OwnEnergy

Overview

Construction of wind farms in the United States has historically benefitted from several forms of tax credit and incentive programs.  These provide the owner of the facility with credits that can be utilized to shield cash taxes or monetized to a third party willing to pay for the credits upfront. This allows the owner of the wind farm (who may not have a tax capacity), to efficiently barter tax credits for project capital.  

Although historically these tax credits have been based on the first ten years of production, the American Recovery and Reinvestment Act (ARRA) of 2009 allowed owners of wind farms to choose between the traditional production tax credit (PTC) and an investment tax credit (ITC) for 30% of construction costs.  The ARRA further allowed for certain projects (depending on their construction date) to receive a grant from the treasury in lieu of the ITC. Projects seeking the treasury grant must have begun construction in 2009 (see below).  

Additional financing benefits to building a wind project today include bonus and accelerated depreciation benefits and new sources of lending, including the federal loan guarantees program and the Clean Renewable Energy Bond (CREB) program (see below). 

Production Tax Credits

The PTC was originally authorized by the Energy Policy Act of 1992 and amended over time. The PTC is an inflation-adjusted tax credit awarded on the basis of each megawatt hour (MWh) produced by the farm during its first 10 years of commercial operation. For 2009, if elected, each MWh produced receives a $21 tax credit. 

The PTC has expired and been extended several times since its original inception.  Currently, all projects placed in service before the end of 2012 are eligible. To qualify, power must be sold to a third party, rather than consumed by the owner.

Investment Tax Credits

Per the recent ARRA legislation, wind developers can now elect to trade a project’s production tax credit for an investment tax credit. The ITC is based on construction costs rather than the actual production of power and are therefore fixed, or set, at completion of the project. The entire tax credit of 30% can be realized the first year after project completion.

The ITC is currently available for PTC-qualified projects placed into service by 2012.  Although the ITC is realized in the first year, it ‘vests’ over the subsequent five years and the credit is only available to the original owner. If a project is sold during that five- year vesting period, the unvested portion will be recaptured by the IRS. Projects utilizing the ITC will have their asset base available for depreciation reduced by half of the ITC, or 15%.

Treasury Grants

As part of ARRA, and in order to incentivize a near-term expansion in the wind industry, a specific grant was created to monetize the ITC for independent construction equity investors (who often do not have sufficient income to properly utilize the ITC).  

For projects placed into construction (which requires 5% of total project costs to be spent) in 2010, the ITC will be monetized and 30% of the project costs returned directly to the owner (in reality both the ITC and the grant are based on slightly less than 100% of the construction costs due to the specific rules on what qualifies as a ‘cost’, but that detail can be discussed later).  

Like the ITC, the Grant will vest over five years and be subject to recapture in certain circumstances. Projects must apply for the grant by September 30, 2011 and must be completed and in service by January 1, 2013.

Accelerated Depreciation

ARRA allows projects placed into service during 2009 to realize additional bonus depreciation of 50% during the first year. Bonus depreciation is not currently expected to be extended beyond 2009. All wind projects benefit from a five-year MACRS depreciation schedule, which effectively allows the entire project to be ‘written off’ in five years for further significant tax benefits that can be internally used or monetized.

DSIRE

DSIRE is a comprehensive source of information on state, local, utility, and federal incentives and policies that promote renewable energy and energy efficiency. Established in 1995 and funded by the U.S. Department of Energy, DSIRE is an ongoing project of the N.C. Solar Center and the Interstate Renewable Energy Council.