April 27, 2016
Oklahoma

Tax incentives for Oklahoma wind farms are getting scrutiny

By Randy Ellis, & Paul Monies | The Oklahoman | April 24, 2016 | newsok.com

The ongoing state budget crisis and the rapid growth of wind energy in Oklahoma in the past decade has reached an inflection point at the state Capitol, with energy industry heavyweights debating the future of incentives for renewable energy.

Both sides have dug in. Competing billboards dotting highways in Oklahoma City tout the benefits of wind energy or blast the cost of incentives to the state budget. Lobbyists are bending the ear of anyone who will listen at the Capitol. Left in the middle are lawmakers and Gov. Mary Fallin, who have to close a budget hole of $1.3 billion by the end of May.

But behind the glowing wind industry studies and doom-and-gloom predictions by wind incentive opponents are real questions about how existing state incentives for wind energy are working and the long-term effects on local schools and the state budget.

Legislators have little clarity on how to best end or modify incentives that forego an increasing share of the state’s revenue.

Some groups, such as the Oklahoma Public School Resource Center and economists from Oklahoma State University, have performed preliminary analyses of wind incentives, but concede that more study is needed. Meanwhile, the state’s Incentive Evaluation Commission is just getting started with its comprehensive review of economic development incentives. The commission is expected to release its first list of incentives to study at its next meeting in May.

It’s even hard to get agreement on just which state incentives for wind should be under review. The Wind Coalition, which counts wind developers and utilities among its members, said the wind industry voluntarily gave up half its state incentives in last year’s legislative session. Lawmakers ended a five-year property tax exemption for wind farms and reaffirmed a sunset date of Jan. 1, 2021, for a half-cent tax credit for electricity from zero-emissions sources.

The Windfall Coalition, which formed earlier this year against wind incentives, said the wind industry also qualifies for other general incentives such as a manufacturing sales tax exemption and the Investment/New Jobs Tax Credit. Including those exemptions and credits in the mix amounts to a giant giveaway to the wind industry, the Windfall Coalition said. The group’s members include Continental Resources Inc. founder and CEO Harold Hamm, former OGE Energy Corp. Chairman and CEO Pete Delaney and Jeff McDougall, president and owner of JMA Energy Co.

Delaney, who retired from OGE Energy last summer, said removing state incentives won’t mean the end of wind in Oklahoma. The recent renewal and phase-down of the federal production tax credit – worth 2.3 cents per kilowatt hour – means wind projects will still locate in the state, he said.

Adding to the confusion is a lack of data, a perennial issue for those studying the effectiveness of state economic development incentives. Many state incentives were designed without built-in evaluation mechanisms or have failed to capture rapid changes or growth in a particular industry, said Jay Moon, president and CEO of the Mississippi Manufacturers Association.

“The public needs to understand what you’re doing with their resources,” said Moon, who gave a presentation last week before the Oklahoma Incentive Evaluation Commission. “Once you tell them what you’re doing, you show them the benefits and you show how it’s helping them, I think they are more than willing to understand how to make those commitments happen. You are open, you are accountable, and you are transparent, and you show those benefits.”

While the wind industry and wind-incentive detractors might disagree on the effectiveness of incentives, there can be no argument on how much growth has come in the past dozen years. With more than 5,100 megawatts and 39 wind farms, Oklahoma ranked fourth among the states for the amount of wind capacity by the end of 2015. Wind generation – from 2,800 turbines – provided 18 percent of the state’s electricity last year.

Wind industry representatives concede wind is no longer in an infancy stage that needs a boost from Oklahoma to get started. But they worry discussions at the Capitol over ending wind incentive programs earlier than expected would chill investment in the state and spur prospective developments to locate instead in Texas and Kansas, where the wind is just as plentiful and state incentives are also available.

“Changing the rules again by altering the zero-emissions tax credit before its sunset date will put a freeze on investments in Oklahoma, at a time when diversifying Oklahoma’s energy industry is becoming increasingly necessary,” said Steve Vavrik, chief commercial officer at Apex Clean Energy.

Others, such as Preston Doerflinger, the governor’s finance secretary, said their projections show wind incentives could balloon to “hundreds of millions” in the next few years. Doerflinger called the zero-emissions tax credit “one of the biggest financial liabilities that we as a state face today.”

