In a 378-46 vote on Wednesday, the U.S. House of Representatives passed a bill that would extend over 50 lapsed tax breaks that expired at the end of 2013, including the wind production tax credit (PTC). However, if enacted, the legislation would offer an extension only through the end of 2014, giving wind developers about three weeks left to start construction in order to qualify for the PTC.
The retroactive one-year renewal falls short of a two-year deal the U.S. wind industry had been pushing for, and the American Wind Energy Association (AWEA) has deemed the proposed extension virtually meaningless.
The House bill, H.R.5771, has now been sent to the U.S. Senate.
Earlier this year, the Senate voted on its own tax extenders package, but bipartisan feuding stalled the legislation. Known as the EXPIRE Act, the bill would have extended the PTC and a slew of other tax breaks through 2015.
Following the November elections, Congress vowed to again work on passing a tax extenders deal, and members from both chambers worked out a tentative agreement to extend the tax benefits for two years. The deal quickly unraveled, though, after the White House warned that President Barack Obama would veto the package. According to reports, the White House thought the deal was too heavily weighted toward corporate benefits and did not include enough relief for individuals.
House Ways and Means Committee Chairman Dave Camp, R-Mich., who introduced H.R.5771, claimed the potential veto forced the House to take “a different and less effective approach” and propose the one-year retroactive extension.
In a statement about the legislation, he explained, “With the end of the year and a new tax filing season rapidly approaching, we need to act. The IRS has been clear that unless Congress acts quickly, it will be forced to delay the start of the tax filing season.”
Nevertheless, U.S. wind industry stakeholders have warned that a one-year retroactive PTC extension would do little to help the sector and likely cause harm. After all, a wind developer would have to have started construction on a project by year-end in order to cash in on the incentive, which provides a $0.023 tax credit for every kilowatt-hour produced.
As Keith Martin, co-head of the project finance group at Chadbourne & Parke, explains, there are two ways to “start construction” under current PTC rules: One is to incur at least 5% of the project cost, and the other is to begin significant physical work. Martin admits, however, that unless a wind developer has already taken one of those necessary steps, qualifying for the PTC at this point would not be a very realistic goal.
An AWEA blog – titled “Keeping Score: Why Is a Three-Week PTC Extension Worthless?” – echoes that sentiment.
In it, Michael Goggin, AWEA’s director of research, writes, “AWEA has spoken with the leading construction companies that build wind projects, and they’ve explained that it is virtually impossible for a three-week extension to drive new wind development. There’s simply not enough time for any substantial number of new projects to physically begin construction before the end of the year.”
Mickey Leibner, government affairs advisor at Mayer Brown, agrees that a one-year extension would not provide enough certainty for the wind industry.
“Short-term fixes like this one are quite difficult for the industry. Like any other industry, wind producers depend on financial and regulatory certainty when planning for future projects,” he says. “Wind projects require particular planning, including years of permitting and study.
“No company, whether they are in the wind business or the widget business, can commit to a multimillion-dollar project years in advance without a clue as to whether a key tax credit will even be in place.”
Tom Kiernan, CEO of the AWEA, recently warned, “A three-week extension kills jobs and provides businesses little ability to create the jobs we want to create.”
According to AWEA, “When the PTC expired in 2013, new wind installations came to a halt, resulting in a 92 percent drop in new wind projects compared to 2012 and a $23 billion drop in private investment in the U.S. economy. Nearly 30,000 American jobs were lost. Similar job losses would be expected to occur unless an extension through at least 2015 is passed.”
So, what are the odds that the Senate will pass the House bill? Although wind champions, such as Sen. Chuck Grassley, R-Iowa, and Senate Finance Committee Chairman Ron Wyden, D-Ore., vowed to fight for the EXPIRE Act and a two-year PTC extension during the lame-duck session, the Senate may simply have to accept the short-term fix before Congress adjourns in the next couple of weeks.
“All signs this morning were that the effort to get a two-year extension is collapsing in the Senate,” says Martin.
In fact, a Wyden spokesperson has suggested that the Senator, who spearheaded the EXPIRE Act, no longer foresees a possible two-year extension this session.
According to a POLITICO report, the spokesperson said, “We are disappointed that, at this point, there doesn’t appear to be a procedural path forward.”
