Wind Energy Tax Credits: New Five-Year Extension Ensures Federal Benefits

March 4, 2016

A recent extension of federal tax credits for renewable energy, signed by President Barack Obama on December 18th, 2015,[1] has ensured that wind-energy projects will continue to reap federal benefits for the next five years before a planned phase-out of the program. The new extension was passed with the hopes of creating new jobs, securing new investments, and moving towards renewable energy in the near-future. The extension calls for a phase-out program, which sees the tax credits decrease yearly in an attempt to lessen the dependence of the wind-energy industry on the federal benefits.

 

The Production Tax Credit (“PTC”) originated in the Energy Policy Act of 1992, and was meant to encourage renewable energy, including wind.[2] The PTC, which is found in section 45 of the U.S. Internal Revenue Code, is an income tax credit that is available to the owner of a wind-energy project to use against its income for each kilowatt-hour that it produces and sells to an unrelated entity.[3] Section 48 of the Code also provides an Investment Tax Credit (“ITC”), which provides a tax credit for each energy property brought into service during any taxable year. The PTC, along with the ITC, were both extended at the end of 2015.  A wind-energy company can elect to use either the PTC or the ITC, and while the PTC is more commonly used, the ITC does not require actual production of electricity.[4] The PTC and ITC together have helped support investment in the wind-energy industry, which has seen an average of $15 billion of private investment in each of the past five years.[5]

 

In 2013, the American Taxpayer Relief Act extended both the PTC and ITC for an additional year. This kept with the previous trend, where one and two-year extensions had been common for the PTC and ITC.[6] When Congress approved an additional five years for the PTC and ITC at the end of 2015, it was welcomed with open arms by renewable energy companies.[7] In the past, PTC and ITC were renewed for a single year at the end of that same year, meaning actions taken by clean energy companies in the past year were eligible for tax credit, but future investments into clean energy were uncertain due to questions of whether the PTC and ITC would be renewed again. By renewing the tax credits for an additional five years, Congress hopes to spark investment in the clean energy market, while at the same time weaning companies off of the tax credits by phasing them out over time.[8]

 

The 2015 Consolidated Appropriations Act, signed by President Obama, that extends the PTC and ITC, received support from both the House of Representatives and the Senate, passing 316 to 113 in the House, and 65 to 33 in the Senate.[9] Wind facilities for which construction begins before January 1st of 2020 will be eligible for the PTC, after which date the fate of the PTC is unknown. The renewal of the PTC and ITC is projected to secure 73,000 American jobs, while allowing 8 million additional households to run on renewable energy by the year 2020.[10] The tax credits are estimated at $25 billion over the next 5 years, and will hopefully spark nearly $35 billion in investment in wind energy.[11]

 

The phase-out schedule for both the PTC and the ITC will take place over the next decade, with the PTC being more aggressively reduced. For those taking advantage of the PTC, there is a 20% reduction if construction begins in 2017, 40% reduction if it begins in 2018, and 60% reduction if it begins in 2019.[12] The 30% ITC will be available for solar energy until the end of 2018, when it will be reduced incrementally to 10% in 2022.[13]

 

While natural gas and coal are currently cheaper than solar and wind, renewable energy is thought to be the future, and both are projected to be cheapest forms of new electricity in many states by the time the tax credits expire.[14] Even so, one Senator has introduced legislation that will end the federal tax credits early. Senator James Lankford (R-Oklahoma) has proposed legislation that will not allow any more companies to qualify for the tax credit after 2019. The current tax credits are undefined after 2020, but Lankford wants to make sure that they are completely phased out. Lankford described the renewable energy market as well-developed, economically stable, and pulling its own weight in the system. “We should allow it to continue to fly on its own. It’s not as if wind goes away if we don’t provide a tax credit,” said Lankford.[15]

 

The Production Tax Credit and Income Tax Credit have been vital in encouraging the development of wind farms, and the five-year extension will go far in ensuring that wind energy continues to grow. Not only has the extension rewarded those who have invested in wind energy in 2015, but will encourage more to do so in 2016 and beyond. The phase-out schedule is transparent enough that investors and wind developers alike can prepare for the end of federal tax credits and plan accordingly, while still reaping the benefits for the next five years, and passing those benefits onto energy consumers across the United States for the foreseeable future.

 

 

[1] Erik Lange, U.S. Legislation Extends Tax Credits for Renewable Energy, National Law Review, Jan. 13, 2016, http://www.natlawreview.com/article/us-legislation-extends-tax-credits-renewable-energy.

[2] See 26 U.S.C.A. §§ 38, 45 (2010).

[3] See Id.

[4] Ernest E. Smith, Roderick E. Wetsel, Becky H. Diffen, and Melissa Powers, Wind Law, § 5.01 (LexisNexis Matthew Bender 2015).

[5]Federal Production Tax Credit for Wind Energy, American Wind Energy Association, http://awea.files.cms-plus.com/FileDownloads/pdfs/PTC%20Fact%20Sheet.pdf.

[6] See Smith, Wind Law, § 5.01.

[7] See Christopher Martin, SOLAR COMPANIES SURGE AS U.S. TAX CREDIT BRINGS EARLY HOLIDAY, Bloomberg New Energy Finance, Dec. 16, 2015, http://about.bnef.com/bnef-news/solar-companies-gain-as-tax-credit-brings-early-holiday-gift-1/.

[8] H.R.2029 – 114th Congress (2015-2016).

[9] Lange, supra note 1.

[10] U.S. wind industry leaders praise multi-year extension of tax credits, American Wind Energy Association, Dec. 18, 2015, http://www.awea.org/MediaCenter/pressrelease.aspx?ItemNumber=8254.

[11] Tom Randall, What Just Happened in Solar Is a Bigger Deal Than Oil Exports, Bloomberg Business, Dec. 17, 2015, http://www.bloomberg.com/news/articles/2015-12-17/what-just-happened-to-solar-and-wind-is-a-really-big-deal.

[12] Lange, supra note 1.

[13] Josh Brewer, Surprise U.S. Tax Credit Extension Ensures Renewable Energy Future, Mother Earth News, Jan. 12, 2016, http://www.motherearthnews.com/renewable-energy/energy-policy/investment-tax-credit-extension-zbwz1601zbre.aspx.

[14] Randall, supra note 11.

[15] Brian Hardzinski, Lankford Proposes Ending Federal Wind Energy Production Tax Credit, KGOU, Feb. 3, 2016, http://kgou.org/post/video-lankford-proposes-ending-federal-wind-energy-production-tax-credit#stream/0.

About

Evan Falon is a third-year law student at the University of Texas School of Law. Evan graduated with honors from Hamline University in St. Paul, Minnesota, where he was a four-year letter winner in men’s soccer. Evan will be working at Richards, Layton & Finger in Wilmington, Delaware after graduation.