life.
These damaging impacts are multiplied by the sheer number of wind and solar projects being built now, and those proposed. Congress and many environmental groups are acting as though the impacts of wind and solar development are already well understood and mitigated for. This is not true. In fact, the science has not kept current with the rapid development.
14. What can we expect from Congress regarding the PTC?
Looking at language in the Moving Forward Act (H.R 2) passed by the House in July 2020, we can get a sense of the policies many Democratic members of Congress are pushing for renewables under the Green New Deal.
For example, H.R 2 calls for another five-year extension of the production tax credit at 60% of the current value. The bill also brings back the direct pay option which eliminates the need for tax investors. Armed with five more years of the PTC and cash grants, wind developers and their Corporate and Wall Street partners will have sufficient funding to get nearly any project permitted and built. Since Congress has repeatedly demonstrated its willingness to assist the industry, other extensions are likely to be enacted.
H.R.2 also establishes the goal of permitting no less than 25,000 megawatts of new wind, solar, and geothermal on public lands by 2025. In order for this to be accomplished, H.R. 2 calls for wind priority areas to be designated on public land where the environmental reviews of proposed projects will be expedited under a programmatic environmental impact statement. It is not clear from the language to what extent detailed, project-specific analyses will be allowed.
If serious wildlife issues arise after construction, it is impossible to enforce operational mitigation measures. A developer is only bound by the conditions in the EIS. If the permit assumes no adverse impact, there will be no mitigation measures for that impact, nor will there be monitoring to determine whether that assumption was correct.
Further, who decides the parameters for what is, and what is not suitable land for wind farm development matters. We’re only now beginning to understand how much of the wildlife resident or migrating through project areas have been killed or displace by the development.
Conclusion
The history of public policy towards industrial wind turbines reconfirms the insight from Milton and Rose Friedman: “The so-called infants never grow up.” But wind is less infant than it is inferior for new generation compared to, in particular, natural-gas-fired combined-cycle generation.
Wind is thought of as a free, endless source for electricity. But in business, economic, and ecological terms, it is just the opposite. The infrastructure required to turn free wind currents into usable energy–land, cement, steel, and long-distance transmission wires — are hardly inexpensive and limitless. Suitable sites that do not compromise health and property are quite finite, bringing the descriptor renewable into question.
This means that even with artificial (government-enabled) profitability, the resource faces what environmentalists a generation ago called the limits to growth.