Journal of Tax Credit Investing

Congress delays, states act for wind energy

Industry experts are confident that the federal wind energy tax credit will be renewed thanks to bipartisan support and the advocacy of a few powerful senators like Chuck Grassley (R-Iowa). But experts also agree that Congress' delay in renewing the credit has already damaged the wind energy business' prospects for 2004 and that the damage is only getting worse.

Congress delayed the renewal of the tax credit over the summer of 2003 while it debated a larger energy bill - the same energy bill that failed to pass last year. However states like Minnesota are taking action of their own to encourage the development of facilities for generating electrical power from the wind. What's more, increasing concerns about the supply of natural gas are likely to motivate even more utilities to look at wind as a hedge against gas price volatility.

In May 2003, Minnesota put some teeth in an existing law that requires electric utilities to make a good-faith effort to generate or purchase at least 10% of the electricity in their portfolios from renewable energy technologies by 2015, beginning with a 1% requirement by 2005.

The new legislation requires utilities to submit their renewable energy plans to the Minnesota Public Utilities Commission for review. If 9% of Minnesota's electricity were generated by wind power, as is probable under the law, this policy would result in 2,023 megawatts of new wind development, according to information from the Database of State Incentives for Renewable Energy.

In addition, Xcel Energy, Minnesota's largest utility, has promised to add an additional 300 megawatts to its energy portfolio above the 10% requirement. In exchange, the state is allowing Xcel to keep its Prairie Island nuclear power plant open and increase its storage of spent nuclear fuel rods.

Xcel also agreed to provide a cash benefit of 1.5 cents per kilowatt hour to subsidize 100 megawatts from smaller wind farms that produce under 2 megawatts apiece. This money will be distributed by the state's Department of Commerce.

Other states have also created financial incentives to support the wind energy industry in recent months, including tax exemptions in Iowa and Tennessee and $2.5 million in incentives, up to $100,000 per project, to be distributed by the New York State Energy Research and Development Authority.

Back in Washington, D.C., as of mid-July, it looked as though the earliest that Congress could possibly complete the process of renewing the credit was October.

Legislators of both parties strongly support the federal wind energy production tax credit, but not enough to rush the bill into law. Instead, the credit tends to get caught up in the struggle surrounding larger energy issues. Congress has let the credit expire twice before, at the end of 2001 and 1999, only to renew the credit retroactively months later.

As a result of the ensuing uncertainty, wind power generation developers were already beginning to delay projects for 2004. These wind projects cannot close their financing until the credit is renewed, and it takes at least seven months after closing financing to complete a project.

Greg Jaunich, president of Navitas Energy in Minneapolis, is already uncertain whether he will be able to complete any projects in 2004.

In contrast, 2003 has been extremely busy for Jaunich. "We'll be putting in 50 megawatts this year," he said.

Uncertainty about the credit wreaks havoc on wind energy deals because developers rush projects before the credit expires or hold them until after the credit is renewed.

For example, before the credit expired in 2001, new wind plants opened in the United States that added 1,696 megawatts of capacity. But in 2002, when the credit lapsed for several months, only 410 megawatts of capacity came on-line. Another 1,100 to 1,400 megawatts of capacity should come on-line this year, according to Christine Real de Azua, spokeswoman for the American Wind Energy Association. The new windmills built this year will bring the total wind energy generating capacity in the U.S. to about 6,000 megawatts, a small but rapidly growing number.

This year's crop of new developments should include FPL Energy's New Mexico Wind Energy Center, a 136-turbine wind farm with 204 megawatts of capacity. The utility PNM has contracted to buy the project's electricity. The development will become the world's third largest wind farm.

At press time, the House of Representatives had already passed a three-year extension of the tax credit as part of H.R. 6, the "Energy Policy Act of 2003." The Senate was set to add a renewal of the credit to its massive energy bill, S. 14, at the end of July. If the bill passes the Senate before Congress' August recess, then the House and Senate versions of the bill may go to conference committee in September and could be signed into law as early as October, according to Bill Wicker, Democratic communications director for the Senate Energy Committee.

However, the process could be derailed by such contentious issues as the Bush administration's desire to allow drilling in the Alaskan National Wildlife Reserve (ANWR), which is a part of the House bill, but not the Senate bill.

"If a conference bill comes back with ANWR in it, it will be filibustered and it will fail," Wicker said.

Wind energy advocates remain confident despite the uncertainty. "We know it [the credit] will be extended," Jaunich said. "It's just a question of when."

In addition, at press time experts were hoping Sen. Jeff Bingaman (D-N.M.) would succeed in adding his own amendment to the Senate energy bill in late July: a national renewable portfolio standard that would require utilities to get a percentage of their electricity from renewable sources and would help fight what Wicker called the nation's "over-reliance on natural gas."

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