In order to be financially competitive, most wind projects need to take advantage of federal and, where available, state tax incentives. It is critical to understand the role and mechanics of tax incentives while developing a commercial-scale community wind project because these incentives can represent one-half to two thirds of the total revenue stream over the first 10 years of operation due to the Federal Production Tax Credit (PTC) and Modified Accelerated Cost-Recovery System (MACRS) or other type of depreciation that can be applied to wind energy assets. You will need to consult a tax professional in the early stages of project planning to ensure that your financial projections are valid and accurately take into account the project’s tax burden and benefits.
Policy - Federal Level
Lawrence Berkley National Laboratory published this report, written by Mark Bolinger, to address concerns regarding the interaction between the USDA Farm Bill and the federal Production Tax Credits for wind energy projects.
The Database of State Incentives for Renewables and Efficiency (DSIRE) is a comprehensive database of incentives for wind and other forms of renewable energy. It is a great resource for up-to-date policy information.
The New Markets Tax Credit Program (NMTC) provides a credit against Federal income taxes in exchange for making qualified equity investments in designated Community Development Entities (CDEs). All of these investments must in turn be used by the CDE to provide loans or equity investments for designated projects in lower-income communities. The credits are provided to the CDE and passed through to investors based on their proportionate investment in the CDE. The credits are equal to 39 percent of the funds invested and are claimed over a seven-year credit allowance period. In each of the first three years, the investor receives a credit equal to five percent of the total amount paid for the stock or capital interest at the time of purchase. For the final four years, the value of the credit is six percent annually. Investors may not redeem their investments in CDEs prior to the conclusion of the seven-year period.
CDE’s apply for an allocation during the annual allocation period (July-September). The CDE does not have to identify specific projects or have a committed source of capital to fund those projects. To date, the Fund has made 170 awards totaling $8 billion in allocation authority.
A designated community must meet certain low-income characteristics. Eligible communities include low-income rural counties with high out-migration. An organization wishing to receive awards under the NMTC Program must be certified as a CDE by the Fund.
Once a CDE is awarded a NMTC allocation, it solicits projects consistent with its targeted investments. At the same time, it attracts private capital to invest in the CDE. The CDE then makes equity investments in or lends to the designated projects. Lending terms are usually better than what may be offered by commercial lenders. The outside investors receive tax credits and, depending on the structure of the transaction, either interest payments from or an equity stake in the projects.
To qualify as a CDE, an organization must:
- be a domestic corporation or partnership at the time of the certification application;
- demonstrate a primary a mission of serving or providing investment capital for low-income communities or low-income persons; and
- maintain accountability to residents of low-income communities through representation on a governing board of or advisory board to the entity.
In 2006, three Midwestern and one Gulf Coast CDEs were awarded NMTC allocations to provide debt and equity for rural businesses involved in value-added agricultural activities including renewable energy. These were:
Midwest Minnesota Community Development Corporation, Detroit Lakes, MN
$80 million allocation
Projects in Minnesota
Dakotas America, LLC, Sioux Falls, SD
$50 million allocation
Projects in North and South Dakota
American Community Renewable Energy Fund, LLC, New Orleans, LA
$42 million allocation
Projects in the Gulf Coast
Potential developers of community wind or other renewable energy projects in the targeted geographic investment areas of the four CDE entities listed above can contact them to discuss financing considerations.
Combining NMTCs with the PTC
According to tax counsel at the law firm Nixon Peabody LLP, a renewable energy project that is eligible for Section 45 tax credits can utilize both NMTCs and the production tax credits from the project. Unlike other grant or subsidized loan programs, there would be no reduction in the available production tax credits from the project. If the CDE is providing debt to the project, then the investors in the CDE can claim the NMTCs while equity investors in the project can claim the PTCs. If the CDE is providing equity support to the project (less typical these days because the Treasury strongly favors CDEs that aren’t “related” to the businesses they invest in), then the investors in the CDE can claim both the NMTCs and their proportionate share of the PTCs. Note that for a typical wind project ($1,500/kW, 35% capacity factor), the New Markets Tax Credit has roughly the same value as the PTC.
For More Information
The Clean Renewable Energy Bond (CREB) program is a new financial incentive created in the Energy Policy Act of 2005. It is available to municipal utilities and electric cooperatives and is intended to promote renewable energy development.
The Federal Production Tax Credit (PTC) has been the dominant mode of financing for renewable energy projects since it was made available in the early 1990s. The PTC, however, was designed to benefit the large investor-owned utilities and to track their capital into the renewable energy marketplace. Electric cooperatives and government entities like public power systems and municipal utilities have never been eligible for the PTC. In order to get into the marketplace, they successfully lobbied Congress in 2005 for the creation of CREBs, which is a tax credit bond available only to them. The program was modeled after the Qualified Zone Academy Bond (QZAB) program enacted in 1998 to provide tax incentives for the rehabilitation of public school buildings.
