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Renewable energy projects are inherently capital intensive. The most appropriate federal incentive to assist renewable projects to compete economically with coal and natural gas electric generation should be targeted to reduce capital financing costs. Tax-exempt bonds are a proven and effective federal incentive to lower long-term capital financing costs. Permitting private wind developers access to tax exempt private activity bonds in an “either/or” choice to the Renewable Energy Production Tax Credit will stimulate additional renewable energy, particularly wind energy projects, and lower costs of delivered power to consumers without additional federal cost.

BACKGROUND

Wind is the fastest growing energy technology in the world today, and expectations of future growth in the wind industry remain positive. In the last three years alone, wind capacity worldwide has more than doubled.[1] In line with these positive expectations, the Department of Energy (“DOE”) has set a goal of obtaining 5% of U.S. electricity from wind by 2020. In addition, the DOE’s Wind Powering America program has stated that it expects that by 2020, wind power will add $60 billion in capital investment, create 80,000 permanent jobs, and provide $1.2 billion in new income for farmers, Native Americans, and rural landowners.[2]

Despite the positive forecasts, the U.S. has a long way to go before it can meet the DOE’s goals and expectations. Twenty years ago, the U.S. was the largest producer of wind energy, producing 95% of the world’s wind-blown electricity. [3] Reports indicate, however, that by 1996, the U.S. was only producing 30% of the world’s wind-blown electricity. [4] Although, over the past several years, production of wind energy in the U.S. has increased, the nation continues to struggle to fully develop the industry to its previous levels.

ANALYSIS

I. NATIONAL ENERGY POLICY NOW SUPPORTS RENEWABLE ENERGY VIA THE SECTION 45 PRODUCTION TAX CREDIT.

Recognizing the importance of renewable energies, Congress has created several incentive programs to help support renewable energy industries, including the wind industry. Thus far, such incentive programs have proven to be very helpful. For example, in 1992, the U.S. Installed Capacity for wind energy was only 1,584 megawatts (MW). However, in 2003 –- ten years later -- the Installed Capacity reached 6,381 MW -- a four fold increase.[5] According to the Energy Information Agency, this significant growth is attributable mainly to incentive programs, in particular the production tax credit (PTC). [6]

Since its creation in 1992, the PTC has been an effective financial incentive to encourage renewable energy investments by the private sector.[7] Unfortunately its episodic renewal by Congress has created a pattern of “boom and bust” for the renewable energy industry.[8] This pattern undermines both wind turbine manufacturing companies and the stability of wind developers.

The PTC does not fully address the needs of wind developers. The U.S. wind energy industry is comprised of many small- to medium-sized companies, with inclusion of a few large firms.[9] The PTC is effective for larger wind developers and less effective for smaller wind developers. One main reason for this difference is that the PTC is not tradable or marketable. Consequently, for renewable energy project owners without large and continuing federal tax liabilities, the PTC is a less valuable and reliable financial incentive.

A sound alternative to the PTC incentive is to offer wind developers tax-exempt bond financing. Renewable energy projects are inherently capital intensive. Tax-exempt bond financing is among the least expensive form of long term capital. If made available for renewable energy projects, it is estimated that the cost of delivered renewable energy could be reduced by approximately 8% per kWh.

Currently, only municipal utilities are able to access the tax-exempt bond market for wind projects, while privately owned projects are not eligible to use federally tax-exempt bonds due to the private use restrictions in the federal tax code. Yet, privately owned projects comprise roughly 75% of renewable energy generation. By providing wind developers access to the tax-exempt bond market, the solution will directly address the needs of wind developers by incentivizing investment in wind energy projects.

IV. TAX-EXEMPT BOND FINANCING IS LESS EXPENSIVE TO THE FEDERAL BUDGET THAN THE PTC INCENTIVE.

A comparison of 1,000 MW of renewable energy financed by conventional sources with the PTC indicates a 10-year total federal cost of $653 million, while the same amount of power financed with tax-exempt bonds and only 50% of the PTC incentive currently allowed by Section 45 indicates a 10-year federal cost of $476 million. These figures reveal that the tax-exempt bonds have a 18% lower federal budget consequence than the PTC.

V. FEDERAL TAX INCENTIVES NOW PERMIT SOME PRIVATE PURPOSE USES OF TAX EXEMPT BONDS.

The tax code permits tax-exempt financing for many private uses, including waste recovery power generation and limited construction of private electrical transmission projects.[10] However, the code does not permit use of tax-exempt bonds for renewable energy projects -- even though such projects would have more positive environmental and rural development benefits than waste recovery projects.

CONCLUSION

The federal tax code should be amended to permit an opportunity for private renewable energy developers to use either 100% of the eligible PTC incentive or a new provision to finance projects with private purpose tax-exempt bonds with only 50% use of the PTC. Offering tax-exempt bonds as a federal renewable energy incentive would be a positive step for national energy policy, particularly since this form of incentive has no net negative federal budget consequences.

[1] Louise Guey-Lee, Wind Energy Developments: Incentives in Selected Countries, Renewable Energy Annual 1998: Issues and Trends, Energy Information Administration (1998).

[2] Windustry’s Wind Basics, http://www.windustry.com/basics/01-introduction.htm.

[3] Facts on Wind Energy, Energy Information Administration, http://www.eia.doe.gov/kids/energyfacts/sources/renewable/wind.html.

[4] Facts on Wind Energy, Energy Information Administration, http://www.eia.doe.gov/kids/energyfacts/sources/renewable/wind.html.

[5] American Wind Energy Association estimate, Wind Power: U.S. Installed Capacity (Megawatts) 1981-2004, http://www.awea.org/faq/instcap.html (2005).

[6] Annual Energy Outlook 2005, Energy Information Agency (2005).

[7] 26 U.S.C. § 45 (2004).

[8] Since its inception, the PTC has gone through several cycles of expiration and renewal. In 1999, the PTC was allowed to expire as scheduled. However, within a few months, Congress enacted the “Tax Relief Extension Act of 1999,” which retroactively extended the PTC through the end of 2001. Public Law 106-170. Two years later, the PTC was allowed to expire again on December 31, 2001. Again, Congress retroactively extended a second time to December 31, 2003 in the “Job Creation and Worker Assistance Act of 2002.” Public Law 107-147. Recently, Congress extended the tax credit a third time in the “Working Families Tax Relief Act of 2004” to eligible plants entering service on or before December 31, 2005. P.L. 108-311.

[9] Wind Industry Statistics, American Wind Industry Association, http://www.awea.org/faq/tutorial/wwt_statistics.html.

[10] 26 U.S.C. § 142 (2005).