Analysis: will offshore wind survive without tax credits? 

Wind industry advocates are working overtime to convince Congress to renew expiring tax credits. The incentives are unquestionably important, but less attention is paid to scenarios in which the lobbying is unsuccessful.

Would the offshore wind industry still emerge without the expiring tax credits?

The federal production tax credit (PTC) has provided incentives for wind power (offshore and land) since it was authorized by the Energy Policy Act of 1992.

The PTC provides a 2.1 cent per kilowatt-hour corporate income tax credit for electricity generated by qualified energy projects, available during the first 10 years of a project’s operation. The PTC was most recently extended under the American Recovery and Reinvestment Act of 2009, but is set to expire at the end of 2012.

Despite intense lobbying, Congress has failed to extend the tax credits past 2012, and many in the industry are operating under the assumption that nothing will happen until after the November elections. Indeed, many participants at the recent Offshore Wind Power USA conference in Boston seemed resigned to the fact that projects would be put on hold.

Last week, a bipartisan group of twelve Senators wrote to their respective Senate party leaders, stating that “Congress must quickly work to reauthorize the wind production tax credit before our wind capabilities are damaged.”

The American Wind Energy Association has called for a long-term extension in order to give developers and financers certainty, as most wind projects operate under an extended developmental timeline.

The only time that the PTC was allowed to lapse since its inception was 2004 (it was reinstated in 2005). Wind energy production ramped up in 2003 in anticipation of the expiration and then dropped off dramatically in 2004 before rebounding in 2005. Coincidentally, that year also featured a hotly contested presidential election involving a polarizing incumbent.

In 2012, Congress is being met with a near universal call from the industry to extend the tax credit. That unanimity, however, has not yet resulted in an extension. So perhaps it’s time to ask, can the North American offshore wind industry succeed without federal tax credits?

The projects that attain financing without the promise of a tax credit could be stronger in the long-term. The industry could build on the foundation of these small, but independently viable, projects.

Last week at the Boston conference, Bryan Martin (of Deepwater Wind backer D.E. Shaw) suggested that the North American offshore wind industry will have the greatest likelihood of success if it starts small and builds its way up. He praised the idea of economically viable test projects that gradually increase to scale.

Fittingly, DE Shaw has invested heavily in this strategy as co-owners of Deepwater Wind, which is developing the planned Block Island Wind Farm off of Rhode Island.

Deepwater plans to begin construction of the $205 million, 30-megawatt Block Island project in 2013 or 2014, and has already put in an order to purchase five 6MW turbines from Siemens.

According to Martin, the privately financed project will fill an immediate need by lowering energy prices on Block Island (which currently uses diesel generators). Deepwater then plans to expand with a second project, if financially viable, of 750 to 1,000MW which could service larger energy markets in New York and New England.

“If you serve high enough price markets, then the tax credit will be a relatively small part of your revenue stream,” Martin said.

Both Martin and Deepwater CEO William Moore are fond of saying that “good projects always get financed.”

Offshore wind developers and financers would likely prefer to see both an extension of the PTC and a revival of the Investment Tax Credit, but they may have to face the reality of living with neither.

It seems like a foregone conclusion that the uncertainty surrounding the federal tax incentives will result in fewer projects being financed and built in the near future.

The silver lining may be that the projects that are built will provide a sturdier foundation on which to gradually build this evolving industry without the help of unpredictable government subsidies.