Energy

Troutman Sanders LLP: Without Tax Credit Extensions, Returns Of PPAs For Renewables Will Have To Give, GAO Says

 

By Renewable Energy Insights

SNL reports that if Congress does not extend a pair of subsidies for the renewable energy industry, new construction will slow unless retail electricity providers pay significantly more for wind and solar power or developers forfeit a big chunk of their returns, the U.S. Government Accountability Office projected in a recent report.

The results should not come as a surprise to developers of utilities.

That analysis, included in a report responding to a congressional request for information on federal programs designed to support utility-scale power projects, comes as wind and solar lobbyists increase pressure on lawmakers to renew the production and investment tax credits. The production tax credit, which compensates developers $23 per MWh that a wind farm generates, expired at the end of 2014, while the 30% investment tax credit is scheduled to fall to 10% of project costs at the end of 2016.

The incentives, which together accounted for $11.5 billion in forgone revenue from fiscal year 2004 through 2013, are key drivers of construction and employment, industry trade groups argue. But because the Internal Revenue Service does not collect project-level data, it is impossible to know how much generation the incentives actually support, according to the report.

“Without project-level data on the ITC and PTC, Congress cannot evaluate their effectiveness as it considers whether to reauthorize or extend them,” the GAO said.

Tax credits are one form of policy support that the government has used to aid energy development in recent years. Overall, around 500 traditional power projects totaling around 157,000 MW were built in the U.S. from 2004 through 2013 compared to nearly 2,000 renewable energy facilities totaling about 69,000 MW, according to a GAO analysis of SNL Financial data.

Tax expenditures for renewable energy projects accounted for an estimated $13.7 billion in forgone revenue compared to around $1.4 billion for traditional power projects, the GAO said, noting that expenditures from the PTC will continue as projects that qualify are typically eligible for the first 10 years of their production. Another $16.8 billion in support was provided through outlays, most of which was dispersed through the Department of Treasury’s cash grants in lieu of tax credits program. That program, which supported 1,073 projects for a total of 28,309 MW, sunset at the end of 2011, but projects that started construction by the end of that year remained eligible for the grant after that.

Even without project-level data, the GAO determined that fewer projects would be built without the financial support of the production and investment tax credits.

Without the PTC, a developer of a 150-MW wind farm would have to give up between 68% and 109% of project returns to keep from having to push for higher prices in power purchase agreements. A 10% ITC, meanwhile, would require a developer of a 100-MW solar photovoltaic plant to forgo between 39% and 76% of returns to keep PPA prices level.

Alternatively, a developer could push for a 32% to 36% increase in PPA prices to keep returns level without the production tax credit or a 20% to 27% increase in PPA prices to maintain project returns under a 10% investment tax credit.

However, project returns likely would be first on the chopping block, the GAO said, since retail service providers and state regulators would probably be reluctant to agree to higher priced power purchase agreements, particularly if cheap natural gas is available.

To avoid market disruptions, the American Wind Energy Association, a trade group, recently said it will pursue a five-year extension of the production tax credit. AWEA said it will publicly attack politicians who do not support its agenda.

Local economic benefits help bolster support for the wind industry among state officials. Governors Jay Inslee, a Democrat from Washington, and Terry Branstad, a Republican from Iowa, wrote congressional leaders May 26 on behalf of the Governors’ Wind Energy Coalition, urging them to “promptly” extend the investment and production tax credits, saying the U.S. wind industry will “stagnate” over the next decade without continued policy support.

“There’s currently over $23 billion of projects under construction and to keep that momentum going we need a long-term, stable policy environment,” an AWEA spokesman wrote in an email after the group unveiled its plan to pursue a five-year extension of the production tax credit. “We’ll be working with supporters in Congress on both sides of the aisle to extend this successful policy as long as possible so we don’t send a thriving U.S. industry off a cliff.”

A 2014 report by the National Renewable Energy Laboratory found that gradually reducing the PTC through 2020 would support between 3,000 MW and 4,000 MW of new capacity annually under low gas price and low load growth conditions and between 6,000 MW and 8,000 MW under high gas price and high load growth conditions. Between 2008 and 2012, the U.S. wind industry averaged 8,700 MW of new installations annually, according to the report, “Implications of a PTC Extension on U.S. Wind Deployment.”

Pattern Energy Group Inc. President and CEO Michael Garland said his company, a yieldco that holds mostly wind assets, favors phasing the incentive out over three to five years. “That will get 10%, 20% more production out of the wind at the same cost as the current projects, which will put us cost competitive almost anywhere in North America against $4 gas, in our view,” Garland said during a May 7 earnings call.

Lawmakers who favor incentives for the renewable energy industry, including Republican Sen. Chuck Grassley of Iowa, have criticized colleagues who are trying to dismantle the subsidies while leaving in place incentives for other sectors of the energy industry, such as deductions that the oil and gas industry can claim for intangible drilling costs and well depletion.

“I think investment tax credits, which [are] the analog in the offshore [wind] business to the production tax credit, are very important for a new technology, for an industry just beginning,” Deepwater Wind CEO Jeffrey Grybowski said recently at an industry conference in Orlando, Fla. “And I think while we don’t have a level playing field in this country with respect to government subsidies of the energy sector, then maintenance of the ITC and the PTC are very important,” he said. Deepwater Wind plans to start construction this summer on the first commercial offshore wind farm in the U.S.

In more mature sectors of the renewable energy industry, some say that eliminating tax credits would not be a permanent setback. “When you shift the capital stack, it’s going to cause some issues and disruption in the market. But I think it will adjust at the end of the day” because “the demand side is still there,” Timothy Kemper, co-director of CohnReznick LLP’s national renewable energy industry practice, saidin April.

However, if the renewable energy industry loses its tax incentives and there is upward pressure on the price of power purchase agreements, development, particularly in states where utilities have already met or exceeded renewable energy mandates, could get pinched, the GAO said.

Still, many are confident that the biggest wind and solar companies, in particular, will able to drive costs down fast enough to handle a worst-case scenario.

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