IN DEPTH: Tax credit may allow US offshore wind lift-off in 2013
By extending the renewable energy investment tax credit (ITC) one year through 31 December on more favorable terms for developers, Congress has increased chances that construction of the first US offshore wind projects can begin in 2013, industry leaders tell Recharge.
They believe that CapeWind, which has 77.5% of its proposed 468MW nameplate capacity under long-term contract, and Deepwater Wind’s 30MW Block Island demonstration project off Rhode Island with full output sold, will start being built this year. Developer Energy Management Inc. is believed to be scheduling a 2013 construction start.
“Extension of the ITC is an extremely positive step for the wind industry in general and for Block Island,” says Deepwater Wind chief executive Jeffrey Grybowski. Last year, it submitted final state and federal permit applications for the project. He notes it is important that Congress recognizes offshore wind as a new industry that merits continued support through the tax code.
Construction work is also possible this year on Fishermen’s Energy 25-30MW pilot project 2.8 miles (4.5km) off Atlantic City, New Jersey, if the developer can find a power buyer and win state eligibility for taxpayer financing through an offshore wind renewable energy credit (OREC) programme.
Fishermen’s Energy spokeswoman Rhonda Jackson says the ITC extension helps give the project momentum and will allow the state to “capture the economic benefits of offshore wind at a significantly lower cost.” These include creation of hundreds of jobs and new manufacturing capacity.
The move was part of a last-minute political compromise late Tuesday on fiscal measures that allow the US to avoid automatic and deep spending cuts by the deficit-ridden federal government.
The bill, which President Barack Obama says he will sign into law, changes eligibility to offshore wind projects that begin construction before ITC expiration from those under the prior law that had been “placed in service.”
The ITC, which provides developers with a credit equivalent to 30% their project costs, has been available since Obama took office in 2009. None have been able to qualify given long project lead times and lengthy federal permitting delays.
Industry executives and investors are now seeking clarity on how the federal government defines “begin construction” for offshore projects that could qualify for the ITC. Their initial view is that the Obama administration will retain the prior Treasury 1603 grant programme rule that an applicant must begin “physical work of a significant nature,” or pay or incur 5% or more of the project’s eligible basis by the “begin construction” deadline.
The 5% of capital expenditure payment, however, would be a difficult barrier for a developer to surmount without a revenue stream from a long-term binding power purchase agreement that would underpin project financing, industry officials say.
“We’ve begun looking at what we need to qualify Block Island for the investment tax credit,” Grybowski says, adding that he believes construction can begin this year if the Treasury 1603 eligibility guidelines are kept.
Lawmakers’ support for an ITC extension will also allow the industry to open some distance with its onshore counterpart, which is overly-reliant on the controversial production tax credit that Congress also renewed for one year.
“The ITC extension was very significant as it lets us stand on our own,” says Jim Lanard, who heads the Offshore Wind Development Coalition (OWDC), an industry group based in Washington, DC.
The nonpartisan Congressional Budget Office estimates that the PTC renewal will cost taxpayers $12.1bn over the next decade, a number that stands out as official Washington grapples with runaway budget deficits the remainder of this decade. Fiscal conservatives in Congress are likely to resume efforts later this year to phase out the PTC, now in its 21st year.
By contrast, “You don’t phase out the ITC before it is phased in,” notes Lanard. “The ITC is just starting.”
The industry intends to lobby Congress for a multi-year ITC extension for the first 3GW of projects that would be available to developers on a “first come, first use” basis, he says. A 2011 bipartisan bill introduced in the Senate would have given developers five years to build a project once eligible for the tax credit.
This would eliminate the need for an increasingly politicized PTC-style annual extension, and allow lawmakers to better estimate and plan for such expenditure.