“This industry is here to stay, and it produces a clean, quality commodity that is profitable,” Doerflinger said. “I just think it’s capable of doing that without a government subsidy.”

Oklahoma’s zero-emissions tax credit was put in place in 2002 before there were any commercial wind farms in the state. The incentive has changed over the years but now provides a tax credit of 0.5 cents for every kilowatt of electricity from zero-emissions sources. It can be carried forward for up to 10 years, allowing companies to accumulate tax credits and use them in later years to offset taxes owed.

A tax credit grants a corporation or individual a dollar for dollar reduction in the amount of income tax they otherwise would owe. At first glance, these tax credits might appear to be of questionable value because wind farm owners normally don’t owe any corporate income taxes – at least for several years – because of other tax breaks they receive based on their large investments.

The incentive used to be a transferable tax credit, meaning wind developers could sell the credit to other taxpayers to reduce tax bills. To increase transparency, lawmakers changed the incentive to a refundable tax credit in 2014, with the state issuing a rebate check of up to 85 percent of the value of the credit.

So wind companies can now sell their tax credits to the state and receive 85 cents on the dollar. Wind tax credits have been growing and cost the state more than $101 million from tax years 2012 through 2014, including more than $56 million in tax year 2014 alone.

The zero-emissions tax credit averaged about $2.5 million a year from 2008 to 2011. But it jumped to $18.1 million in 2012, $27.2 million in 2013 and $58.7 million in 2014, according to the Oklahoma Tax Commission.

The tax commission is still collecting tax returns for 2015 and didn’t provide an estimate for last year. But based on wind generation data provided to the Energy Information Administration, the refundable tax credit could cost almost $60 million in 2015.

Even if no more wind farms were built in Oklahoma and wind generation remained at 2015 levels, then the state is looking at paying at least $60 million a year for the zero-emissions tax credit through 2030. The annual amount could vary, since some wind farms would cycle off the credit after they reach the 10-year limit. Wind might be stronger or weaker in a particular year based on weather patterns, which would also affect generation levels.

The zero-emissions tax credit ends Jan. 1, 2021, although wind farms built before then will be able to qualify for the full 10 years of the credit until 2031. That’s a concern for members of the Windfall Coalition. They worry wind developers will race to put projects in place in Oklahoma before the tax credit ends.

Part of their concern lies with the recent federal approval of the Plains and Eastern Clean Line, a 700-mile transmission line that will ship renewable energy from the Oklahoma and Texas panhandles directly to utilities and other customers in the southeastern United States. The high-voltage, direct-current line will take 4,000 megawatts of wind or solar energy to out-of-state customers, so it’s unlikely Oklahoma customers will see savings on their utility bills. The project is expected to be complete by mid-2020.

Clean Line Energy Partners plans to build a $300 million AC/DC converter station in southern Texas County, just miles from the border with Texas. The high-tech station will take alternating current electricity from proposed wind farms and convert it to direct current, which is a more efficient way to ship electricity over long distances.

There’s no guarantee all the wind projects needed for the Plains and Eastern Clean Line will be built in Oklahoma. With the Oklahoma Panhandle just 34 miles wide, some of the wind farms could be built in Texas or Kansas, too.

Wind backers, including Panhandle economic developers, said the Clean Line project and the associated wind farms will boost the local economy in a far-off corner of the state often forgotten by “downstaters.”

Getting a clear picture of just how much wind could be added in Oklahoma between now and the end of 2020 is tricky. So far, at least four wind farms are under construction in Oklahoma and expected to be producing electricity by the end of the year, adding another 700 megawatts of capacity from 370 turbines.

Hundreds of megawatts of wind in the advanced stage of planning in Oklahoma haven’t yet been publicly announced by developers or utilities, according to the latest market report by the American Wind Energy Association.

Under Senate Bill 808, passed last year, wind developers are supposed to notify county officials and the Oklahoma Corporation Commission of their intent to build a wind farm. Those notifications have begun to be filed in the past several months, with more than a dozen new wind farms planned in the next couple of years.

The Southwest Power Pool, which plans transmission and runs a wholesale electricity market for Oklahoma and parts of 13 other states, now has 12,400 megawatts of wind, up from 2,600 megawatts in 2008.

