Power tool: Production tax credits
The federal production tax credit (PTC) is generally defined as a business credit that applies to electricity generated from wind and other renewable energy sources for sale at "wholesale," such as to a utility or other electricity supplier, that then sells the electricity to customers at "retail." In the case of wind, it applies to electricity produced during the first 10 years of a wind plant’s operation. The company that owns the wind plant subtracts the value of the credit from the business taxes that it would otherwise pay.
Benjamin Israel, an attorney with the Washington, D.C., law office of Bracewell & Giuliani LLP, told POWER that the PTC is critical for the continued development of wind resources in the U.S., as these credits help create a level playing field by allowing wind energy to be more cost-competitive with traditional fossil-fueled electricity production. "The PTC provides the foundation for the current boom in wind energy investment in the U.S.," he said.
Anthony agrees with Israel. With a stable PTC since 2005, the industry has experienced three years of record growth, he said. This has enabled the industry to build a solid foundation, which offers great potential for expanding the amount of wind being tapped in the U.S.
"Historically, when the PTC has been allowed to expire [Figure 2] before being extended (in 1999, 2001, and 2003), wind energy installations dropped by as much as 93% in the following year," he said. "Over the longer term, an array of stable and supportive policies are needed." (See the Commentary, p. 156, for international evidence of this dynamic.)
2. Gone with the wind. The number of wind turbines installed dropped quickly each time the U.S. production tax credit expired. Courtesy: American Wind Energy Association
Coming on the heels of Congress’s action in October to give a one-year extension to the renewable energy PTC for 2009, a flurry of announcements of new U.S. wind manufacturing facilities showed wind power’s potential to provide a critically important stimulus to the faltering U.S. economy, according to AWEA. If Congress had not acted in October, the PTC was scheduled to expire at the end of 2008. AWEA asserted that the plant announcements and openings in Arkansas, Minnesota, Indiana, and Iowa underscore wind power’s ability to generate jobs as well as electricity.
State wind power programs
"Presently, 25 states and the District of Columbia have enacted mandatory renewable portfolio standards (RPSs) that require retail sellers of electricity to obtain from renewable energy resources a minimum percentage of the power they sell at retail," William D. Hewitt, an attorney with the law firm of Pierce Atwood LLP in Portland, Maine, said in an interview with POWER. "Retail sellers whose generation portfolios do not meet the RPS standard can purchase renewable energy credits (RECs) to bring their portfolio into compliance with the RPS mandates of the state where the retail sale is made."
According to Hewitt, RECs are an attribute of green energy, and they can generally be severed and sold independent of the energy. Thus, RECs provide a developer with a valuable revenue stream that, along with power sales and various federal, state, and local tax incentives, are helping to make wind competitive with traditional fossil generation.
Israel, the Washington-based energy attorney, also has strong views concerning the impact of state initiatives on the development of wind energy. He said that although the PTC provides the foundation for investment in wind energy in the U.S., the PTC does not dictate where wind farms will be developed. Rather, according to Israel, it is the RPSs that mandate that a certain amount of electric power should be generated by renewable energy resources and that shape the market for renewable energy in the country.
"While efforts to pass a national RPS have consistently failed in Congress, mandatory RPSs have been established in a patchwork manner in 25 states and the District of Columbia, with nonbinding RPSs in another four states," Israel said. "It is these state RPSs, combined with other state programs and incentives, which are leading and shaping the country’s development of renewable energy."
According to Israel, most utilities that purchase energy from wind farms have the right to claim all "green attributes" associated with those wind farms — including RECs. As a result, many wind projects are not able to separately market their RECs, making the REC market less liquid than it might otherwise be. However, this is not always the case.
"When wind farms do sell their RECs, they are often sold under the "Green-E Energy" certification program that assures the quality, quantity, and ownership of those RECs," he said. "It is the continued use of the Green-E certification program that keeps the REC market vibrant and potentially more liquid, further enabling the development of new wind farms."
Another interesting phenomenon associated with the segregation of RECs from power sales, according to Israel, is the ability of some wind farm owners to back-stop their power sales with a hedging device. The hedge gives the owner a guaranteed minimum energy sales price and allows the owner to separately sell, and receive compensation for, the RECs. Therefore, RECs can be sold to multiple purchasers whose needs for RECs may vary greatly from those of a regulated electric utility acquiring RECs through a traditional power purchase agreement.
According to GE’s Lowe, most, but not all, of the states with an RPS allow for REC trading, although in many cases the market is still small. The most developed REC market is in Texas, which has helped that state become the leader in wind power. A strong "solar REC" market is also emerging in New Jersey, helping it become the number two state in solar energy. In California, RECs are still "bundled" with power purchase agreements and cannot be traded separately, though this may change in the future.
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