OFFSHORE WIND: TAX CREDIT EXTENSION IS VITAL
By Stas Margaronis, RBTUS
Jim Lanard, president of the Offshore Wind Development Coalition says the extension of the Investment Tax Credit by Congress is vital to continued investment and development for the wind industry. He discusses this in the following interview:
What Are Prospects for An Investment Tax Credit Extension by Congress?
Lanard: “Ultimately, this depends on whether a fiscal deal is enacted by Congress and the Administration. We remain hopeful about the investment tax credit, but it would have to be included in a piece of tax legislation which would have to be part of the fiscal deal. We are a small part of that but we keep ourselves in front of everyone in the hopes that the tax credit will be extended.”
Why Is the Investment Tax Credit Important to the Wind Industry?
Lanard:” No wind farm developer currently has the appetite for the tax credit, because they do not yet have the revenue. And so what happens is that if a wind farm developer qualifies for a tax credit, the developer goes to a broker who sells that credit to someone who has the appetite for the credit. Let’s say you have a $600 million investment tax credit. You go to a broker and you sell it at a discount of say $550 million. The buyer can be General Electric or Campbell Soup. They save $50 million on the credit, have the appetite for the credit and apply it against their revenue. Typically the credit will be applied for about 30% of the cost of the wind farm. The result is the wind farm developer gets cash or some other form of repayment that can be used to build the wind farm. Now this is not the most efficient system, because you lose the $50 million in selling the credit and paying off the broker. But Congress doesn’t like outright grants, so the incentive is through tax credits.”
What Are Power Purchase Agreements and Why Are They Important?
Lanard: “Power purchase agreements (PPA) are long term contracts with utilities to buy the power generated by the wind farm developer. Currently the proposed Cape Wind project in Massachusetts has a PPA with two utilities to buy 450 MW of power from its proposed wind farm. The proposed Block Island project off Rhode Island has a PPA from one utility to buy 30 MW of power from its offshore wind farm….When the wind farm developer proposes a PPA with a utility, it factors the cost of power generation on either a front-loaded basis, say 20 + cents per kwh for the life of the agreement or on an escalating basis. You can’t treat the higher rate as a capital cost and depreciate it, because your agreement is based on a certain rate over the life of the agreement. Your financing is also based on a similar calculation…Feed In Tariffs (FIT) are rates that customers pay to support the new installation and are usually imposed by governments on utility rate payers. There are no FITs in the United States. The PPA achieves the same goal for the developer, except that it is done on a contractual basis between the two parties.”