PTC impact on widespread renewables uncertain
The Production Tax Credit (PTC) extends well beyond just the wind industry to include other sources of energy such as geothermal, solar, hydropower, biomass, landfill gas and municipal solid waste. And although these energy sources may benefit, there is an amount of uncertainty that exists.
Certainty of benefits is crucial to obtaining financing for renewable energy projects, but uncertainty exists clouding what it means to "begin construction" by the end of 2013.
"It is possible that Treasury may look to the Section 1603 Treasury Grant program for this definition. Even though the Section 1603 Treasury Grant program expired at the end of 2011, projects were still able to qualify for the grant if construction had begun by the end of 2011," Marc Schultz, a partner at the law firm of Snell & Wilmer, said.
In addition to beginning physical work by the end of 2011, the Section 1603 Treasury Grant program allowed for the alternative of accruing a certain percentage of project costs by the end of 2011 to satisfy the beginning construction requirement.
"The accrual of costs is more objective than beginning physical work. Tax credit investors like bright line tests for determining whether the facility will qualify for the tax credits," Schultz said. "It is important that guidance is released relatively soon so that [utilities] can formulate their plans to "begin construction" and line up their financing for these projects as soon as possible."
Unless and until this is done, utilities will not have the needed certainty that a facility will qualify for the tax credits in order to begin construction.
PTC vs. ITC
On the other side of the coin is the Investment Tax Credit (ITC). Energy resources eligible for the PTC have the option of electing the ITC in lieu of the PTC.
The PTC favors projects that are high capacity as the credit is paid based on the energy produced; the ITC is based on cost, so it can make some lower capacity projects economic, according to Burton.
"The PTC favors projects that are high capacity as the credit is paid based on the energy produced," explained David K. Burton, an attorney with Akin, Gump, Strauss, Hauer & Feld LLP. "The ITC is based on cost, so it can make some lower-capacity projects economic. Therefore, before [utilities turn their] back on a wind or geothermal project, consider the ITC election."
To be eligible for the ITC election, the project must start construction in 2013, similar to the PTC.
Certainty of benefits is crucial to obtaining financing for renewable energy projects, but uncertainty exists clouding what it means to "begin construction"
The modification adopted for geothermal, which allows projects to qualify for the PTC based upon an "under construction" status, represents an approach to renewable tax incentives that will work more effectively for geothermal and other renewable power technologies that have longer development lead times, which should lead to technology improvements that make geothermal projects more cost effective and competitive.
However, geothermal is often considered a high risk technology. Although the process is the same as other renewables in terms of obtaining land rights and permits and negotiating complex contracts, the risk is whether or not the energy supply will actually materialize.
"Geothermal involves drilling holes, much like drilling for oil. Engineering studies are obtained before drilling, but instances of dry holes are not uncommon in contrast to wind and solar," Burton said. "One successful renewable energy developer has a fantastic track record with wind projects; it made one foray into geothermal and that project is a drag on its balance sheet," and is unlikely to make up a significant portion of utility-scale power production in the near future.
The Geothermal Energy Association (GEA), on the other hand, believes that the PTC will make a significant impact and estimates that new geothermal power projects in as many as a dozen states could be stimulated to move forward this year as a result.
"Congress' action will spur significant new employment and sustain geothermal industry growth," said GEA Executive Director Karl Gawell. "Consumers and utilities will benefit, as well, because developers will have greater certainty about whether the credit will be available for their project."
The extension of the PTC is a good news/bad news proposition for solar.
According to Burton, the extension provides solar with a legislative opportunity with respect to the 30 percent ITC while denying solar an opportunity to have access to a larger pool of tax equity from bank and corporate investors willing to accept much of their return in tax credits and accelerated depreciation.
"The fact that the deadline for wind was changed from placed in service to start of construction gives the solar industry ammunition to lobby for changing the standard for solar too, so that solar projects to be eligible for a 30 percent ITC only need to start construction by the end of 2016," Burton contends. "…if the PTC had lapsed, then there would have been more tax equity available for solar which could have resulted in lower financing costs for solar developers."