Developers sweat clean energy tax credits

Sen. Max Baucus at a wind project near Great Falls

When another attempt to extend the Production Tax Credit (PTC) for wind, closed- and open-loop biomass, small irrigation, small hydropower, landfill gas and trash combustion projects, and the Investment Tax Credit (ITC) for solar energy and fuel cells failed Wednesday, states’ ability to meet renewable portfolio standards (RPS) mandating clean energy investments became more complicated.

The two tax credits are set to expire at the end of the year. Already, investment in new renewable energy projects is dropping off sharply. The uncertainty has also stalled a number of projects.

While a majority of members in both houses of Congress support an extension, bills to renew the credits cannot get passed thanks to "pay-go rules" instituted by House Democrats, who require all tax cuts tp be paid for with increased revenues elsewhere in the budget. Senate Republicans and some Democrats are chafing against proposed PTC and ITC pay-fors that would raise taxes on companies involved in oil and gas exploration.

Senators Max Baucus (D-Mont.) and Harry Reid (D-Nev.) on July 24 introduced a bill that includes numerous tax credits, including extensions of the PTC and ITC.

On Wednesday, Senate Democrats again failed to end debate on the measure when they could only muster 51 votes instead of the necessary 60 in favor of ending debate on the bill. With the Senate starting its month-long August recess Friday, opportunities to pass credit extensions are now very limited, because presidential election politics could put the kibosh on any tax-related legislation between September and November. After the election, members of a lame-duck Congress may not be interested in reaching agreements if the makeup of Congress is about to change. Inclusion of short-term extensions in the annual year-end omnibus "extenders" bill would be the credits’ final chance before 2009.

The PTC and the ITC have expired three times since they first passed in 1992: 1999, 2001 and 2003. Each time, wind and solar installations dropped off precipitously. If the credits expire this time, $19 billion in investments and as many as 116,000 jobs could be lost in the United States, according to a study released earlier this year by Navigant Consulting.

Mike Marelli, manager of origination in the Renewable and Alternative power group at Southern California Edison, says a number of already-signed power purchase agreements with renewable generators could be at jeopardy. So could California’s ambitious RPS, which calls for 20 percent of the state’s power needs to be met with renewable energy by 2010, he says.

According to Marelli, the company’s pro-forma contract for renewable generators includes a clause that allows the utility to terminate a contract if the tax credits are not passed. The only other option for projects in this situation is a re-negotiation of the price for power. For wind, that could mean as much as $20 more per megawatt hour. While a fund does exist that allows utilities to pay above market costs for renewables when necessary. According to the state’s Public Utilities Commission, SCE’s share of the $773,000 fund is just $322,000. It will be depleted quickly if the tax credits are not extended, says Marelli.

Seventy percent of planned renewable energy projects in California are at risk of being delayed or canceled because of uncertainty around the credits, according to a recent report delivered to the state legislature by the Public Utilities Commission.

Not all developers are feeling the pinch. Chris Taylor, director of development for Horizon Wind, says his company is still planning projects that will break ground in early 2009, even though uncertainty over the tax credits will dramatically influence the price and complicate final negotiations.

"We want to be in place to break ground as early in 2009 as possible," Taylor says.