Based on wind projects already under construction, SPP expects to have almost 17,000 megawatts of total wind capacity in the 14-state region by the end of 2016. Another 2,000 megawatts could be added by 2017. SPP officials said up to 1,400 megawatts of wind could come to Oklahoma by the end of this year.

SPP recently studied the rapid growth of wind in the region and its effects on the grid. The group said wind could reliably generate up to 60 percent of the region’s power needs in peak-wind spring months, if additional investments in transmission and voltage-control infrastructure were made. Other scenarios looked at a 60 percent wind rate in fall and 30 and 45 percent rates in spring and fall.

SPP has improved its ability to forecast wind, giving extra certainty to the way the grid operator chooses which generating plants to run at any given time. With such a large geographical footprint, generation dispatchers can see where wind might be falling off in one area and order another wind farm to begin spinning where the wind is picking up.

“We do have some diversity in the wind in our footprint,” Bruce Rew, SPP’s vice president of operations, said when the study was released in January. “That’s beneficial so you won’t have a big (weather) front come through and cause a big swing in wind resources.”

Budget negotiations at the Legislature could include changes to the zero-emissions tax credit. It wouldn’t be the first time lawmakers have tinkered with the incentive. During an earlier budget crisis in 2010, wind developers were included under a two-year moratorium that covered six tax credits. The moratorium was lifted at the end of 2013.

Sen. Mike Mazzei, R-Tulsa, has proposed a cap on the zero-emissions tax credit as part of the solution to the state’s budget shortfall. How a cap would work has yet to be determined. But lawmakers could defer any amounts over the cap to future budget years, or they could limit the number of years the credit can be carried forward. If the cap is set at a percentage of the projected refund total, then every wind developer could see their credit cut by that proportion.

The Windfall Coalition wants an immediate end to all wind incentives in Oklahoma. The group didn’t expand on how that could be put in place. But it said Iowa has a 363-megawatt cap on its renewable energy tax credit, which amounts to about $20 million each year.

Wind industry representatives said any changes to the zero-emissions tax credit would have to be prospective. It would be unwise to change the rules in the middle of a tax year, or try to make any changes retroactive, they said. Doing so would chill investment and “cause the business community to question the integrity and stability of the Oklahoma business climate,” said Jeff Clark, executive director of The Wind Coalition.

Vavrik, with Apex Clean Energy, said the wind industry is competitive, with many developers assembling projects and responding to requests for proposals from utilities and corporate purchasers. Part of the all-in price of power-purchase agreements for wind includes an assessment of available incentives. The typical utility-scale wind farm can cost more than $400 million.

“Wind companies compete to provide the lowest-cost power to potential customers,” Vavrik said. “Companies determine what price they can charge for their power based on power production, capital costs, anticipated turbine efficiency, interconnection costs and available tax incentives, which vary from state to state.”

The biggest selling point for wind power-purchase agreements is the predictable price for the energy over the 25-year contract. Wind developers said few of those contracts include automatic inflation escalators or other provisions that would pass through to the customer. Changing the treatment of incentives already in place could jeopardize the all-in price agreed to in the contract.

“Wind project investors are looking for a competitive return to compensate for the risks of spending most of the cost of the facility upfront,” Vavrik said. “The price of the power sold solves the equation, balancing those risks and the return.”

The five-year property tax exemption for wind farms ends Jan. 1, but wind farms in commercial operation by the end of this year will still be able to qualify for the full five years of the exemption. That means the state will pay the tab until the end of 2021 by reimbursing local school districts and counties for the lost revenue.

Voters approved the property tax exemption more than 30 years ago with the passage of State Question 588. Since then, the state has granted about $880 million in local property tax exemptions, according to Oklahoma Tax Commission data. The incentive was initially targeted for large manufacturers, but has been expanded over the years to include small manufacturers, electric power plants, data centers, distribution centers and wind farms.

After a building boom in independent natural gas plants a decade ago, electric generating plants were dropped from the property tax exemption in 2009.

The property tax exemption is a cost-shifting incentive. Qualifying companies don’t have to pay local property taxes for five years, with the state picking up the tab and paying back schools, counties and other local authorities. Reimbursements come from a dedicated, one percent allocation from state income taxes. But the program has been so successful that allocation isn’t enough. The Legislature has had to make supplemental appropriations since 2003 to make up the annual shortfall in the Ad Valorem Reimbursement Fund.

