Wind energy development projects, no matter where they are built, rely heavily on financial grants, allowances, credits, schemes and subsidies in order to be viable.
Production Tax Credit (PTC)
Investment Tax Credit (ITC)
Renewable Energy Grants
Modified Accelerated Cost Recovery System (MACRS)
Federal Loan Guarantees
Renewable Energy Certificates (RECs)
Greenhouse Gas Emission Credits (future)
Tax Increment Financing
Maine's Pine Tree Development Program
As Glenn R. Schleede of The Science & Public Policy Institute states (The True Cost of Electricity from Wind is Always Underestimated and its Value Always Overestimated):
“When initially proposed, wind energy advocates argued that tax breaks and subsidies were necessary to permit a relatively “new and developing technology” to gain a foothold in competition with other sources of energy for producing electricity. However, industry demands for continuation, expansion and extension of subsidies have made it clear that there are no longer any serious expectations that wind energy is competitive or that improvements in the technology will eventually make it competitive. There is no longer any serious doubt but that tax breaks and subsidies — not environmental, energy, or economic benefits are the primary reasons that “wind farms” are being built.”
Here's a description of some of the grants, subsidies and tax schemes available to wind energy developers:
Production Tax Credits (PTC). The federal government provides extremely generous tax incentives. Wind power providers are offered a Production Tax Credit which amounts to a 2.2 cent tax credit per kilowatt produced in the first 10 years of operation. Far more valuable than a tax deduction, this is a 100% direct credit against taxes owed. This incentive has been the driving force behind much of the country's wind developments. This program is currently scheduled to expire at the end of 2012.
But what good are tax credits if you're losing money and therefore owe no taxes? Not to worry! By utilizing what's called “Tax Equity Financing” wind developers with little or no taxable income can benefit from PTCs. Tax equity financing is a business model specifically designed to help wind project owners with little need for tax credits pair up with a larger entity that has a more substantial tax burden and therefore can use the tax credits. Because the tax credits available to project owners are typically proportional to their level of ownership in the project, the tax-motivated entity, the one who needs the tax credits, becomes the majority owner in the first 10 years of production and often pays a “management fee” to the operating company in lieu of power sales revenue. Once the tax incentive period ends after year 10, the majority ownership of the project reverts back to the local owner, and the tax-motivated investor becomes a minority share in the project.
Investment Tax Credit (ITC). If a wind developer prefers, he may elect to take the ITC instead of the PTC. A determination of which credit to claim will depend on the financing options available and a calculation of projected costs and revenue generated by the project.
The ITC allows a direct credit for 30% of the cost of qualified property used in a wind energy facility which can be claimed entirely in the year the facility is placed into service. Unlike the PTC, there is no requirement that electricity from a facility is sold, just that it generates electricity. As with the PTC, wind project owners with little need for tax credits typically utilize Tax Equity Financing by which they pair up with a larger entity that has a more substantial tax burden and therefore can use the tax credits.
Renewable Energy Grant. Wind energy facilities that are eligible for the PTC or the ITC and under construction before the end of 2012 (previous deadline was 2010 but this program was extended by Congress 12/2010), may elect to apply for a cash grant from the Treasury Department for 30% of the cost of qualified property in lieu of the PTC or ITC. And best of all, the cash grant is tax free!!! Developers like the cash grants because they eliminate the need for taking on a tax partner who can utilize tax credits, however it may remain difficult for a developer to fully utilize depreciation benefits without a tax partner.
As of April, 2010 more than $2.6 billion has been granted to industrial wind developers. First Wind has so far received three outright grants totaling $117 million. This program is in no way tied to the amount of energy generated. Click here to read how this program is explained by a consultant to the wind industry.
Sadly, this program has been abused by many wind energy developers and politicians. Responding to frenzied lobbying efforts by the American Wind Energy Association and individual developers, First Wind included, the Federal Government agreed to grant millions of dollars to wind projects that were built prior to the program. Stetson I is the posterchild of this slick maneuver. Stetson received its tax-free grant AFTER it was constructed. This runs contrary to the program's intent which is to stimulate job creation. Click here to read an article documenting this scam.
