NJ offshore wind project faces dilemma

Fishermen's Energy's proposed offshore wind project off the New Jersey coast has essentially all its permits in place to start construction -- but the project's future is in doubt over a question of financial support from electricity ratepayers.

Fishermen's Energy has proposed building a 25-megawatt wind project about 2.8 miles off the coast of Atlantic City.  The $200 million project would be connected to the mainland electricity grid, enabling the power it produces to be sold to New Jersey electric customers.  The project has already received key permits, such as approval by the Army Corps of Engineers to begin construction.

Building what could be the nation's first commercial offshore wind project will be expensive.  While future offshore wind projects could be cost-competitive against more traditional electric generation resources, the New Jersey pilot project's finances rely on a portfolio of federal and state financial incentives.  These include federal tax credits, a grant from the U.S. Department of Energy, and a state commitment that utility ratepayers will shoulder above-market costs.

A 2010 New Jersey law established an offshore wind renewable energy certificate program known as OREC that was designed to provide that ratepayer commitment.  For over a year, Fishermen's Energy has been waiting for the New Jersey Board of Public Utilities to decide whether to require mainland utilities to purchase the project’s renewable energy output.  But that case remains pending, with no clear state-law timeline for its resolution.  Issues in play include the project's cost to ratepayers, particularly if the project fails to win further competitive grants from the federal Department of Energy.

In the meantime, Fishermen’s Energy needs to spend at least $10 million on the project this year to remain eligible for the federal investment tax credit.  Yet the developer is presumably reluctant to commit those funds before learning whether it will also win ratepayer support.  As December 31 draws nearer, this dilemma makes it more challenging for Fishermen's Energy to sustain project development efforts.

Energy implications of fiscal cliff deal

Congress enacted the American Taxpayer Relief Act of 2012 on January 1, 2013.  The bill's primary purpose was to stave off the so-called fiscal cliff by extending tax cuts and unemployment benefits.  The bill also included a variety of energy-related provisions, including extensions of tax credits for producers of biofuels and renewable electricity.  These policies will shape business activity in 2013.

The most prominent energy provisions in the act extend and modify incentives for producing renewable electricity.  One extended the production tax credit for wind.  The production tax credit is worth 2.2 cents per kilowatt hour of electricity produced for a 10-year period from a wind facility.  While the production tax credit had previously been available only to wind facilities placed-in-service by the end of 2012, the new legislation extends the credit to any facility that begins construction before the end of 2013 to claim the 10-year credit.  This provision is estimated to have a net of cost $12.109 billion over ten years but was seen by some as essential to continued investment in renewable energy facilities.  A parallel provision extended the investment tax credit in lieu of production tax credit, which gives a tax credit equal to 30 percent of eligible investment in renewable facilities in the year that the facility is placed-in-service. Facilities must begin construction by the end of 2013.  This provision is estimated to cost $135 million over ten years, suggesting Congress thinks the investment tax credit will be applied to about $450,000,000 in qualified investments.

Other provisions extended credits for energy-efficient improvements to existing homes, plug-in electric vehicles and alternative vehicle refueling property, producing cellulosic bifuel, biodiesel and renewable diesel.

The extension of the renewable electricity credits will stimulate growth in an industry that has suffered from uncertainty over their renewal.  Their previously-scheduled 2012 end led to a rush of construction to enable projects to qualify for the tax credits, but fewer new projects were announced in 2012 as they appeared unable to be placed in service before the deadline.  The credits' renewal will likely lead to a similar scramble to complete at least some construction financing and begin construction in 2013.  This in turn may mean busy caseloads for state environmental and energy permitting authorities, as developers pursue permits to enable construction to begin this year.  Projects able to start construction in 2013 will be eligible for either the production tax credit or the investment tax credit, even if construction takes several years.  This feature may help offshore wind and other projects with long construction times, if they can get the permits to start work this year.

2013: a look ahead

With the new year upon us, here is a preview of several energy-related issues and events we will likely see this year:

Expansion of natural gas production, transmission and distribution.  The spread of hydraulic fracturing or fracking as a technique to produce natural gas from previously-uneconomic sources appears to be the largest revolution in the U.S. energy landscape in decades.  Natural gas will continue to displace coal and oil as an energy source in 2013, particularly for the generation of electricity.  The availability of cheap natural gas will also lead to the development of more local distribution company pipelines, enabling more businesses and homes to connect to natural gas supplies.  2013 will likely also bring proposed new natural gas transmission pipelines, connecting gas sources like the Marcellus and Utica shale fields to consumers across the country.
 
Offshore wind in U.S. waters.  2013 may see the construction of the first offshore wind projects in United States waters.  Cape Wind's project off Massachusetts may start cable work or other construction this year, as may Deepwater Wind's Block Island project off Rhode Island and Fishermen’s Energy's project off Atlantic City, New Jersey.  Congress's last-minute extension of the Investment Tax Credit or ITC gives a significant boost to offshore wind projects capable of beginning construction in 2013.  Not only was the tax credit's deadline extended by one year, but Congress also changed the trigger from being "placed in service" to commencing construction by December 31, 2013.  No offshore wind projects are currently operating or under construction in U.S. waters, so 2013 could be the year the first projects enter the water.  The federal Bureau of Ocean Energy Management is expected to continue its leasing program, making more ocean sites available for future offshore wind projects.

