For the two decades, investors in wind energy have been buoyed by nearly $9 billion in federal and state subsides and giveaways. The federal “production tax credit” gives corporations in the industry a 2.3-cent tax credit for every kilowatt-hour of electricity produced. Some states have padded the subsidies with their own generous financial support. Whenever we look at company or industry, however, it’s critical to realize that we are not looking at a photograph, a snapshot in time, but rather more like a movie an evolving story that can sometimes take an unforeseen twist. In the case of the wind industry, it’s looking like just such a twist is coming as the days of government support for the industry appear to coming to an end.
For this development we turn to first to Texas where the State Senate by a two-to-one margin effectively eliminated all support for wind power. Oklahoma’s state House voted by a 78-3 margin to eliminate property tax exemptions for the wind power sector. In February, the West Virginia legislature repealed a requirement that state entities generate a quarter of their power from alternative sources.
Now the federal government appears ready to sever to wind energy subsidy, a move that will test whether the upstart industry is prepared to stand on its own two feet without the crutch of government support. Wind energy companies have heavily relied upon a government construct known as the “Production Tax Credit” (PTC ) to support their bottom lines. The PTC is a federal program that provides billions of dollars annually to subsidize renewable energy facilities such as wind farms. Generally speaking a clean technology facility receives a tax credit for 10 years after the date the facility is placed in service with the tax credit amount ranging from $0.23 per kilowatt-hour (kWh) for wind to $0.011 per kWh for qualified hydroelectric. Looking at the International Journal of Sustainable Manufacturing, researchers concluded that “in terms of cumulative energy payback, or the time to produce the amount of energy required of production and installation, a wind turbine with a working life of 20 years will offer a net benefit within five to eight months of being brought online.”
Rep. Kenny Marchant (R-Tex) has just introduced legislation known as The PTC Elimination Act striking the statutory language for the primary federal handout for the wind industry from the U.S. tax code and provides that the PTC should expire as of December 31, 2014 and not be extended in the future or retroactively.
This legislation includes a number of additional measures that reduce the subsidy for current beneficiaries, including tightening eligibility definitions and repealing the inflation adjustment for current PTC recipients. These changes will reduce the amount that American taxpayers are forced to subsidize wind companies by approximately 35 percent.
“If we want to build a healthier American economy, Congress must get rid of the deadweight in the tax code that is limiting our nation’s potential,” Marchant said. “That’s why I have introduced legislation to eliminate the production tax credit.” Marchant noted, “Since its creation in 1992, the PTC has ballooned from a temporary boost for energy innovation into a massive special interest handout for the now multibillion-dollar wind industry. Today the wind industry regularly produces more energy than the market demands while hardworking taxpayers shell out billions of dollars each year in PTC support. In fact, because the credit pays claimants for 10 years of energy produced, Americans are currently on the hook for a minimum of $6.4 billion over the next decade.”
This has benefitted companies like NextEra Energy , which has received over $400 million in under the PTC. While that is one of the larger amounts, there is no shortage of other companies that have also benefitted. Duke Energy , received nearly $100 million in subsidies, while Sempra Energy , received an estimated $65 million and Xcel (XEL) received over $30 million. As noted in Sempra Energy’s 2014 annual report, “For each of the years ended December 31, 2014, 2013 and 2012, PTCs represented a large portion of our wind farm earnings, often exceeding earnings from operations.” Passage of the Marchant sponsored legislation would force Wall Street to cut earnings expectations for the above companies as well as those that serve the wind power industry, such as Siemens , Atlantic Power , Emerson Electric , and ABB .
Aside from the tax credit revenue side of the PTC, there is a darker side that is often ignored. The PTC has become a corporate tax shield to corporations like Berkshire Hathaway and Google . At one of his famous investor’s summits, Warren Buffet once bragged that he would “do anything that is basically covered by the law to reduce Berkshire’s tax rate. For example, on wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit. Addressing this aspect of the PTC as well would help close tax loopholes that would enable companies to minimize taxable income.
One would think ending the handouts and closing tax loopholes would be enough for both sides of Congress to cross the aisle. If they do, wind power investors could see tailwinds become headwinds.
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