Production Tax Credit for Renewable Energy
In one of the last measures taken by the 110th Congress, critical tax incentives for promoting the development of renewable energy and energy efficiency were extended. The tax incentives were set to expire on December 31, 2008, but due to the efforts of a very diverse coalition that included UCS, they were extended as part of the Emergency Economic Stabilization Act of 2008 that President Bush signed on October 3, 2008.
Companies that generate wind, geothermal, and “closed-loop” bioenergy (which is powered by dedicated energy crops) are eligible for the production tax credit (PTC), which provides a 1.9-cent per kilowatt-hour (kWh) benefit for the first ten years of a renewable energy facility's operation. Other technologies, such as "open-loop" biomass, incremental hydropower, small irrigation systems, landfill gas, and municipal solid waste (MSW), receive a lesser value tax credit.
The PTC for wind, which as the largest producer of renewable energy has the greatest impact on the budget, was extended for one year, until the end of 2009.
The PTC for incremental hydro, geothermal, and bioenergy was extended for two years, until the end of 2010. Also included in the two-year extension of the PTC are hydropower generated with irrigation water, capacity expansion at existing plants, and with generators added to existing dams. The bill also creates a new PTC for electricity produced by wave and tidal energy.
Businesses and individuals who buy solar energy systems are eligible to receive the solar energy investment tax credit. For residential purchasers, the solar ITC is capped at 30% of the cost of their system; a $2,000 cap on the ITC for residential owners was lifted.
In addition, the bill extended incentives for energy efficiency. Tax deductions for energy-efficient commercial buildings are extended through 2013. Tax deductions for energy-efficient home improvements are re-instated, with a new $300 tax credit for energy-efficient biomass fuel stoves. Tax credits for builders of new energy-efficient homes are extended through 2009 and increases and extends tax credits for manufacturers of energy-efficient appliances through 2010.
This marks just the third time that the PTC was extended by Congress before it had been allowed to expire. At the end of the 109th Congress, the PTC and ITC were extended to the end of 2008 as part of the Tax Relief and Health Care Act of 2006 (H.R. 6408). Previously, in August 2005, a two-year extension of the PTC was included in a large package of tax incentives in the Energy Policy Act of 2005 (H.R. 6); the solar ITC was created in 2005 as part of HR 6. The PTC was set to expire at the end of 2005, and its extension was one of the few bright spots for renewable energy in this energy bill.
From 1999 until 2004, the PTC had expired on three separate occasions. Originally enacted as part of the Energy Policy Act of 1992, the PTC—then targeted to support just wind and certain bioenergy resources—was first allowed to sunset on June 30, 1999. In December of 1999, again due to the efforts of UCS and other organizations, the credit was extended until December 31, 2001. The PTC expired at the end of 2001, and it was not until March 2002 that the credit was extended for another two years. Congress allowed the PTC to expire for the third time at the end of 2003. From late 2003 through most of 2004 attempts to extend and expand the PTC were held hostage to the fossil-fuel dominated comprehensive energy bill that ultimately failed to pass during the 108th Congress. In early October 2004, a one-year extension (retroactive back to January 1, 2004) of the PTC was included in a larger package of 'high priority' tax incentives for businesses signed by President George Bush. A second bill—extending the PTC through 2005 and expanding the list of eligible renewable energy technologies—was enacted just a few weeks later.
Combined with a growing number of states that have adopted renewable electricity standards, the PTC has been a major driver of wind power development over the past six years. Unfortunately, the "on-again/off-again" status that has historically been associated with the PTC contributes to a boom-bust cycle of development that plagues the wind industry (see Figure below). The cycle begins with the wind industry experiencing strong growth in development around the country during the years leading up to the PTC's expiration. Lapses in the PTC then cause a dramatic slow down in the implementation of planned wind projects. When the PTC is restored, the wind power industry takes time to regain its footing, and then experiences strong growth until the tax credits expire. And so on.
The last lapse in the PTC—at the end of 2003—came on the heels of a strong year in U.S. wind energy capacity growth. In 2003, the wind power industry added 1,687 megawatts (MW) of capacity—a 36 percent annual increase. With no PTC in place for most of 2004, U.S. wind development decreased dramatically to less than 400 MW—a five-year low. With the PTC re-instated, 2005 marked the best year ever for U.S. wind energy development with 2,431 MW of capacity installed—a 43 percent increase over the previous record year established in 2001. With the PTC firmly in place, 2006 was another near record year in the U.S. wind industry. Wind power capacity grew by 2,454 MW—a 27 percent increase. The American Wind Energy Association tallied 5,244 MW of capacity installed in 2007 and expects 2008 to be another record year.
However, without changes to the PTC and ITC, renewable energy deployment is expected to slow considerably in 2009. The economic downturn of late 2008 has left many renewable energy developers with dwindling profits. As their profits slump, renewable developers have less “appetite” for tax credits, As a result, the declining value of the PTC and ITC is expected to slow investments in renewable energy facilities. In the next congress, UCS, our allies and renewable energy developers will be working to revise the PTC and ITC to make them refundable. Refundable credits will ensure that renewable energy development will continue even when the economy slows—the very time sustained growth in renewable energy is needed most to create jobs and income.
Short term extensions of the PTC will allow the wind industry to continue building on previous years' momentum, but it is insufficient for sustaining the long-term growth of renewable energy. The planning and permitting process for new wind facilities can take up to two years or longer to complete. As a result, many renewable energy developers that depend on the PTC to improve a facility's cost effectiveness may hesitate to start a new project due to the uncertainty that the credit will still be available to them when the project is completed.
UCS is continuing to work with our coalition partners to extend and revise tax incentives for renewable energy that help boost development of clean renewable electricity, not polluting energy sources.
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