The state has paid more than $144 million on behalf of wind farm owners under this program over the past 10 years.

From 2004 through 2014, the state treasury was tapped to make $117 million in property tax payments to counties and school districts on behalf of wind farms, while wind farm owners paid only $16.8 million, according to Oklahoma State University economist Shannon Ferrell.

Wind farm owners will pay a higher proportion of industry taxes as the state’s wind farms age. Ultimately they are projected to pay about $1.69 in ad valorem taxes for every $1 paid up front by the state throughout the projected 25-year lives of the state’s current and planned wind farms, Ferrell said. Changes in the law are expected to impact that ratio.

About $29.6 million of the total 2015 ad valorem exemption came from wind farms. Manufacturing made up $35 million, with data centers about $15 million of the reimbursements.

The state will reimburse local authorities about $80.2 million from exemptions granted in 2015, according to the Oklahoma Tax Commission. Half of the reimbursement will come from the fund, with a supplemental appropriation of about $40 million needed from the fiscal year 2017 budget.

Google Inc., which operates a data center in Pryor, qualified for $13.5 million in property tax exemptions in 2015, according to the Tax Commission. The Internet search and advertising giant is also a big backer of renewable energy. Google last year signed contracts for 400 megawatts of power from two Oklahoma wind farms now under construction: RES Americas’ Bluestem project in Beaver County and EDF Renewable Energy’s Great Western Wind Project in Woodward and Ellis counties.

Andrew Silvestri, head of public policy and external affairs for Google in Oklahoma, said the company built its Pryor data center in part because of the availability of wind energy.

“Google is striving to power itself entirely with renewables, but this isn’t just philosophical, it makes great business sense,” Silvestri said in an email. “Wind energy allows us to hedge out power-price volatility from things like fuel costs, and since renewables have no fuel inputs there are very low operating costs. Another benefit is we can enter into long-term contracts, giving us long-term price certainty that helps smooth out our financial planning.”

Silvestri, a former Fallin staffer, said the governor’s Oklahoma First Energy Plan provides a blue print to investors who crave certainty. The plan touts an “all-of-the-above” approach to state energy sources.

“This is an important issue to Google,” Silvestri said. “We certainly want to see Oklahoma’s commitment to renewable energy incentives continue.”

Wind farms have qualified for more than $144.5 million in property tax exemptions in the past 10 years, according to the Tax Commission. The state calculates the value of the turbine, tower and other parts of a project during the first five years of the incentive and issues a check to local authorities.

Because of the way a wind turbine depreciates in value, the state is paying a big chunk of a project’s tax revenue in those first five years. Moving parts depreciate over a 12-year schedule, while non-moving parts are on a 25-year depreciation schedule. Once the five-year exemption ends, calculating the property taxes on the turbine is up to the county assessor.

In a study last year for the State Chamber of Oklahoma’s Research Foundation, Oklahoma State University economist Shannon Ferrell estimated the owners of existing and planned wind farms will pay $948.5 million in property taxes through 2043. In addition, local schools and counties will get state reimbursements totaling $560.7 million in that same period.

The windfall to some rural school districts – picked up the state for the first five years – has helped more than 40 leave the state-aid portion of Oklahoma’s complicated funding formula for education. Those superintendents are happy to talk about the good things the extra funding has done for their district.

A study released earlier this month by the Oklahoma Public School Resource Center looked at districts that had received a boost from wind farms. Those gains flattened out and then began to drop as wind farms aged. It said the depreciation schedule could cause problems if a school district has taken on more bond debt and expects to use the additional valuation from wind farms to pay back the bonds.

“Wind energy systems do increase the value of a district’s bonding capacity; however, the depreciation schedule once again comes back in as an issue,” said the report by Andy Evans, Tom Curran and Seth Hill. “As the ad valorem changes due to depreciation, the cost of the bond is moved from the value of the wind energy system to the other property owners within the district.”

The report said wind farms benefit local schools, but said declining depreciation could cause some districts that have left the state-aid portion to go back on the funding formula.

“Any changes to the tax positions of wind energy systems should be carefully studied to avoid unexpected consequences,” the report said.

As well as ending state incentives for wind, the Windfall Coalition said lawmakers should “level the playing field” for all energy production in Oklahoma. They suggest a tax on electricity generated from wind.