“The Senate’s next moves will depend, in large part, on how much those who supported the EXPIRE Act want to push,” notes Leibner. “Most folks on Capitol Hill rightfully have one eye toward the Republican takeover of the Senate in just a few weeks, and I wouldn’t be surprised if most Senate Republicans – even those who were supporters of the EXPIRE Act – will ultimately be fine with addressing all these tax issues in a more comprehensive manner next year, when they have control of both chambers.”
If the Senate passes the bill, it would be sent to President Obama’s desk. According to reports, the president has indicated that he would sign a one-year tax extenders package into law.
The incoming chairman of the U.S. Senate Finance Committee says working to renew a slew of expired tax breaks, including the production tax credit (PTC), will be one of his first priorities when he takes office.
Sen. Ron Wyden, D-Ore., is slated to take over the powerful role for former Sen. Max Baucus, D-Mont., who was recently confirmed as the U.S. ambassador to China. On Feb. 11, Wyden told reporters, “My sense is that the focus at the outset is likely to be the extender package.”
The so-called extender package includes over 50 tax provisions that expired at the end of 2013, one of which was the PTC. Keith Martin, a partner at law firm Chadbourne & Parke, tells NAW that it’s likely that the package will get passed but not until the last half of this year.
“Wyden is replacing the senior staff on the Senate Finance Committee. It will take time for them to settle in,” he says.
In addition, Martin expects U.S. Senate Majority Leader Harry Reid, D-Nev., will avoid presenting the extender as stand-alone legislation.
“He usually needs something to propel such a bill forward, like doing it in the context of budget reconciliation where special rules limit debate or as a rider to some other must-pass legislation or because Congress is at the end of the session and eager to get home,” Martin explains.
He also warns that outside opposition to a PTC extension for wind is better organized “than ever before,” and the Republican-controlled House of Representatives will likely follow suit and stand against the tax incentive. Nonetheless, Martin believes the extenders will eventually pass after both houses of Congress negotiate.
Furthermore, he bets the construction-start deadline for the PTC will be extended for at least a year and suggests, “Companies should start planning how to incur at least five percent of the cost of more projects this year and be ready to pull the trigger when the extenders pass.”
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Following news that U.S. Sen. Ron Wyden, D-Ore., will take over as new chair of the Senate Finance Committee, Iowa State Senator and Climate Parents member Rob Hogg plans to send a petition urging Wyden to take action by extending the production tax credit (PTC) immediately.
Climate Parents, a national organization of families advocating for climate change solutions, is spearheading the campaign and says that about 50,000 people have signed the petition.
“We must support wind power and renewable energy,” says Hogg. “Our children and our grandchildren are counting on Congress to act.”
The senator also notes, “Wind power currently provides 25 percent of Iowa’s electricity generation and has increased nationally by 30 percent per year over the past five years. The wind power tax credit made this possible.”
The petition is available here.
I just signed a letter calling on U.S. Senator Ron Wyden and Congress to renew the vital tax credit for wind and other sources of renewable energy. The Production Tax Credit (PTC) helps wind energy compete with highly subsidized fossil fuel industries, attracts investors for new wind projects, fosters innovation and employs tens of thousands of Americans in the clean energy economy.
Because of wind energy’s growing success, dirty energy billionaires, like the Koch brothers, campaigned to kill the renewable energy credit program. Congress is at a crossroads.
Will they support policies and industries that increase carbon pollution, fueling climate-related disasters? Or will they take action to promote safe, clean energy that will allow us to stabilize the climate?
As incoming Chairman of the Finance Committee, Senator Wyden will play a major role in deciding which direction Congress goes.
Please join me in telling Senator Wyden to renew the renewable energy tax credit now: http://act.engagementlab.org/sign/wind-credit_Wyden/?referring_akid=.227975.zAnFDm&source=taf
By signing the letter, you will send a message the future of our kids and and the stability of our climate are priorities that deserve urgent attention. Thank you for taking action!
PLEASE SIGN THE PETITION via Climate Parents | Senator Wyden: Restore support for wind power!.
