A Half-Baked Tax Credit

Congress is offering too little, too late for the wind-power industry.

The wind-power industry got a half-baked deal when Congress extended the production tax credit. The deal provides qualified wind-energy facilities with tax credits only if those facilities begin construction before the end of the year. The reality is that one year is not enough time to start most new projects.

Here's why: Utility grade projects don't appear overnight. Most projects must complete six steps before they can begin construction and qualify for the tax credit:

1. Decide it wants to develop a wind farm and have the resources available to develop a new power project.
2. Locate qualified land. To qualify, the land must have enough wind to power massive turbines, have access to a utility connection, and be able to acquire permits. Because so many sites fail qualification, many utilities seek multiple sites for one project.
3. Control the land. Either the company negotiates a purchase of the land or seeks an option to purchase the land. Either way, placing land under the control of the developer takes time.
4. Design the wind farms to match the topography of the land before seeking zoning, permitting and utility connections.
5. Gain approval from local governments and state agencies and get Federal Energy Regulatory Commission (FERC) approval to become a "qualified facility."
6. With firm designs in hand, the company must negotiate with the local utility and the Regional Transmission Organization (RTO) to connect its wind generators to the grid. Currently, the wait for a connection study at some utilities and RTOs exceed a year. Without a connection agreement, power from the wind turbines cannot reach the market, cannot be sold at market, and may not earn the tax credit.

Most projects cannot make it through all six steps. And those that do find the cost is too high and the economics fail. Regardless, no project of size can complete all six steps within a year. The only companies interested in this deal are owners of projects midway through the development process.

BP (BP) is an example. According to the Wilkes-Barre Times-Leader, BP Wind Energy put workers on overtime to make sure its Mehoopany Wind Farm in Pennsylvania was on line by Dec. 31, before the original tax credit was set to expire. With the extension in place, BP hopes to complete its Cape Vincent Wind Farm in New York.

But Congress's action is too little, too late. Companies such as NextEra Energy (NEE) shelved new projects beyond 2012 because without shovel-ready projects, the tax extension will be not enough.

Exelon (EXC) spent last year lobbying Congress against wind and appears to have succeeded. According to a Fox News report, Tennessee Republican Senator Lamar Alexander wants to end the tax credit because of the cost to taxpayers and because it puts coal and nuclear energy at an economic disadvantage.

The irony is that those who want lower taxes for businesses are protesting against lower taxes for businesses. Congress is not handing out cash to owners of wind plants; it is simply lowering federal taxes on potential profits some wind power plants may generate. The lower taxes are limited to new facilities and are limited for the first several years of operation. If a new wind generator creates no profits, Congress offers no tax breaks. In addition, Congress offers no tax breaks for older wind plants.

The tax deal offered to the wind-power industry is similar to the tax deal Congress provided to the nuclear power industry. Section 1306 of The Energy Policy Act of 2005 offers new nuclear power plant owners similar production tax credits. Like the wind-power deal, the nuclear power production tax credit is limited in time and in scope.

The other irony is that those wanting less government are protesting the free markets. Power markets currently reward power generated from wind, solar and other cost leaders. The same markets punish power generated from nuclear, coal and high-cost hydrocarbons. It seems the nuclear industry now wants government to interfere with the free market, penalizing renewable energy and rewarding legacy power plants.

Consumers win if the production tax credit is extended for several years. Tax credits are cashless transactions and they help the economy by providing businesses with certainty. That certainty will restore the tens of thousands of jobs already lost in the industry. It will also help business and residential consumers save money by driving down energy prices.

At the time of publication, Williams had no positions in any of the stocks mentioned.