September 6, 2011

Wind Industry rallying for tax extension

So far 2011 has been a good year f0or wind energy projects. Installations in the first six months of 2011 were almost double what they were in the comparable period in 2010 in terms of total megawatts (2,151 versus 1,250), according to the American Wind Energy Association. But a bipartisan coalition of 24 state governors, fretting that the industry could lose momentum, has already begun lobbying the Obama administration to improve business conditions for wind energy developers.

In a letter, the Governors Wind Energy Coalition recently urged President Obama to support several industry-specific measures like extending the production tax credit, a federal tax incentive that proponents say is vital to the industry’s progress.

The production tax credit program allows owners of wind projects that sell renewable energy to a utility to take a tax credit of 2.2 cents per kilowatt-hour for the first 10 years of a project’s operation. That program is set to expire at the end of 2012, and uncertainty over whether it will be renewed has already affected the industry.

The last time the credit lapsed, at the end of 2003, development of new wind projects tapered off significantly. The credit was ultimately renewed toward the end of 2004, but only 389 megawatts of new wind capacity came on line that year, compared with 1,687 megawatts in 2003.

Because tax credits reduce federal revenues, a sensitive topic in this political season, renewal of the production tax credit is far from certain, according to John Farrell, a researcher with the Institute for Local Self-Reliance, an advocacy group for community-based energy solutions. “Right now I’d say it has even odds for extension,” Mr. Farrell said in an e-mail. Working in its favor is the potential for job creation, he said.

Although tax credits are the predominant mechanism in the United States for stimulating renewable energy, most other countries rely on a system known as a feed-in tariff that guarantees project developers a set rate per kilowatt hour for the electricity they generate. These programs typically obligate the local utility to purchase power from renewable energy projects under a long-term contract at prices set and controlled by regulators.

Proponents say feed-in tariffs provide a level of certainty that reduces risk for the project, providing the developer with lower financing rates and lowering the overall cost of the project.

The feed-in tariff has been the favored policy in the European Union, for example. A recent report by the World Resources Institute points to Germany and Spain in particular that have used the feed-in-tariff model to become the top two countries globally for installed megawatts of solar power. And Japan, anxious to encourage the renewable energy sector after the Fukushima nuclear accident, approved a national feed-in tariff last week.

Enacting a national-level tariff program in the United States is more challenging because of potential conflicts between state and federal energy regulations, according to Ted Ko, associate executive director of the Clean Coalition, a nonprofit group that works on access and regulatory issues impeding renewable energy.

Instead, these tariffs have started to appear at the state level, in California and Vermont, and in cities served by public utility systems, most notably Gainesville, Fla. Although the California tariff program became law at the beginning of 2010, state regulators have been slow to put it into effect as debate continues on how to set prices.

For proponents of feed-in tariffs, all eyes will be on California once those pricing issues are resolved. It will “definitely set an example of how feed-in-tariff prices can be set within federal guidelines and if successful, will become a good model for other states,” Mr. Ko said.

As for the production tax credit, “ideally, the prices are set so that the developer doesn’t need the P.T.C. to be a viable project,” he said.

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