CREBs are tax credit bonds with an interest-free finance rate. The entire interest on the bond is paid by the U.S. Treasury in the form of a tax credit. $800 million have been allocated by the Secretary of the Treasury to the program for the time period between January 1, 2006 and December 31, 2007. $300 million of that has been designated for rural electric cooperatives. The borrower has five years to spend 95% of the proceeds. The tax credit rate is posted daily by the U.S. Treasury. The discount rate is designed to provide for the maximum term equal to produce 50% of the face amount of the bond (approximately 11 years).
Who Can Issue CREBs?
- State and local governments
- District of Columbia
- CoBank, ACB
- Mutual or cooperative electric companies
- U.S. territories and possessions
- Native American tribal governments
- National Rural Utilities Cooperative Finance Corporation
- A not-for-profit electric utility that has received a loan or loan guarantee under the Rural Electrification Act
Who Can Borrow CREB Proceeds?
- A mutual or cooperative electric company
- A governmental body
Allocation of CREBs
Applications for CREBs were due April 26, 2006. The Secretary of the Treasury will allocate CREBs starting with the smallest project and proceeding through the larger projects until the entire $800 million has been allocated.
For More Information
- The Environmental Law and Policy Center (ELPC) has a detailed summary of the CREB program
- The conference proceedings from Windustry’s March 2006 Community Wind Energy Conference have more information on CREBs.
The Value-Added Producer Grant (VAPG) program was first established in the Agriculture Risk Protection Act of 2000 and was later amended in the 2002 Farm Bill. Grant funds are available for planning activities and working capital for marketing value-added agricultural products and for farm-based energy. Independent producers, farmer and rancher cooperatives, agricultural producer groups, and majority-controlled producer-based business ventures are eligible.
The USDA website includes information about past winners, the application process, a full program guide, and links to the required federal forms:
The Rural Business-Cooperative Service (RBS) announced the availability of approximately $19.3 million in competitive grant funds for fiscal year (FY) 2007 to help independent agricultural producers enter into value-added activities. Awards may be made for planning activities or for working capital expenses, but not for both. The maximum grant amount for a planning grant is $100,000 and the maximum grant amount for a working capital grant is $300,000.Paper copies must be postmarked and mailed, shipped, or sent overnight no later than May 16, 2007, to be eligible for FY 2007 grant funding. Electronic copies must be received by May 16, 2007 to be eligible for FY 2007 grant funding.
Previous VAPG Recipients for Wind Energy Projects
Wray Farmer-Owned Wind Farm Group, Colorado: $128,000
Grant funds will be used to conduct a feasibility study and to develop a business plan for a farmer-owned commercial wind energy project in Wray, CO.
Iowa Floyd County Wind: $7,312
Purpose: This is a 6 member producer group using Value-added Producer Grants funds to investigate the potential of electrical wind generation in Floyd County, IA.
Iowa Farm Energy, LLC: $7,500
Purpose: Farm Energy, LLC requested grant funds to assist in determining the feasibility and business planning of a small scale producer owned wind farm in Northwest Iowa.
Idaho West Slope Farms, Inc: $20,250
Purpose: To determine the feasibility of installing on-farm wind turbines.
Oregon Summit Ridge Group: $85,900
Provided a positive outcome of the feasibility study, the project will create a new business to coordinate and finance the development, construction and operation of on-farm wind turbines, resulting in the sale of electricity.
Harvest Land Cooperative, Morgan, Minnesota: $148,000
Purpose: To assist in the development of on-farm renewable energy generation using wind.
Last Mile Electric Cooperative, Olympia, Washington: $150,000
Purpose: To assess the feasibility of installing small scale wind turbines on farms in the Pacific Northwest.
More Information on VAPG
The Public Utilities Regulatory Policy Act of 1978 (PURPA) was enacted as part of the National Energy Act of 1978, during a time of unprecedented energy supply instability in the United States. The law requires utilities to purchase energy from non-utility generators or small renewable energy producers that can produce electricity for less than what it would have cost for the utility to generate the power, or the "avoided cost." Although once considered a key incentive for renewable energy, PURPA is less helpful for renewables today due to lower fossil energy prices.
Double-declining balance, five-year depreciation schedule (I.R.C. Subtitle A, Ch. 1, Subch. B, Part VI, Sec. 168 (1994) (accelerated cost recovery system)) is another federal policy that encourages wind development by allowing the cost of wind equipment to be depreciated faster.
Winners of the USDA Farm Bill for uses with wind power, 2004-2006