Wind Energy: Twisting and Turning and Getting Bent out of Shape

The wind energy industry has some breathing room with the extension of its much-valued production tax credit. But that reprieve will be short-lived, not just because it only got a one-year extension but also because those supporting the sector are starting to diverge.

A new argument is now being made — that the credit is flowing exclusively to the developers of wind power and that none of it is going to the utilities that buy the fuel. Among those utilities making that case is Xcel Energy, which has 3,800 megawatts of wind power and which must provide such energy in those states that require it. The company would like to see a fraction of the credit go to utilities to compensate them for having to reserve space on their transmission systems and for having to run the back-up systems when the wind dies down.

After a ferocious debate that took center stage during the presidential campaign, the 2.2 cents per kilowatt hour of electricity generated credit was included in the “fiscal cliff” resolution on New Year’s day. The wind folks say that the benefit is a huge job saver and that it improves overall economic productivity, while providing cleaner-burning electric fuel. It credits wind developers for contributing $15.5 billion a year to the U.S. economy.

But the traditional argument against that credit is that it is costly to the U.S. treasury and that it creates economic inefficiencies, forcing capital into assets that are less productive. That point, in fact, has been made by Exelon Corp., which had a high-profile divorce from the American Wind Energy Association. The cost of the production tax credit has been estimated to be $1 billion annually.

Divvying up the production tax credit could put a crimp in the ongoing discussions. The wind association now says that it would be willing to gradually phase out the credit over six years. The current uncertainty, it adds, causes wind production to fall off — only to rev back up when lawmakers re-institute the benefit.

Consider that Spanish wind developer Gamesa Corp. said that it had to fire 165 workers in Pennsylvania in the fall because Congress was using the credit as a political bargaining chip. Vestas, meanwhile, said that if the incentive was not extended that it would have to cut 1,600 U.S. workers.

The revised credit applies to projects started in 2013 but it will remain in effect for two years so that developers will have time to finish them. “Even though the late timing of the extension will result in a significant reduction in 2013 installations relative to previous years due to the time it takes from when an order is placed to project completion, the U.S. market will nonetheless be stronger as a result of the (credit’s) extension,” says Vestas.

The political odds would suggest that the tax credit will get revamped or that the benefit may take on a completely new form. One idea now getting attention is “master limited partnerships” that are also given to oil, natural gas and coal. Simply, that is a business structure with limited liability that allows investors to be taxed at their personal rate on dividends.

Right now, the fossil fuels can set up those partnerships but the green fuels cannot. Such deals are able to attract capital because profits are only taxed once — when the dividends are distributed, and not at the corporate level. Those investments are liquid and they can be traded, making them a valuable part of building long-term energy infrastructure projects.

Dan Reicher, former director of climate change and energy at Google, raised this issue during an EnergyBiz conference. He said that those master limited partnerships could supply “hundreds of millions of dollars” to renewable energy projects by appealing to investors who seek an attractive dividend payment, which could be around 6 percent.

The future? The wind association wrote lawmakers saying that it would accept a 10-percent annual reduction in the value of its tax credit over six years until it would stop altogether in 2018. Abruptly halting those incentives would make no sense, it says.

The wind lobby would also support an expansion of the master limited partnership provision to include wind and solar energies. But the argument against such a move is that it would erode the tax base, allowing investments in renewable energy projects to become tax havens, as opposed to legitimate mechanisms by which green energy development would occur.

© Guerito 2005 (Photo credit: Wikipedia)So, what about the idea of giving utilities some portion of the current production tax credit? Ryan Wiser, an analyst with the Lawrence Berkeley National Laboratory, previously told this reporter that the cost of integrating wind energy into the grid is relatively small: a half penny per kilowatt hour.

He also says that wind’s price predictability is a selling point that benefits utilities. As for Xcel, he says that it is saving money by operating wind plants instead of natural gas facilities.

“Most utilities enter into a fixed and known price for wind or other renewables,” says Wiser. “Wind contracts are offered at known prices that may escalate with inflation. Conversely, most of the natural gas generation is indexed to the price of natural gas. And that imposes some risk to utilities and their rate payers.”

“If you think of wind as an added variable — not something in isolation — but in the context of running an entire portfolio, it is attractive,” adds Brian Parsons, with the National Renewable Energy Laboratory in Golden, Colorado. “We are displacing gas and other fuels. That’s the main value.”

That’s the argument that wind’s proponents will be delivering to U.S. lawmakers as the year unfolds. The production tax credit will no doubt get reshaped. Its next iteration, however, is uncertain — just like benefit’s history has been.