MACRS. Another Federal tax incentive provided to wind energy developers is accelerated depreciation, in this case Modified Accelerated Cost Recovery System (MACRS). In a capital-intense industry like energy, the value of accelerated depreciation can't be overstated. It allows developers to write-off the value of their equipment (using an “adjusted basis”) from taxable income over only 5 years. With the deduction heavily weighted in the earliest years, wind developers get significant tax savings faster than other industries.
But just like with the Production Tax Credits, if the project owner has no income against which to apply this accelerated depreciation, what good is it? Again the answer is Tax Equity Financing. The project owner with a small tax burden will take on a tax-motivated investor with a sufficient tax appetite to consume the entire incentive.
Federal Loan Guarantees. The American Recovery and Reinvestment Act of 2009 (ARRA, Section 1703) provides for $6 billion in loan guarantees for renewable energy developers. This means that the wind developer can approach a bank for a loan and present the U.S. Government as its co-signor. What bank wouldn't want to lend to someone whose co-signer can print money? Of course in reality it isn't the U.S. Government guaranteeing the loan, ultimately it's the U.S. taxpayer who's on the hook. So far (date: 2010), American taxpayers are guaranteeing $117 million of First Wind's debt even though First Wind consistently loses money. According to the Form S-1 they filed with the SEC, they had 2009 revenues of $75.3 million and ended the year with a net loss of $61 million.
Angus King is famous for his good ol' boy sayings like:
" Ya take no risk, you get no return!"
"I believe in TANSTAAFL: There ain't no such thing as a free lunch!"
I guess he wants all of US to buy his lunch. And he wants US to take the risk so HE can get the return. You see, he's the beneficiary of a Federal $102million loan guarantee for his Record Hill Wind Project.
Renewable Energy Certificates (RECs). In order to increase the amount of renewable power produced, many states have mandated that a certain percentage of electricity sales or installed capacity must come from renewable resources by a certain deadline. These requirements are called Renewable Portfolio Standards (RPSs). They are the equivalent of the failed Cap and Trade legislation that was defeated on a national scale. The following chart shows the RPSs that are currently on the books. Each data mark represents a state:
The black line running through the middle of the crowd shows the statistical mean. The closer a state is to that line, the more 'in line' it is with the other states. The red data point way up at the top represents Maine. The percentage mandated by Maine is the highest at 40%. That's 48% higher than the second highest state, Connecticut at 27%. Maine is also imposing a deadline of 2017 which is sooner than all but five other states.
But what happens if an electric supplier is unable, through its supply contracts, to reach the required percentage? That's where Renewable Energy Certificates (RECs, also called Renewable Energy Credits) come in. That electricity supplier will be required to purchase RECs in the amount of their shortfall. This is their punishment for having bought more 'dirty' electricity than the state mandated. Keep in mind, the supplier has to pay for RECs over and above the electricity it's already bought to supply its customers. Just in case a utility should happen to satisfy Maine's absurd RPS goals, the legislature added that 25% of the renewable energy must come from renewable sources that have been in operation two years or less. That effectively removes hydropower and tidal power from the equation. For a detailed description of the legislation that established Maine's RPS, click here.
For every 'green' megawatt hour generated and sold by a wind project, the project owner receives one REC. These certificates are issued by various entities, one of which is Green-e. The wind project owner then retains a clearing house to sell these RECs for them at auction. Green-e also serves this function. So a REC is nothing more than a piece of paper that represents 1 megawatt hour of 'green' electricity that someone else has generated. It is a tradable, non-tangible, energy commodity that represents electricity that has already been sold to someone else. RECs were invented by the folks at Enron.
The wind company gets to sell its power AND sell its RECs. The utility has to buy all the electricity its customers demand AND pay for RECs.
In April 2010, RECs are trading in New England in the $25 - $30 range but the price fluctuates according to supply and demand. This means that as states insist their utilities buy ever greater percentages of their energy from renewable sources, demand for RECs, and therefore the price of RECs, will increase. This is an extremely attractive source of revenue for wind developers but an increasing cost to electricity suppliers. Naturally, the cost of buying these RECs is passed on to consumers in higher electricity bills. In 2009 First Wind's received $11.5 million for their RECs in New England.
