United States

United States

Call to phase out production tax credit gathers pace

UNITED STATES: As the $0.023/kWh production tax credit (PTC) is back on a countdown to expiration just months after US Congress passed a short-term extension of the incentive, some in the US wind sector are weighing whether negotiating its eventual demise may be the only way to put the industry on a stable footing for the long term.

Lobbying… AWEA has suggested a six-year phase-out of the PTC to Congress
Lobbying… AWEA has suggested a six-year phase-out of the PTC to Congress

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Congress passed a tax bill in January extending the PTC to projects that start construction before the end of this year, a hard-won victory for industry lobbyists who faced resistance from lawmakers wondering when the 20-year-old incentive would end. Several suggested publicly that it was time the industry considered backing a phase out of the credit.

At the height of the debate in December, the American Wind Energy Association (AWEA) sent a letter to tax-policy writers in Congress suggesting that a six-year phase out, which would ramp down credit to 60% of its current value before ending in 2019, would preserve "a minimally viable industry, able to continue achieving cost reductions".

AWEA's assessment was not meant to be a proposal or a plan, says Peter Kelly, vice-president for public affairs at AWEA. "It is simply an analysis of what it would take to sustain the wind industry," he explains. How it might play into discussions to extend the PTC again before the end of this year is not clear, he adds. "It's really too soon to say what's going to be possible in this Congress," Kelly says. "We're happy to return to that discussion when they get around to legislation that would affect us."

Wider reform

What is clear is that AWEA does not want to be the only one at the table when it comes to talking about phasing out incentives. The discussion has to be part of some wider effort to implement tax reform or craft a broad-based energy policy for the US that would assess the future of government support for all parts of the energy sector, says Kelly.

"That makes a big difference," he adds. "Why should the wind energy be the only industry to lose its primary incentive, while everything else is left untouched?"

The idea of a PTC phase out has gathered steam since December. A coalition of CEOs from some the country's leading companies called for the gradual elimination of the credit in a February report. Right on the heels of that, the Bipartisan Policy Center recommended Congress develop a plan that would see the PTC end three years earlier than AWEA's best-case scenario.

"Phasing out the production tax credit for renewable energy by the end of 2016 would align the incentive programme with actual and expected reductions in wind project costs and increases in energy revenues," said the Washington-based think-tank's 20-member panel of key stakeholders, led by former senators Byron Dorgan, a Democrat, and Trent Lott, a Republican,

One approach for all

But, echoing Kelly's concerns, the centre cautioned against "piecemeal efforts to target a particular industry or technology" and urged policymakers to also develop a strategy that would phase out tax benefits to all mature energy technologies.

With uncertainty that tax reform will progress this year and congressional action on energy policy unlikely, however, the US wind industry is once again left waiting to see what will happen to the PTC at the end of the year.

The frustration at the ongoing uncertainty was evident among speakers at this year's Infocast Wind Power Finance and Investment Summit. "It's really depressing year after year to have only a visible lifetime of 12-18 months. I think this is very detrimental to the market," says Tristan Grimbert, CEO of EDF Renewable Energy.

With gridlock in Congress and strong opposition to the PTC from some Republicans, few in the industry hold out hope that a long-term extension of the full credit is possible. But pursuing a phase out, several industry players suggested, is a tradeoff that could give the sector the planning horizon that it needs.

A risk worth taking

"I think the six-year extension would be a good option for the industry," says Declan Flanagan, chief executive of Lincoln Renewable Energy. "It would be taking a risk that we could lower the installed cost of equipment over that time to make up for the difference we are gradually losing.

"It is also a bet on the price of gas settling out in the $4-5/mmBTU range," Flanagan added. "But it's a bet worth taking rather than the uncertainty that exists today." Natural gas prices in the US averaged about $2.70/mmBTU in 2012, making it difficult for wind to compete.But expectation is that the price will increase.

A clear path to the end of the PTC would give all parts of the value chain the predictability they need to reduce costs and become more competitive, says David Zwillinger, vice-president of private-equity firm DE Shaw & Co.

Having an on-again, off-again policy, on the other hand, results in disruption and inaction. "I think the inertia has been a massive negative," Zwillinger says. "I actually have the view that if the PTC extension hadn't happened, everybody would be complaining in 2013, but the industry would be fixed by 2014 or 2015."

Short-term extensions are a problem for the industry, agrees Jim Spencer, chief executive of Everpower Wind Holdings. "I was probably in a camp of people who was half hoping the PTC would not be extended. I would be in favour of the six-year phase out if I thought we would have the PTC for six years, because at least you would have certainty," he says.

"It's not clear to me that all of the political capital that was spent by AWEA and everyone else for this latest extension was really worth it," adds Spencer. "We kicked the can down the road in terms of future uncertainty and really haven't achieved that much."


The US wind industry's efforts to find new sources of low-cost capital received a boost earlier this year when both a coalition of top US CEOs and President Barack Obama's science advisers recommended giving the sector access to a tax break used by the fossil-fuel industry. But the road to actually making it happen remains a long one, experts say.

So-called master limited partnerships (MLPs) are traded on stock exchanges like corporations but pay no corporate taxes. Instead, unit-holders pay personal income tax on any profits. The ability to access stock-market investors, combined with the favourable tax treatment, allows MLPs to raise equity more cheaply.

With a question mark hanging over the future of the production tax credit - now worth $0.023/kWh - wind advocates are ramping up their calls for equal access to the benefit.

"I'm a huge fan of the MLP. I think that's the panacea," David Zwillinger, vice-president of private-equity firm DE Shaw & Co said.

One of the headwinds facing the industry, however, is the growing popularity of MLPs at a time when lawmakers are under pressure to balance the books. Congress's Joint Committee on Taxation estimates that they will cost government $1.6 billion a year by 2016, about four times more than previously thought.

Sensitive timing

"I think the existing beneficiaries are pushing against the topic being raised, because in this environment, that's likely to lead to a discussion about how the existing benefits get cut, not necessarily amended - and certainly not broadened," says Martin Torres, an executive director at financial-services firm Morgan Stanley.

Keith Martin, a partner at law firm Chadbourne and Parke, says wind is not the only industry pushing to be included under the MLP umbrella, and it is likely that policymakers will only act on the issue as part of comprehensive tax reform. "At that point, Congress will have to decide who can operate without paying corporate income taxes."

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