Understanding Industrial Wind’s Production Tax Credit (Part II: 2020 Status)

“In recent years, wind energy development costs have dropped while capacity factors increased dramatically. As such, the benefit to developers of the adjusted PTC is staggering.”

Wind power’s Production Tax Credit (PTC) has not expired as of 2020. And there is no certainty that it will ever be allowed to expire.

Under the phase-out, 2019 was supposed to be the last year wind projects could qualify for the PTC. Projects that started construction in 2019 and are placed in service within four years would earn 40% of the PTC or 1¢/kwh during the first 10-years of operation. But during the final hours before the December 2019 holiday break, Congress voted for a 1-year extension of the PTC through to 2020 and increased its value to 60% or 1.5¢/kwh.

Projects that started construction in 2019 would still earn the 40% PTC. Projects that start construction in 2020 now earn 60% of the full PTC.

2.1 Have there been any other concessions for wind developers?

Yes. Less than 3 months after Congress extended the PTC for another year and increased its value to 60% of the full subsidy, the wind industry sought preferred treatment again as part of the March 2020 COVID-19 stimulus bill negotiations. The industry made three costly requests of Congress:

1. Extend the PTC development window from four to six years for ALL projects commencing construction after December 31, 2015.
2. Secure a direct pay provision equal to 100% of the PTC value to address potential decreases in the availability of tax equity.
3. Extend the PTC beyond the 2020 expiration date.

The effort stalled in the Senate after Republicans argued that other industries including hospitality, entertainment and the airlines were experiencing more severe impacts from the virus. When Congress was unable to enact the changes legislatively, pressure was placed on the IRS to extend the development window and the IRS complied.

In May 2020 the IRS issued Notice 2020-41 wherein it granted a 5-year development window (up from 4-years) for projects that started construction in 2016 or 2017. Projects that started after 2017 received no Covid concession from the IRS.

2.2 Why is it a problem to extend the 4-year window?

The development window was a concept created by the IRS in order to ease reporting requirements. The duration of the window (4 years) was established based on industry data showing that it would typically take between 2 and 4 years for renewable energy projects to be placed in service.

Increasing the 4-year window ignores the underlying intent that developers were required to demonstrate continuous progress toward completion of their projects. Industry analysts have openly admitted that the developers largely dismissed the continuous progress test and relied on the more concrete 4-year window time frame. 

Developers seeking full-PTC benefits had from 2016 until the end of 2020 to reach commercial operation. Projects started in 2017 have until the end of 2021 to earn 80% PTC, and so on. Developers are now looking back at the stockpile of turbines they knew would likely miss the 2020/2021 deadlines and see another chance at full or 80% PTC benefits. A one-year extension to the development window makes this possible.

In effect, the IRS is rewarding those developers who essentially ignored the guidance.

2.3 Does 60% of full PTC mean developers are moving off the subsidy?

Not really. Since 1992 when the wind PTC was first enacted, cost of living adjustments increased the value of the wind PTC from the original 1.5¢/kWh to 2.5¢/kWh today. Projects that are eligible for 60% of the PTC earn 1.5¢/kWh, which is the base value before inflation adjustments.

However, in recent years, wind energy development costs have dropped while capacity factors increased dramatically. As such, the benefit to developers of the adjusted PTC is staggering. 

Consider a 1000 kW project built in 1992 at an assumed installed cost of $2200 per kilowatt and a 22% capacity factor. Over ten years, the project would produce 19,272,000 kWh of electricity and receive production tax credits valued at $289,080 (19,272,000 kWh x 1.5¢/kWh). The subsidy would contribute about 13% to the total cost of installation.

That same 1000 kW project can be installed today at about $1400/kW. Assuming a 45% capacity factor and full PTC benefit of 2.5¢/kWh subsidy, the turbine would produce 4,000,000 kWh of electricity and receive $1,000,000 in tax credits over ten years.

In other words, U.S. taxpayers at large would pay 71% of the total project capital cost. At 60% of the PTC, the subsidy still represents a substantial 41% of capital costs. If you add in generous depreciation policies, the total tax equity available to project owners is greater still. (Note: These figures are not exact and are illustrative only. The present value of tax credits earned over a 10-year period is not accounted for.)

—————-

Part I yesterday defined wind power’s Production Tax Credit. Tomorrow concludes the series by looking at the future of industrial wind in a subsidy-neutral world.