Congress recently provided the wind industry fodder for speculation regarding the future of renewable energy tax incentives. Below is a discussion of the modified accelerated cost recovery system (MACRS) depreciation news, followed by a discussion of the future of production tax credits (PTCs) and the possibility of extending master limited partnership (MLP) status to renewable energy projects.
First, Sen. Max Baucus, D-Mont., who chairs the Finance Committee, released his outline of corporate tax reform. His proposal is intended to achieve a lower corporate tax rate (the exact rate remains to be specified) but sacrifice MACRS.
Under the proposal, a wind farm would be depreciated 5% a year using a declining balance calculation, meaning 5% in the first year, 4.75% (i.e., 5% of 95%) in the second, and so on. This is drastically less accelerated than the current depreciation over five years, using a 200% declining balance. Further, as compared to the 50% “bonus” depreciation that is available for projects in service this year, it is a drop in the bucket.
The value of MACRS in a wind tax equity transaction varies between 10% and 30% of the tax equity investor’s economics. (The range is due to the varying cost of funds of different investors and varying tax appetite assumptions.) Sen. Baucus’ proposed depreciation methodology would wipe out that benefit.
In an apparent effort to avoid triggering heart attacks throughout the industry, the senator’s proposal has a reference to “considering improving and making permanent the energy tax credits set to expire in 2013.” The statement appears to be referring to the PTC. (The 30% investment tax credit (ITC) for solar does not expire until the end of 2016, but it would be surprising if the proposal only addressed PTCs.)
The wind industry must wait until Baucus releases the summary of tax reform provisions related to energy to know what the senator has in store for the PTC.
The likelihood that the proposal to expand MLP rules to include renewable energy projects as part of tax reform increased when the Joint Committee on Taxation “scored” the proposal in the Master Limited Partnership Parity Act (S.795) as costing a modest $1.3 billion over the 10-year scoring period.
In the context of tax reform, $1.3 billion is a low amount. For instance, replacing MACRS raises an estimated $500 billion. Further, the last time the PTC was extended for just one more year, it was scored as costing $12 billion. Thus, the MLP expansion is little more than a rounding error in tax reform.
The benefit of MLP status is being able to raise equity from the public while only incurring a single layer of tax. That tax is imposed at the unit holder level only. Under current law, MLPs cannot effectively pass-through tax credits or tax deductions (e.g., depreciation) in excess of their income to individual investors, and no proposal has been introduced to modify those limitations.
Therefore, the proposed MLP change does not eliminate the need for tax equity investors or address the shortage thereof. What the MLP change would do is permit “sponsor” equity to be raised from retail investors and create a secondary market for projects that are beyond the tax credit period.
The MLP legislation has bi-partisan support. Besides Sen. Chris Coons, D-Del., who reintroduced the bill in April, supporters include Sens. Mary Landrieu, D-La., and Debbie Stabenow, D-Mich. On the Republican side, supporters include Susan Collins, R-Maine, Jerry Moran, R-Kan., and Lisa Murkowski, R-Alaska.
A similar bill was introduced in the House in August by Rep. Mike Thompson, D-Calif., and was co-sponsored by 18 other Democratic House members. In addition, the White House appears to support the proposal.
The MLP expansion also has some odd allies when it comes to trade associations. For example, the proposal has been endorsed by the American Petroleum Institute (API). There are two potential rationales for that support. The first is that API may believe that the MLP rules are less likely to be a sacrificial lamb in the tax reform process if the renewables industry is also a beneficiary of the rules. The second is that API may hope to couch the expansion of the MLP rules as a trade for allowing the PTC and ITC to expire.
For that reason, the support from the renewable energy trade associations has been somewhat tepid. They would like to see the MLP rules expanded but not at the expense of tax credits. The financial benefit of the MLP rule expansion is a fraction of the value of the tax credits.
There has not been an analysis prepared yet that compares the value of the MLP expansion to the value of MACRS.
However, if Baucus carries through on the suggestion that he would improve and make permanent the PTC and that is combined with an expansion of the MLP rules, it would constitute a proposal that would merit careful analysis by the wind industry. It would be a novel experience for wind developers to be able to make long-term plans that do not have to account for the possibility that the PTC may lapse.
David K. Burton is partner at law firm Akin Gump Strauss Hauer & Feld. He can be reached at (212) 872-1068 or dburton©akingump.com