COLUMN-World wind market faces US tax credit hit: Gerard Wynn

Thu Mar 29, 2012 12:11pm EDT

By Gerard Wynn

LONDON, March 29 (Reuters) - A struggling green energy industry faces a further drag next year as the proposed renewal of U.S. wind power tax credits languishes in Congress, adding to project finance woes and falling subsidies in Europe.

Wind power is feeling pangs as western governments trim subsidies, whose costs fall on austerity-hit populations, leading to over-capacity and falling equipment prices.

Congress has delayed renewal of a wind power tax credit due to expire on Dec. 31, which is in a queue with other tax proposals awaiting attachment to larger legislation (individual tax bills don't move on their own, instead attached to bigger bills Congress is addressing).

The credit is likely to be renewed towards the end of the year, too late to avoid damaging the 2013 U.S. market.

The United States was the world's second-biggest market for wind turbines last year, after China. An abrupt fall would see the world market decline too, according to Denmark-based MAKE Consulting.

A U.S. slump would probably most affect the wind arm of engineering conglomerate General Electric, which is ranked number one or two in the U.S. market compared with third to sixth globally, according to a range of consultancy estimates.

RENEWAL

U.S. wind lobbyists had hoped, but were ultimately disappointed, that the production tax credit (PTC) would get attached to the recent Payroll Tax Bill. It also looks unlikely to get attached to the Transportation Bill currently being debated, they say.

The trouble is that a welter of similar tax proposals await approval. If one gets attached, supporters of the others tend to demand the same treatment, which risks slowing a bill's progress.

The most likely outcome for the PTC, which has bipartisan support, is renewal after the U.S. election in November, shortly before expiry, according to MAKE Consulting.

Another Danish consultancy, BTM Consult, bases its forecasts on a PTC renewal this summer.

The two forecasts for the 2013 U.S. market differ by 5 gigawatts, which compares with a U.S. total of less than 7 GW last year and underlines the importance of timing.

In previous years when the PTC expired, although it was subsequently renewed, installations dipped by more than 70 percent the following year, according to the American Wind Energy Association.

TREASURY GRANT

The PTC allows wind project owners to deduct 2.2 cents from their income tax on every kilowatt-hour of wind power they generate over a period of 10 years.

That effectively adds to the revenues of wind power projects, which coupled with power sales is enough to drive adequate investment returns.

Some wind project developers don't have sufficient income, however, to claim the full potential value of the tax credit. Instead they have used a roundabout route of selling stakes in their projects to banks and others, who can use a share of the credit.

A previous alternative was the investment tax credit (ITC), which allowed project developers to obtain upfront capital worth up to 30 percent of construction costs, rather than per unit of power produced.

In the aftermath of the financial crisis, however, the supply of tax equity investors dried up, and so the U.S. Treasury stepped in to monetise the ITC with a grant.

Those treasury grants expired last year, but eligibility continued for investors under certain conditions and if projects were fully commissioned by the end of 2012.

The treasury grant is simpler, potentially cheaper and provides up-front cash. Developers prefer it to the PTC, but there is no prospect for its renewal, and the wind industry is lobbying for renewal of the PTC where there's a realistic prospect.

US VS EU SUPPORT

Wind power support under the tax credit system is more difficult to predict than for feed-in tariffs in Europe, where generators get a fixed price per unit of electricity.

The U.S. tax credit system is based on power prices, which means the overall revenues of a wind project are a function of wholesale power prices as well as prices of rivals such as natural gas.

But some European countries are moving in that direction as they try to increase value for money for consumers.

For example, Britain is proposing that generators of low-carbon power (wind, solar, nuclear, biomass and so on) only get the difference between variable wholesale power prices and a fixed strike price.

And in Italy, legislators are mulling a change in support to auctioning contracts for solar power, investors say, similar to an existing system in California.

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