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Wednesday, April 23, 2014

Incentives Watch: A Sharp Decline in Growth of U.S. Wind Energy Production Predicted If Federal Production Tax Credit Not Renewed

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In this interview, Gwendolyn Bredehoeft, an operations research analyst at the U.S. Energy Information Administration, discusses wind energy production in the United States.  In particular, Ms. Bredehoeft explains why the vast majority of wind-generated electricity is concentrated in only a handful of states, as well as how various federal and state incentives, including the federal production tax credit, have impacted wind-generated electricity overall.

According to the U.S. Energy Information Administration’s electric power report last month, 80 percent of wind-generated electricity in the country last year came from just 12 states.  In order of the most wind-generated produced, those states are:  Texas, Iowa, California, Oklahoma, Illinois, Kansas, Minnesota, Oregon, Colorado, Washington, North Dakota and Wyoming.

Bloomberg BNA:  Why are only 12 states responsible for 80 percent of wind-generated electricity in the United States?
Bredehoeft:  This is a function primarily of wind resource and policy.  Wind resource is not uniform throughout the country and, in general, the states with the highest levels of wind capacity (and generation) also correspond to those with stronger wind resource.  The Southeast states, for example, have little-to-no wind capacity – and this corresponds to the fact that these states generally have poor wind resource.  If a given area is generally less windy, then the wind turbines will not run as often or at as high of a power output.  A wind plant that is expected to generate less electricity will have a harder time being profitable than a plant where electricity output is consistently higher and, therefore, is less likely to be built.

State renewable policy has also played an important role in driving wind capacity additions – in particular, the renewable portfolio standard (RPS).  An RPS requires electricity providers to supply a minimum share of the electricity they provide from eligible renewable resources.  Depending on the wind resource, the relative availability of other eligible resources such as solar, biomass, geothermal, hydroelectricity, etc. and other factors (for example, the need for firm versus intermittent generation source, or the time frame of the policy requirements), wind can be an attractive option to meet those standards.  Other policies, such as state-level tax credits, rebates, or financing incentives, can also play a role.

Bloomberg BNA:  What impact did the federal production tax credit under I.R.C. § 45 have on wind-generated electricity in 2013?
Bredehoeft: 
A record level of wind capacity was installed in 2012, in part due to the impending expiration of the production tax credit (PTC).  Although the PTC was extended at the very beginning of 2013, there was a great deal of uncertainty as to whether that would actually happen, so developers rushed to complete projects prior to the end of 2012.  That surge in installed capacity resulted in a corresponding surge in 2013 wind generation that was about 20 percent above the level in 2012, and about 40 percent above the level in 2011. 

Bloomberg BNA:  Besides the federal tax credit, how do state tax credits impact wind-generated electricity?
Bredehoeft: 
As mentioned above, renewable portfolio standards tend to be the driving state-level policy for encouraging wind capacity growth.  This is in part because electricity providers generally must comply with RPS policies, whereas tax credits incentivize, but do not require, the development of new renewable energy installations.  State-level tax credits are credited against state taxes, and sometimes have implicit or explicit caps on the total amount that can be credited against the project owner’s state tax liability.  That being said, it is another mechanism through which a project can improve its revenue stream and, to the extent that wind projects are increasingly cost-competitive in some areas, every source of additional project revenue is important to pushing it over the margin.

Bloomberg BNA:  What does the future hold for wind energy production?
Bredehoeft: 
The EIA projects that wind capacity will continue to grow from 2014 to 2016, with about 15 gigawatts of additional capacity projected to be added by the end of 2016, compared to about 60 gigawatts of total installed capacity at the end of 2013.  However, under the assumption that the federal production tax credit is not extended again, the EIA projects that growth will slow down significantly in the years after 2016 due to relatively little demand for new capacity, and that growth will not pick back up until after 2030.

*Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn:  Will the federal production tax credit be extended again or phased out entirely?

For more information about wind energy tax credits and incentives, check out Bloomberg BNA’s Credits and Incentives Portfolios andGreen Incentives Navigator by signing up for a free trial of the Bloomberg BNA Premier State Tax Library.

By:  Kathleen Caggiano

Follow Kathleen on Twitter at:  @katcaggiano.

Follow BBNA on Twitter at: @BBNATax.

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