Wind power tax credits extended by Congress

New Hampshire Business Review, Oct 15, 2004 by Patch, Doug

Good news has emerged from Washington for proponents of renewable energy.

Although Congress has been struggling unsuccessfully for the last two years to pass comprehensive energy legislation, it has finally passed legislation extending four energy tax incentives, a measure that the president has said he will sign.

In the end, pressures to enact the credits became intense because so many projects and jobs depend on them. One of the most important credits is the 1.5 cents per kilowatt-hour of electricity generated by wind turbines in the first 10 years of operation, which has contributed significantly to the development of wind energy. That credit, now 1.8 cents per kWh after adjustments for inflation, also is critical to new projects hoping to win financing from lenders.

The wind energy production tax credit costs $1.2 billion over 10 years. The other three credits combined cost about $167 million over 10 years.

Lawmakers are considering expanding the wind production credits to apply to facilities that produce electricity using solar, geothermal and certain forms of biomass. The bill brought to the president also extends tax incentives to 2005 for biomass produced specifically for electricity and poultry waste used in energy production. Lawmakers also extended the taxable income limit on depletion for oil and natural gas produced from marginal wells.

Federal lawmakers also delayed the phase-out of the income tax deduction for owners of alternative-fuel and hybrid vehicles, meaning the $2,000 deduction will extend to vehicles purchased in 2004 and 2005. That deduction will be reduced to $500 per vehicle in 2006 before expiring altogether.

Most of the focus in recent years, however, has been on wind power Worldwide, about 40,000 megawatts of utility-scale wind turbines are installed today - 0.4 percent of the world's electricity demand. Europe generates about 30,000 megawatts and the United States roughly 6,300 MW - 1,687 of which were added last year, according to the American and European Wind Energy Associations.

Proponents of wind power say it can capture as much as 10 percent of the electric generation market in the United States within 20 years. Despite these optimistic predictions, there are a number of challenges to a significant expansion.

Wind farms, for example, are generally more expensive to build than fossil-fuel generators. The Department of Energy says that roughly 80 percent of the cost of wind projects is the machinery, with the balance being site preparation. The tax breaks, however, make the cost per kilowatt-hour competitive with other fuel sources, at about 5 cents per kilowatt-hour.

The nearly 1,700 MW of new wind power installed by the wind industry last year brought $2 billion in new investment to rural areas of the country, and most industry participants predicted that 2004 could have been an even better year than 2003 had the production tax credit not expired.

The damage to the industry from letting the credits expire has affected companies all along the supply chain: fiberglass manufacturers that make wind turbine blades; makers of other components, such as towers, generators and gearboxes, and trucking companies that haul turbines to new wind farm sites.

If the wind industry were to consistently grow at a rate of 18 percent per year, the wind association says that 6 percent of the nation's electricity could be generated by wind power by the year 2020, resulting in over $100 billion of investment in rural America, where such farms are built. Over the last five years, US. wind capacity has expanded at an annual average rate of 28 percent.

One of Canada's largest energy companies, TransCanada Corp., has bid $505 million to acquire hydroelectric dams on the Connecticut and Deerfield rivers.

USGen New England; the bankrupt owner of the 567-megawatt hydroelectric system, said the ultimate sale of the dams and the hydroelectric facilities would go to the highest bidder, not necessarily TransCanada.

Vermont Gov. James Douglas says that the state will still aggressively pursue the purchase of the dams, which represent about half of all the power needs in the state. The sale covers 13 dams with 41 generating units, the company said.

Eleven of the dams are in Vermont. The Connecticut River system, winch includes dams in Vernon, Bellows Falls, Wilder and Barnet, has a capacity of 484 megawatts, and the Deerfield River system with generating facilities at the Harriman and Somerset reservoirs, has the capacity to produce 83 megawatts. The state had subnutted a bid in the first round but apparently knew it had not been accepted.

TransCanada's so-called "stalking-horse" bid now sets the pace for the auction. A "stalkinghorse" is chosen from a pool of bidder, to open the bidding on a bankrupt company. This initial bid does not buy the company, but sets the bar for the rest of the bid process so that others can't lowball the purchase price.

The news about this possible sale follows closely the announcement of the sale of three other generating facilities owned by USGen New England in Massachusetts and Rhode Island to Dominion Resources Inc.