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United States

Tax breaks for transmission -- Opening up South Dakota

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New tax legislation in South Dakota aimed at greasing the wheels of wind development should not only smooth the way for project investors, but also provide money for building the transmission lines needed to take the power to centres of population. South Dakota occupies fourth place in the list of states with the best wind resources in the US, but so far it has less than 100 MW of wind power generation to its name, and just 200 MW more expected online this year.

In an effort to speed up development of its wind resource, the state legislature has been looking at its tax laws. In place of South Dakota's old method of taxing wind power plant based on a mixture of property tax, sales tax and contractors' excise tax, a new structure simplifies the tax base into two parts: a tariff of $3 per installed kilowatt levied on the nameplate capacity of the project and a 2% tax levied on the yearly revenues from power sales.

Importantly, an option coupled to the tax on revenues provides an incentive for wind developers to make investments in local transmission upgrades. During the first five years of a project's operation, its owner will be able to apply for a rebate of up to 90% of the revenue-tax based on investments in transmission. Rebates will be limited to 50% in the second five years.

Transmission expansions are needed for South Dakota to expand its use of wind power. The windiest areas are far from population centres, the state has less than 800,000 people, so exports of wind energy are important. Minneapolis, Minnesota, and Chicago, Illinois, are the target markets.

Strong incentive

The rebate component can be used to pay for transmission among more than one project. "Let's say five years down the road you've utilised all the rebate you can within your wind farm," says Hunter Roberts, South Dakota's assistant energy director. "If you have another project on the drawing board that needs transmission lines, you can use the rebate from your first project to go toward those costs on the second project. We've worked with a lot of the industry on this legislation to make sure that it's going to work for them."

The bottom line for South Dakota's wind market is lower taxes coupled with transmission expansion incentives. "By the time you put a pencil to it and by the time you put a net present value to all of the tax streams, it represents a tax break of approximately one-third," says Republican state senator Tom Dempster. "It will be a strong incentive towards building wind projects in South Dakota, which we obviously want to encourage."

Current projects

When the 55 MW South Dakota side of PPM Energy's 150 MW Minn-Dakota project came online to start the new year, the state's cumulative tally reached 98 MW. Another 189 MW will be added before year's end by way of three additional projects. A chunk of that came online last month as Acciona Energy flipped the switch on its 180 MW Tatanka project in both North and South Dakota, bringing 88.5 MW online on the South Dakota side. PPM Energy's 50 MW Buffalo Ridge project in Brookings County is expected online in the fall. And Babcock and Brown's Wessington Springs development will add another 50.5 MW before the year is out.

"There's twenty-thousand plus megawatt in the queue in South Dakota," says Roberts. "But we also need transmission and we're hoping this new legislation puts us over the top and really gets things rolling."

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