The objective of RECs is to promote renewable energy sources at the expense of non-renewable energy sources. Supposedly each REC represents 1 MWh of energy that did not have to come from a dirty, non-renewable source. But there is a serious flaw in the plan. It assumes that every MWh of wind energy displaces one MWh of polluting energy. That is a false assumption and no one is required to provide proof of displaced polluting energy. Since wind power is intermittent and variable, it does not displace an equivalent amount of nonrenewable energy production.
This chart shown above could accurately be titled: "What State wants to burden its residents and businesses with the highest energy costs the fastest?" It shows clearly that no one is rushing into renewable energy as aggressively as Maine. The absurd RPS goal set by Governor Baldacci will destroy Maine's business climate through higher energy costs and decimate the tourism industry by destroying our mountaintops. Maine will lose businesses and jobs. Who benefits? The wind developers and the former politicians who work for them.
If you'd like to learn more about RECs, read Renewable Energy Certificates, a PDF file put out by the EPA.
Greenhouse Gas Emissions Legislation. The U.S. Congress is currently considering several proposals that would establish new mandatory reduction targets for greenhouse gases, including "cap-and-trade" bills. Cap-and-trade legislation would set caps on the emissions of greenhouse-gas-emitting entities and allow open market trading in Emissions Allowance Certificates with the aim of meeting emission reduction targets. Because a spinning wind turbine does not emit greenhouse gases, wind energy facilities will be granted Emissions Allowance Certificates which they can then sell, providing them with yet another revenue stream. Just like Renewable Portfolio Standards and RECs, this approach assumes incorrectly that each MWh of wind energy generated represents one MWh of traditional energy that we didn't have to generate.
Tax Increment Financing (TIF). Maine’s TIF program allows municipalities to reach agreements with developers that will:
1) effectively reduce the local taxes paid by the developer,
2) attract a project that will create jobs and economic development in the community,
3) allow the municipality to minimize its reportable tax income so it will not jeopardize
federal and state aid.
A good example of a TIF would be when a developer wants to build a football stadium in a community. The community gives the developer tax breaks, knowing the project will spur other economic growth (new businesses and jobs) that will give them even more tax revenue down the road.
In Maine, wind developers are selling municipalities on the idea of TIF’s using the same rationale. However, the benefits to the local communities are not as apparent as they are in our football stadium example, so TIF’s must be negotiated carefully. This is because industrial wind power projects don’t create much, if any, additional economic growth and they produce very few long-term local jobs. Communities in Maine consider them because if their tax revenues increase due to a new wind project, these communities may no longer qualify for state and federal aid programs. A TIF can protect them from being shut out of those programs.
Because the wind developer benefits so much from a TIF, the host community is in a strong negotiating position. The municipality should hire its own experienced legal advisor (not one paid for or recommended by the wind developer) to negotiate a TIF with teeth, to ensure the community is being adequately compensated for the generous tax breaks it grants the developer.
To read more about TIFs see Municipal Tax Increment Financing, which is prepared by the Department of Economic and Community Development.
Maine's Pine Tree Development Program. Designed to encourage all kinds of manufacturing businesses, this program provides a package of income, sales and property tax related incentives to encourage business location and expansion in designated areas. The Maine Revenue Services determined that wind energy development undertaken by private developers as opposed to public utilities, qualifies for this lucrative package of benefits:
• An enhanced Employment Tax Increment Financing (ETIF) Program that returns to
company 80% of the income taxes withheld for qualified employees for up to 10 years;
• A 100% refund of corporate income tax for years one through five, and 50% for years
six through 10;
• A local option Tax Increment Financing (TIF) that will not be counted against a
municipality’s existing TIF area and value caps while returning some or all of the new
real property taxes to a business to help finance the development project; and,
• A 100% sales and use tax exemption for construction materials and equipment
purchases; a 100% sales and use tax reimbursement on real property purchases;