The Tax Increase Prevention Act of 2014 passed through the US House of Representatives and the Senate with an overwhelming majority – indicating that renewable energy enjoys bipartisan support – but it does very little to provide certainty since it is retroactive for 2014 and will expire by year end, industry insiders say.
Also known as ‘tax extenders’, the law, which was passed December 16, brings back a set of tax provisions that include the production tax credit and the investment tax credit for facilities that generate electricity from wind and other renewable sources.
To be eligible for the tax credit, construction had to have started before January 1, 2015, provided the project meets the Internal Revenue Service’s (IRS) guidance.
“I think the type of people who would benefit from this very short-term extension are those developers who perhaps began construction prior to 2014 and maybe were concerned that the amount of work they did may have been susceptible to challenge,” Gregg Benson, counsel in Kaye Scholer’s tax department, told Infrastructure Investor.
“To the extent that they were working on their projects in 2014, this extension can provide more certainty in their projects. There might also have been some developers who bet on an extension and began work on projects in 2014 and their bet will have paid off,” he continued.
Still the group of developers or investors to benefit from the tax incentive package is limited. These short-term extensions can provide peaks and valleys of activity, Benson pointed out.
Indeed, according to the American Wind Energy Association (AWEA), total wind power capacity installations in 2013 were 1,084 megawatts (MW) – 92 percent lower from the record-setting 13,131MW installed during 2012. “This drop-off can be attributed to the late extension of the PTC and ITC,” AWEA said in its Fourth Quarter 2013 US Wind Industry Market Report.
However, according to AWEA’s latest market report (3Q 2014), the American wind energy industry installed 1,254MW during the first three quarters of 2014, more than the industry installed during the entire year in 2013. In addition, the second quarter of 2014 saw 14,600MW under construction. “This record-breaking under construction activity is the result of the 2013 PTC extension and historically low wind prices,” according to AWEA, which estimates that the cost of wind energy has fallen by 43 percent between 2010 and 2013.
Asked whether renewables will no longer need to be incentivised, Madeleine Tan, a partner and co-head of Project Finance at Kaye Scholer, responded: “I think everybody would like to certainly have viable projects without incentives. But just to say ‘I’m going to remove incentives from renewables and let’s see if you can do better than everybody else who’s getting a lot of incentives,’ that’s not a fair comparison, I think.”
Since the PTC was implemented as part of the Energy Policy Act of 1992, it has not been extended beyond a two-year basis, while it has been allowed to expire altogether several times.
These short-term extensions provide limited value since wind projects require about two years to develop and build.
Comprehensive tax reform would provide more certainty, but whether that will happen in 2015 “is very questionable right now,” Benson said.
What’s more, the tax credits will have expired by January when the new Congress convenes.
Asked whether a Republican-controlled Congress will be less cooperative on issues related to renewable energy, Tan was optimistic. “There’s always been bipartisan support for renewable energy – especially wind. I think that area is pretty much non-controversial politically,” she said.