The Consolidated Appropriations Act of 2016, which passed through Congress and was signed into law last month, included the latest iteration of the Production Tax Credit (PTC) for renewable generating resources. The PTC was first introduced as part of the Energy Policy Act of 1992. The PTC is currently 2.3 cents-per-kWh ($23/MWh), adjusted annually for inflation, for the first ten years of a renewable energy facility’s operation. In lieu of the PTC, owners of a project can make a one-time election of an Investment Tax Credit (ITC). While the PTC also applies to other types of renewable generation (e.g., closed-loop biomass, geothermal), the vast majority of the PTC is used for wind generation. A project is eligible for the PTC upon “commencing construction”.
The PTC has proved vital for the development of renewable generating resources, and wind-powered resources in particular. While the cost of large-scale wind projects has declined over time, it is still significantly higher than revenues from the sale of electricity and other applicable ancillary products (e.g., renewable energy credits, capacity credits) that can be realized in the region in which a wind project is located. The PTC has been critical in filling that gap for the vast majority of large-scale wind projects that get developed.
Developing wind-powered generating projects is complicated and takes time. Because a wind turbine has relatively small capacity (typically 1-2 MW, with the largest being 8 MW for offshore use), larger projects benefit greatly from economies of scale and reduce the $/MW cost of the project. The following is a list of many of the major tasks required for developing a wind project:
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Identify a site often encompassing more than several hundred acres.
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Negotiate and establish lease with landowners.
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Collect more than a year of wind data and perform wind studies.
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Perform environmental impact studies.
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Educate local communities about the project and its impact.
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Negotiate and acquire turbines, blades, towers, transformers, and other equipment.
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Arrange for transportation, construction, and interconnection of the equipment.
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Arrange for transmission interconnect, which often includes costs to upgrade existing facilities.
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Negotiate and establish a power purchase agreement.
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Obtain any necessary permits, including environmental permits.
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Arrange for financing of the project.
Since the lead time for a project is lengthy and many of the steps in a project are costly, surety of the PTC is critical. Aside from the first iteration of the PTC, which lasted for seven years but was largely ineffective because it could not fill the gap between costs and revenues in most parts of the country, each iteration of the PTC has been hampered by a short term and/or retroactivity. As the chart below shows, the uncertainty of the PTC has led to extremely volatile annual installation statistics.[1]
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While the current incarnation of the PTC has the benefit of extending through the end of 2019, marking the longest term since the initial iteration of the PTC, there is a new wrinkle that could prove to offset the benefit of the longer term. Specifically, there is a phase-down clause, as summarized in the following table,[2] where the PTC is reduced the later a wind facility comes on line within the term of the current iteration of the PTC.
While time will tell whether a reduction in the PTC will be significant enough to make a wind project financially unviable, at least for 2016, investors have surety that the PTC is firmly in place and funded at 100%.
[1] “The Renewable Electricity Production Tax Credit: In Brief”, Molly F. Sherlock, Congressional Research Service, July 14, 2015, and The American Wind Energy Association (www.awea.org).
[2] Department of Energy (http://energy.gov/savings/renewable-electricity-production-tax-credit-ptc).
