The US wind industry is looking to federal policymakers to extend the soon-to-expire $0.022/kWh production tax credit (PTC) during the so-called lame duck session, when the current Congress wraps up its work before the newly elected legislators take over in January. But it will also be watching the debate over automatic across-the-board spending cuts that will come into effect on 2 January unless Congress can work out a deficit reduction deal.
Wind energy projects that come into service before the end of this year can opt to receive a cash grant worth 30% of eligible projects costs instead of the PTC. If the mandatory spending cuts remain in place, every grant paid to projects after 2 January would be reduced by 7.6%, according to a report by the Office of Management and Budget (OBM) sent to Congress in mid-September.
The cuts are designed to trim $1.2 trillion in spending over the next decade and the OMB estimates slicing a piece off grants to wind and other renewable energy projects will save the government about $279 million.
A grant reduction can have significant implications for developers who counted on the full amount in the financing of their projects, said Greg Jenner, a partner in the tax practice group at the law firm Stoel Rives. "It could be fairly serious," he said. A lot of developers have borrowed money with the grant as collateral. "As soon as they receive the grant it goes automatically to pay off the loan. Now they could be short," he added.
That added risk could cause other investors in a project to back away, particularly if the developer does not have enough of a balance sheet to cover a shortfall. But for the most part Jenner does not expect projects to be cancelled. "I think what will happen is people will negotiate around it."
Developers have to wait until projects are in service before they can apply for the cash grant, and the fact that the issue surfaced so late in the year means there may be little wind developers can do to get projects up and operating more quickly. "These things do have their own schedule and there is very little you can do to really accelerate them," said Jenner.
There has been some talk in Congress about delaying the spending cuts by six months to give lawmakers more time to reach an agreement. That would give industry time to get their applications in and processed, said Jenner. "I think they can pay all the wind grants within six months."
7.6% - The possible reduction from Congress of project grants in January 2013.