Tax write offs raise official eyebrows -- Serious industry concern

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Canada's federal finance department is raising warning flags about how wind power companies are utilising one of the few mechanisms available to promote the growth of the industry. Under the government's Canadian Renewable and Conservation Expense (CRCE) program, developers can write off certain exploratory expenses, including installation of a test turbine. The deductions can be flowed through to investors, who can claim them on their income tax. But Finance Canada officials are questioning whether the industry's use of test turbines fits with what policymakers intended.

The officials have pointed out to Canadian Wind Energy Association (CanWEA) president Fred Gallagher that detailed criteria have been developed to define a test turbine, including the requirement that it be the first device at a site and that it be at least 1500 metres from any other turbine. "To date, the 1500 metre minimum distance between turbines criteria appears to have taken precedence over the first turbine criteria," they state. "It is this issue in particular that we are interested in discussing further with the wind energy industry to ensure that the concept of a test wind turbine is clearer from an administrative and compliance perspective." Part of the problem is that neither the government's income tax rules nor its criteria for test turbines makes it clear what constitutes a "site."

Gallagher says he is not aware of any specific instances that gave rise to Finance Canada's concerns, but that he is afraid of what the impact might be. The test turbine has proved to be an important tool for testing the wind regime before committing to development -- and so has the 1500 metre rule, he says. When the CRCE criteria were being developed, "the argument we made to them is that the wind profile can change dramatically within a mile. We've now proven that," he says. "There are some very surprising difference between what you get from anemometers and theoretical production models versus actual production in a machine."

Besides being of technical importance, CRCE has been "absolutely vital" to the birth of small, independent wind generating companies. "Without it, we would never have been able to raise equity," says Gallagher.

Key attribute

Warren Holmes of FirstEnergy Capital Corp, a Calgary investment bank, agrees that the ability to issue flow-through shares through CRCE is a "pretty unique attribute" that has been key to attracting investment. FirstEnergy recently handled the private placement of C$3.1 million in flow-through common shares for Calgary's Canadian Hydro Developers. "We introduced the investors to wind power. In this particular case, I think the flow-through share component was a very important aspect of why people invested," Holmes says. "It was icing on the cake." Canadian Hydro is in the process of installing 26 MW of merchant wind generating capacity, more than doubling the capacity of its existing wind facilities in southern Alberta.

Gallagher also says that if Canadian wind developers are trying to figure out ways to maximise the value of CRCE it is because it is all they have got. "Quite frankly there wouldn't be the pressure on CRCE if there were other mechanisms available."

Earlier this year, CanWEA released its Wind Vision for Canada outlining a series of initiatives that can help the country's wind industry reach its target of 10,000 MW of installed capacity by 2010 (Windpower Monthly, July 2001). The association is calling for the creation of a C$0.02-C$0.025/kWh federal production tax credit, removal of tax barriers for small power producers, establishment of a national greenhouse gas emission reduction trading system, development of a comprehensive wind energy atlas for Canada, stepped up research and development efforts, electricity product labelling and consumer education.

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