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Production Tax Credit Extension Keeps Wind Power Blowing, for Now

Last-minute deal by Congress keeps renewable investment viable for short term.

     Under the short-term “fiscal cliff” agreement passed Jan. 1, Congress agreed to extend the production tax credit (PTC) for wind turbines and other renewable energy projects that begin construction before this year ends. The tax break helps lower the cost of power from these facilities to be more competitive with conventional fuels, like coal or natural gas.

     As written, for-profit companies can qualify for a 2.2 cents per kWh PTC when installing wind, geothermal, and closed-loop biomass (trees or crops grown expressly for electricity production) generation systems for the first 10 years of their operation. Other renewable technologies—such as open-loop biomass (sawdust, tree trimmings, timber slash, wood chips, farm byproducts, animal waste, and landfill gas), capacity additions for existing small hydro (under 25 MW), municipal solid waste combustion, small irrigation (under 5 MW), and hydrokinetic (ocean wave and tidal) power plants—receive a lesser PTC of 1.1 cents per kWh.

     Electric cooperatives, as not-for-profit utilities, are not eligible for PTCs but were able to use Clean Renewable Energy Bonds (which expired at the end of 2010) or form taxable entities eligible to receive payments covering 30 percent of a project’s capital costs through the U.S. Department of Treasury Section 1603 tax grant program (which expired at the end of 2011) for the same purposes. Now, to benefit from the credit, electric co-ops must sign agreements to buy electricity from private-sector wind projects or arrange long-term leasing agreements with a developer that qualifies for the federal incentives.

     Originally enacted as part of the federal Energy Policy Act of 1992, the PTC has been extended four times and, on three occasions (1999, 2001, and 2003), has been allowed to sunset. This on-again/off-again status contributes to a boom-bust development cycle for the wind power industry. Despite this, developers have managed to build wind farms totaling more than 51,000 MW in potential generating capacity.

     It’s uncertain whether the PTC will be extended again beyond the end of 2013. As Congress faces tough fiscal decisions, wind industry leaders have said they are willing to accept a gradual phase-out of the PTC as soon as 2018 and will consider other ways to leverage financing for new turbine construction. 

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