Federal policies play an important role in encouraging wind energy development by leveling the playing field compared to other energy sources. The primary rationales for such incentives are related to the shared external benefits of wind power—such as displacement of pollutant emissions from other power sources, fuel diversity, price stabilization, etc.—that cannot be readily captured by wind generators directly in the price charged for their output, as well as compensating for the federal incentives given to fossil fuels and nuclear resources. The federal Production Tax Credit, commonly referred to as the PTC, has served as an important government incentive to wind power, although it has expired and been extended or reauthorized several times.
The PTC is intended to provide wind generators with incentives similar to those received by other electricity producers. This tax credit is currently set at 2.1 cents per kilowatt-hour (kWh) and is adjusted for inflation over the first 10 years of a project's life, for projects reaching commercial operation prior to the credit's expiration date currently set at December 31, 2012. The tax credit is calculated by multiplying the then-current per-kWh rate by the project's output for the applicable year. The credit is allocated to the project's owners in accordance with their ownership shares. Historically the PTC has been renewed only for 1 to 2 years and often retroactively after expiring. This uncertainty in federal policy has impeded the wind industry's investment in equipment production capacity while also inducing scarcity-driven equipment and installation price increases as project developers race to beat the PTC expiration deadline.
The 2009 American Reinvestment and Recovery Act (ARRA) not only extended the PTC through December 31, 2012 for wind projects but also created two time-limited options for capturing the PTC's intended benefits through alternative mechanisms. First, the ARRA offers wind project owners the option to elect the investment tax credit (ITC) in lieu of the PTC. The ITC, equal to 30% of eligible project capital costs (typically those eligible for 5-year MACRS depreciation, which can be 90% to 95% of a wind project's installed cost), can be fully applied against the project owner's federal income tax liability in the first quarter of project operation, and is not production-dependent. Second, the ARRA also offers the option to elect a Section 1603 cash payment in lieu of the PTC or ITC. Consistent with the ITC, the cash grant is equal to 30% of eligible capital costs and is disbursed to the project 60 days after the Treasury Department deems the grant application complete or 60 days after commercial operation, whichever is later. The option to elect the ITC is currently available through the PTC expiration date (December 31, 2012); whereas the Section 1603 cash grant option is currently available only to those projects that enter construction by December 31, 2011 and are operational by December 31, 2012. Both the ITC and cash grant are subject to recapture if the owner receiving these benefits sells its share of the project within the first 5 years (e.g., a portion of the credit is lost).
For an update on the current status of federal renewable energy incentives, please visit the federal incentives page of the Database of State Incentives for Renewables and Efficiency. Here you will find regularly updated material pertaining to the following federal renewable energy policy mechanisms, and more:
The National Renewable Energy Laboratory also provides annual analyses of federal renewable energy policy.