Size of tax credit for wind farms disputed

Tens of millions of dollars of taxpayer money will play a role in the development of a $219 million wind farm off the coast of Block Island, but just how much has been the subject of debate between the developer and a state consultant.
Because a tax credit that affects the rate of return for investors is involved, the R.I. Public Utilities Commission will need to review it as the body considers whether a contract between wind farm developer Deepwater Wind and National Grid can be considered “commercially reasonable” as required by state law.
As part of the American Recovery and Reinvestment Act of 2009, Congress allowed wind farm developers the option to convert the federal production tax credit into a straight grant equal to 30 percent of the development property’s value. At the time, the wind industry argued wind farms did not generate enough taxable income on their own to take advantage of the credits and the market for the credits dried up along with the economy.
A consultant for the R.I. Division of Public Utilities and Carriers said in recent testimony that the federal program would translate into $65 million for Deepwater Wind for the first Block Island project three miles off its southeastern coast. Subsequently the company wants to build a larger wind farm about 15 miles off the mainland. But New Jersey-based Deepwater Wind disputes that dollar amount, saying the consultant, Richard Hahn, based his figure on a series of bad assumptions. A more appropriate number is an estimated $56.5 million (for the small wind farm) Deepwater Wind CEO William Moore told Providence Business News.
Hahn’s assumptions led him to propose an initial rate of return on the initial, smaller wind farm for equity investors of about 100 percent, a figure that Moore said is far from reality. In testimony and a later interview, the CEO said Deepwater expects a return in the mid to high teens for its equity investors.
Moore said the dispute arises because Hahn assumes that all of Deepwater’s property will qualify for the credit, though Moore says just 86 percent or so will qualify. Moore also charges that Hahn erred in his cash flow projections by assuming that Deepwater would make all its investments in one year and its investors would receive the bulk of the credits in cash rather than use them to pay back traditional lenders like banks.
From studying the financing of onshore wind farms, Moore said Deepwater believes it will need to use most of the credits to repay lenders. Yes, Moore acknowledges, no federal rule requires that, but a bank, he said, would be crazy not to demand such an arrangement. “I can’t think any lender would ever allow you to take advantage of a large investment tax credit and not ask that a prorated tax credit be used to pay down the debt of that project,” Moore said.
The discussion swirls as the industry and a bipartisan group of governors called the Governors’ Wind Energy Coalition urge Congress to extend the credit past 2012. The coalition, for which Gov. Donald L. Carcieri is vice chairman, wants the current grant-in-lieu-of-credit option extended if the economy continues to sag. However, if the economy rebounds and credit markets reappear, the coalition would support an extension in its original form, said Executive Director Larry Pearce.
One bill before Congress would extend the production credit until 2020. Another bill would also extend the credit until 2020 but only for projects in 60 meters of water or more, making the Block Island project ineligible.
Regardless of what Congress does, Moore said the Block Island project’s timeline would remain the same regardless because Deepwater decided long ago not to bank on an extension of the credit.
“We don’t have the luxury of waiting,” Moore said, adding that tax credits formed just a piece of the project’s time-sensitive financing. “We have to plunge ahead and take whatever measures are necessary to preserve our current schedule.”
The tax credit is not the only federal program Deepwater hopes to capitalize on. Moore said Deepwater is actively pursuing a federal loan guarantee program run through the U.S. Department of Energy. Moore said it’s too early to tell how big a loan the department may agree to cover, or if the department may offer a loan directly through the government. In any case though, Moore said the program would likely lead to lower interest rates and a longer repayment period, both key aspects to financing a deal.
Moore said Deepwater also plans to utilize the Modified Accelerated Cost Recovery System (MACRS), a method of accelerated asset depreciation. The tax code allows wind turbine owners to depreciate the turbines after five years, thereby allowing Deepwater Wind to take advantage of fewer taxes earlier in the process. •