Windward Policy: The PTC

New Year’s Day brought wind-energy developers a belated holiday gift when Congress included in its fiscal-cliff budget deal a one-year extension of the production tax credit (PTC) that helps wind farms operate profitably. Slight changes in the language of the extended PTC will expand actual industry benefits beyond the stated Dec. 31, 2013, deadline, but the legislation still could make for a buyers’ market for utilities seeking to boost their wind-energy supplies.

The PTC is worth 2.2 cents per kilowatt-­hour (kWh) for wind-farm owners. Under the new agreement, projects simply need to begin construction by the end of this year to qualify. Previously, projects needed to be operational by the deadline to garner the benefit. One critical element yet to be defined, however, is what it means to “begin construction.” While the phrase may seem to indicate a need to have actually broken ground, developers prefer the qualification to rest on an owner’s investment of, say, 5 percent of a project’s total cost.

“If they had said it had to be operating, that wouldn’t be particularly useful to us,” said John Lamontagne, director of corporate communications for Boston-­based First Wind. Developers need permits and financing in place before the first shovel starts turning earth, he explained, and those efforts could take longer than the single year covered in the current extension. In fact, the American Wind Energy Association (AWEA) estimates 18 to 24 months are needed to develop a new facility.

With the extension in place, the next couple years could continue the boom in wind-farm construction seen in 2012. According to the AWEA, developers put more than 13,000 megawatts (MW) of wind power into service last year—more than twice the total in 2011—as they rushed to meet the previous Dec. 31 deadline. Additionally, more than 40 percent of the entire year’s added capacity came online in December, according to the Energy Information Association. For the year, new wind farms represented 44 percent of all electrical capacity added in the United States. 

Projections aren’t yet available for how much new capacity will be constructed during the time covered by the current extension, but First Wind’s plans indicate last year’s boom may well continue. The company focuses on developing large-scale installations in areas that other developers often steer away from, such as New England, Idaho, Oregon and Hawaii. The company currently operates 980 MW of capacity, and its president has said it plans to expand its portfolio by 50 percent thanks to the PTC’s extension.

However, before any wind-farm developer can ensure a project is far enough along to meet a possible IRS definition, it must line up customers for the electricity a new facility will produce. Power purchase agreements are a critical first step in gaining the financing necessary to construct a farm that can total several hundred million dollars. So, while qualifying projects may not need to be operating for several years, they will need to have purchase contracts signed and sealed by the end of 2013, which could mean a buyer’s market for electric utilities.

Utilities are looking ahead toward renewable-portfolio standards that will force them to get more of the electricity they sell from wind, solar, hydropower and other carbon-free sources in the next five to 10 years. With developers under the gun to get financing lined up for projects that need to “begin construction” by the end of the year, electricity purchasers could have an upper hand in pricing negotiations. Minneapolis-based Xcel Energy is ahead of its current renewable portfolio requirements but made it clear it sees opportunities for bargains in its own recent call for wind-energy proposals.

“Given the recent extension, we want to see if there are any projects that present a good deal for our customers,” said Judy Poferl, president and CEO of Xcel’s Northern States Power operating division. “We have positioned ourselves to be able to take a good project if available but not having to take one if either timing or costs make it less desirable for our customers.”

Developers recognize that the on-again/off-again PTC debate works against their long-term prospects. Some are beginning to promote investment structures similar to real estate investment trusts and master limited partnerships as an alternate means of financing developement of renewable energy. While the PTC has certainly fostered wind-energy growth over the last decade, developers in the field see it as a hindrance in the current political environment.

“Wind energy has had the production tax credit for years. Other forms of energy have more predictive polices in place,” said First Wind’s Lamontagne, sounding a call for change. “The view of many in the industry is that we want to have a level playing field with other forms of energy … so we don’t have to plan two to three years out; we can plan 10 years out.”

About the Author

Chuck Ross

Freelance Writer
Chuck Ross is a freelance writer and editor who has covered building and energy technologies for a range of industry publications and websites for more than 25 years. He specializes in building and energy technologies, along with electric-utility bus...

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