“To level the energy playing and let the market decide what is most economic, especially during a state budget crisis, wind production must be taxed,” the Windfall Coalition said.

That’s also an idea floating around the state Capitol. But Doerflinger conceded a new tax would have trouble getting the three-fourths majority needed to raise taxes in Oklahoma.

“It is a very complex situation,” Doerflinger said. “It is a relatively new industry, so my office, Tax Commission and the Legislature, everybody is looking at how that might look from a practical standpoint. Probably taxing production is a more difficult and more complex conversation than just ending it (the incentive).”

Some Kansas lawmakers tried passing an excise tax on electricity from renewable sources last year. But a coalition of renewable energy advocates, utilities and electric cooperatives argued doing so would just increase rates on customers.

“Although we are sensitive to the state’s need to identify new sources of revenue, we oppose relying so strongly on Kansas utility customers to provide that new revenue stream,” a representative of Westar Energy told a Kansas House committee last year. “In addition, by setting the precedent for an excise tax, the legislature is merely building a short bridge to applying an excise tax on any source of generation – coal, natural gas, nuclear – which the state’s utilities would also oppose.”

Oklahomans already have the lowest electricity prices in the nation, according the latest rankings by the Energy Information Administration. Driven in part by low natural gas prices, the state saw a 7 percent decrease in electricity prices in 2015.

Across all customer classes, Oklahoma had average prices of 7 cents per kilowatt hour. Industrial users paid the least, at 4.65 cents per kilowatt hour. Commercial customers averaged 6.85 cents per kilowatt hour, while residential customers averaged 9 cents per kilowatt hour.

“We are seeing the long-term benefits of great business decisions by our power producers, which continue to increase their utilization of Oklahoma resources like natural gas and wind in order to keep power costs down,” said Michael Teague, Oklahoma’s secretary of energy and environment. “By using our natural resources, we are providing certainty for economic development to continue.”

State economic development officials tout the low-cost of electricity as part of their pitch to companies looking to locate or expand in Oklahoma. The state’s industrial electricity prices are 28 percent below the national average.

“As we work to further diversify our economy and grow the manufacturing industry in our state, this is an area where we can set ourselves apart from the competition and provide costs savings to Oklahomans,” said Deby Snodgrass, Oklahoma’s secretary of commerce and tourism.

But just how much the state’s low electricity prices are a result of wind is uncertain. The Wind Coalition said Oklahoma Gas and Electric Co. and Public Service Co. of Oklahoma – the state’s two largest electric utilities – have said their customers will save $2 billion from the wind added to their systems. OG&E has 840 megawatts of wind either owned or contracted, while PSO will have 1,100 megawatts of wind in its power-purchase agreements by the end of the year.

The two utilities’ savings predictions are tied to some assumptions as to what future prices of natural gas and coal would average, and natural gas prices have a history of volatility. At the very least, locking in contracts with wind farms serves as a hedge against future price increases for fossil fuels.

The Windfall Coalition, meanwhile, refused to ascribe any benefits to wind generation, saying only “the cost far outweighs any benefit.”

For its part, The Wind Coalition said Oklahoma benefits from wind through lower electricity prices, more jobs, higher tax revenue and environmental benefits. Enel Green Power North America Inc., a unit of Italy’s Enel Group, added 420 megawatts of wind capacity in Oklahoma last year, even after some incentives were changed by the Legislature.

“And this significant investment in Oklahoma is, in large part, a result of a strategic regulatory framework that has helped position the state to be an attractive place to invest,” the company said in a statement. “As we look ahead to future growth opportunities in this highly competitive market, EGPNA (Enel Green Power North America) remains focused on investing in projects that are not only located in regions with great resources, but also areas that have a solid regulatory environment.”

Whatever the true benefits of wind energy to Oklahoma might be, the state is a partner in its future through the wind incentives it has granted. That remains a lingering concern for budget officials such as Doerflinger.

“This is not anything against the wind industry, but at some point you have to ask, ‘Has it worked?’ ” Doerflinger said. “Obviously, the case is convincing to say the wind incentive has worked like a charm. We have more wind turbines than all but three states. Our production is growing at a tremendous rate. The incentive worked great. It worked like a charm, and now it’s time for it to go.”