This blog is part of the Southern Wind Energy Association’s Windy Wednesday series leading up to the wind energy industry’s largest annual event, WINDPOWER 2016, being hosted in New Orleans May 23-26. Registration and details available here. You can read the other blogs in this series by clicking on #WindyWednesday.
In late 2015, the United States’ Congress passed long-term extensions of key federal tax incentives for renewable energy resources. As part of the overall legislative package, Congress also passed a long-term phaseout of the federal Production Tax Credit (PTC) for wind energy. Because of the PTC phaseout, there is a real urgency for wind farm development to begin as soon as possible. Electric utilities that delay purchase of wind energy resources may end up losing hundreds of millions, if not billions of dollars in ratepayer savings due to a reduction in the federal PTC value.
The federal PTC provides a 10-year tax credit that currently stands at $23 per megawatt hour (MWh) and that increases over time with inflation. In order to qualify for the full PTC, a wind farm developer must begin construction before the end of 2016. However, the PTC declines in value by 20% each year a wind farm developer delays beginning construction (e.g., projects that start construction in 2017 receive just 80% of the PTC’s full value, dropping to 60% and 40% for projects that start construction in 2018 or 2019, respectively). Wind farms that begin construction in 2020 are currently slated to receive no federal PTC benefit.
By one estimate from the Lawrence Berkeley National Laboratory (LBNL), the full PTC is worth roughly $16/MWh (in PPA price terms) to wind project owners with a limited appetite for tax credits. That same LBNL report finds that, due to financing impacts, a 20% decline in the PTC may actually result in a loss of $5.60/MWh in real dollar value (see Appendix Table, Tax Appetite from Tax Equity, Real Levelized PPA Price (Figures 5 and 6), pg. 52).
Based on this estimate, a 20% decline in the PTC could result in a loss of about $20 million over the life of a 100 megawatt wind farm with a 40% capacity factor. For a 100 megawatt wind farm that has a 50% capacity factor the federal PTC loss would be about $25 million (or about 25% higher). For a 200 megawatt wind farm, the figure would be roughly $39 million (or about double). Savvy readers will notice these values are linear, so as capacity factors increase, or the size of the wind energy purchases increase, so do the federal PTC savings (and losses with the corresponding federal PTC step-downs).
Electric utilities are racing against the clock, and may not be fully aware of the importance of contracting with wind energy projects that qualify for the full federal PTC. Listed below are a few examples of southern utilities that could take advantage of the full federal PTC:
- Entergy Arkansas has developed a 100 megawatt request for proposals (RFP) for renewable energy. If Entergy Arkansas loses 20% of the federal PTC value by waiting until next year to select a contract, that company could lose approximately $20-$25 million in ratepayer savings.
- Southwestern Electric Power Company (SWEPCO) and Entergy Louisiana are both separately developing a 200 MW RFP for renewable energy. If SWEPCO and Entergy Louisiana both lose 20% of the federal PTC value by waiting a year, then those companies could lose $78-$98 million in ratepayer savings.
- The South Mississippi Electric Power Association (SMEPA) had previously announced plans to procure 250 MW of wind energy. If SMEPA loses 20% of the federal PTC value by waiting a year, that company could lose $49-$61 million in ratepayer savings.
- Georgia Power is planning to issue an RFP for up to 425 MW of utility-scale renewable energy. Separate analysis by Georgia Power shows that 2,000 megawatts of wind energy could reliably be integrated and help save ratepayers money. If Georgia Power loses 20% of the federal PTC value by waiting a year, that company could lose up to $104 million in ratepayer savings just on the 425 MW plan. For 2,000 MW of wind energy, the loss would represent approximately $490 million.
- Alabama Power has issued an RFP for up to 500 MW of renewable energy. If Alabama Power loses 20% of the federal PTC value by waiting a year, that company could lose up to $122 million in ratepayer savings.
- If the Tennessee Valley Authority waits to procure 1,500 MW of high-quality wind energy resources, and loses 20% of the federal PTC value, that company could lose about $400 million in ratepayer savings.
Just from these southern electric utilities, ratepayers could lose $810 million-$1.2 billion in savings if these utilities delay wind energy procurement. The contracts combined represent about 3,000-4,500 megawatts of new renewable energy demand; however, because of the way the federal PTC was constructed, initial power delivery could be staggered over the next two or three years as developers only must begin construction by the end of this year.
With all the complexities regarding the federal PTC for wind energy, electric utilities and regulators would be wise to quickly develop requests for proposals for wind energy. This May 23-26, the American Wind Energy Association is hosting its annual WINDPOWER conference in New Orleans. The conference will be an excellent opportunity for utilities and regulators to gain a working knowledge of the wind energy industry, and determine the best ways to take advantage of low-cost, renewable wind power in the near future.