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Less risk preferable to more money

Factors beyond the straight monetary value of the two tax credits now available to wind power producers in America will help determine which one they choose, concludes an analysis of the new incentives introduced in the government's $787 billion economic stimulus package passed into law in February. The analysis was conducted for the government by two federal renewable energy bodies, the Lawrence Berkeley National Laboratory and the National Renewable Energy Laboratory.

The stimulus package offers wind project owners two means of support amounting to an estimated $20 billion in tax incentives targeting clean energy. The two wind incentives are: a three-year extension of the $0.021/kWh production tax credit (PTC) available for energy produced in the first ten years of a wind project's life; or an alternative investment tax credit (ITC), which allows project owners to deduct 30% of the capital cost of a wind farm from their tax bill in its first year of operation. Furthermore, for projects that start construction in 2009 or 2010, developers can opt for an alternative cash grant, equivalent to the value of the ITC.

Researchers from the two laboratories examined the factors that will influence which option developers choose. They found that when it comes to the monetary value to wind projects, the difference between the PTC and ITC is "likely to be rather modest" and depends on a project's installed cost and capacity factor. In sheer monetary terms, most projects would be best served by the PTC.

Cash is king

But other considerations could end up playing a bigger role in the choice, the report says. One of those is the option to elect a cash grant with the ITC. The fact that "cash is king" in today's difficult financial environment may drive projects to the ITC, even if the PTC is worth more. "This may be especially the case if the cash grant allows the project developer to access less expensive debt or equity capital than might otherwise be available were the ITC or PTC used."

Another consideration is the possibility that a project might not perform to expectations, making the PTC a riskier choice. "Some developers and project owners will nevertheless prefer the certainty offered by the ITC over the performance risk inherent in the PTC," the report says.

Since most wind developers do not have a big enough tax credit appetite to use the PTC, they have to go out and find investors with a tax base sufficient to fully absorb all of a project's tax benefits over the coming decade. "In today's turbulent economic times, some tax investors have had difficulty gaining comfort with such a long-term projection. With the ITC, the need to forecast future tax appetite is greatly reduced," the report says. On the other hand, an investor taking the ITC will need a proportionally bigger tax base to absorb it all in the first year. "Of course, if a project elects the 30% cash grant in lieu of the ITC, then tax credit appetite and tax equity investors become much less important," explains the report.

Clear choice

The ITC is a more "widely applicable" incentive because of rules opening it up to different kinds of investors and deals. It also allows developers to use subsidised financing, like government-sponsored low-interest loan programs, without penalty.

The one advantage the PTC does have is in the liquidity of the investment. Because the credit is paid out over ten years, the sale of a project can occur any time during that period and still provide a tax benefit to the buyer. A project that accepts ITC support, however, cannot be sold on without returning the value of the credit.

In sum, the report concludes, most wind projects will benefit more from the ITC. "Furthermore, based on qualitative considerations alone, it is reasonable to expect those projects that begin construction in 2009 or 2010 to elect the equivalent cash grant rather than the ITC itself."

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