Keystone XL pipeline.  The Keystone XL pipeline, a $7 billion proposed extension of an existing crude oil pipeline, is slated to connect Alberta, Canada to Texas.  In 2011 and 2012, the project faced public scrutiny and failed to secure necessary federal and state approvals.  Among other permits, the project faces State Department review because it would enable imports or exports of oil across the national border with Canada.  Meanwhile, project lead TransCanada is moving ahead with the construction of some of the domestic legs of the project, and the full project is likely to come back up for review this year.

Energy efficiency continues to grow.  Investments in energy efficiency are likely to continue to grow in 2013.  Using fuels and energy sources more efficiently saves money for businesses and homeowners capable of making the investment.  It can also lower market prices for electricity and fuels by reducing demand, spreading the savings across all consumers.  New England regional electric grid operator ISO New England recently revised its load forecast to predict no increases in the demand for electricity through 2021 as a result of increased investment in energy efficiency.  This trend is likely to continue nationwide.


With 362 days left in the year, these issues and events are likely to be discussed for some time to come.  Will these predictions come true in 2013? 

Obama: renewable energy tax credit reforms

President Obama's proposal to reform the way the U.S. taxes businesses includes making the soon-to-lapse production tax credit (PTC) for generating renewable electricity both permanent and refundable.  If enacted, this proposal would support the renewable energy industry, but could lead to a change the way projects are financed.

Earlier this month, the President and the Department of the Treasury issued a joint report entitled, "The President's Framework for Business Tax Reform" (25-page PDF).  The report presents a plan to reform America’s system of business taxation.  It labels the U.S. tax system "uncompetitive and inefficient", noting that the U.S. has a relatively narrow corporate tax base further reduced by loopholes, tax expenditures, and tax planning, and that the nation has a high statutory tax rate.

The cure proposed in the report is presented as supporting the "competitiveness of American businesses and increasing incentives to invest and hire in the United States by lowering rates, cutting tax expenditures, and reducing complexity, while being fiscally responsible."  It offers five key elements of business tax reform:

• Eliminate dozens of tax loopholes and subsidies, broaden the base and cut the corporate tax rate to spur growth in America
• Strengthen American manufacturing and innovation
• Strengthen the international tax system, including establishing a new minimum tax on foreign earnings, to encourage domestic investment
• Simplify and cut taxes for America’s small businesses
• Restore fiscal responsibility and not add a dime to the deficit

Each of these elements is treated in some depth in the report.  In the section presenting the President's "Framework for Reform" for the second element, strengthening manufacturing, the report says that the Framework would "[e]xtend, consolidate, and enhance key tax incentives to encourage investment in clean energy":

The President’s Framework would make permanent the tax credit for the production of renewable electricity, in order to provide a strong, consistent incentive to encourage investments in renewable energy technologies like wind and solar. As with the R&E Tax Credit, the United States has to date provided only a temporary production tax credit for renewable electricity generation. This approach has created an uncertain investment climate, undermined the effectiveness of our tax expenditures, and hindered the development of a clean energy sector in the United States. In addition, the structure of renewable production and investment tax credits has required many firms to invest in inefficient tax planning through tax equity structures so that they can benefit even when they do not have tax liability in a given year because of a lack of taxable income. The President’s Framework would address this issue by making the permanent production tax credit refundable. 

Several features of this proposal are worth noting.  First, the production tax credit would become permanent.  To date, the PTC has been enacted, expired, and re-enacted multiple times, although occasionally with breaks in between periods of eligibility.  The PTC soon faces expiration yet again.  Renewable energy developers say that the uncertainty over its future significantly chills interest and development in the renewable sector.  President Obama's plan to make the tax credit permanent would be a positive improvement from their perspective because it represents a longer-term commitment to stable tax treatment.  From the national perspective, this longer-term commitment may spur investment and jobs, although it faces challenge from those who do not believe permanent tax credits should be ever used to support renewable energy, let alone permanently.

Second, the PTC would be refundable.  This roughly means that if you qualify for the credit, you don't need any taxable income to be able to use the credit as an offset against tax liability; when a tax credit is refundable, you can often receive its value in the form of a check from the Treasury.  The non-refundable nature of the PTC and the related investment tax credit (ITC) at present has led to business structures that allow multiple entities to invest in a project while allocating specific tax benefits to those investors capable of using them.  According to the report, the result of the widespread use of these tax equity structures has been investment in inefficient tax planning.  President Obama's plan would eliminate one of the key reasons behind the tax equity structure commonly used today, and could change the scope of developers interested in proposing renewable energy projects.  For example, a developer with low or no U.S. tax liability would be able to reap the tax incentive without partnering with income-rich tax equity investors.  Tax equity structures may still have value even if this proposal passed, but it could lead to a change in the way renewable energy projects are financed.

The President's tax reform plan has yet to be fully reviewed by Congress, and many observers believe it nearly impossible that it would pass as currently conceived.  The renewable energy tax incentives at issue here may or may not be part of a final enacted tax reform plan.  For now, in an election year, this proposal has strengthened the President's alliance with the renewable energy industry, as he has cast himself as their best hope for extended and improved tax credits if reelected.