Wind Energy: With a Tax Break Like This, Why
Don't You Just Shoot Me Instead?
by Brian McGinty
Good News for anyone with a wind turbine - the tax credit was extended for two more years. The extension of the tax credit for wind energy sounds like a good deal - that is what all the headlines said - but headlines are the large print. Lets look at the small print.
A major piece of legislation was signed into law March 9, 2002. Back last year H.R. 3090 was called The Economic Security and Recovery Act of 2001. The bill is 240 pages of...sheesh, you should read Section 103! At any rate, H.R. 3090 was signed into law by George Bush on March 9th, having gained a new title in the process:
Job Creation and Worker Assistance Act of 2002
as well as a new official name:
Public Law 107-147
(The bill being the 147th piece of legislation passed by the 107th Congress.)
Fairly close to the end of the bill (far past Section 103) we see:
VIII. EXTENSIONS OF CERTAIN EXPIRING PROVISIONS
and a little further on:
SEC. 603. CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE RESOURCES. (a) IN GENERAL.-Subparagraphs (A), (B), and (C) of section 45(c)(3) are both amended by striking ''2002'' and inserting ''2004''.
Got it - change '2002' to '2004' in...what? Subparagraphs of what, exactly? Looking back at the beginning of Public Law 107-147 we see:
Section 1.(b) REFERENCES TO INTERNAL REVENUE CODE OF 1986 - Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.
Section 45 is under TITLE 26, Subtitle A, CHAPTER 1, Subchapter A, PART IV, Subpart D, and Section 45(C)(3)(A) is:
(3) Qualified facility
(A) Wind facility In the case of a facility using wind to produce electricity, the term ''qualified facility'' means any facility owned by the taxpayer which is originally placed in service after December 31, 1993, and before January 1, 2002."
So the tax credit expired January 1, 2002 and by changing "2002" to "2004" PL 107-147 extended it two years. While hardly as much help as a coup in Venezuela, you take your breaks where you can find them.
(Can you guess what Subparagraphs (B) and (C) are? The same tax credit extensions: (B) is for 'closed loop biomass' (known on Earth as 'wood') electricity and (C) is for poultry waste electricity).
Not yet ready for prime time, the law now passes to the agencies charged with administering it, and emerges from the colon in the form of administrative rules.
Many laws enacted by Congress require agencies to issue regulations, which means publication of those regulations in the daily Federal Register....After publication in the Federal Register as a final rule, regulations are then codified in the annual Code of Federal Regulations (CFR).
Agencies also engage in "order-making" as well as "rule-making". In these cases the agency adjudicates. These orders establish policies and set precedents which commonly have the impact of law.
This being a federal tax credit, it enters the bowels of the Internal Revenue Service. Imagine the IRS as a giant elephant. Stand underneath the colon area and wait for the rules and orders to land on you. Upon completion of the law-digesting process, an IRS Form 8835 should flutter into your hands.
Form 8835 is the Renewable Electricity Production Credit. Fill it out and attach it to your Federal tax return.
Oh, by the way:
You have to have a windmill.
You have to sell enough electricity to have income.
You have to have enough income to owe taxes.
This means being connected to the grid and selling some electricity. This is a non-trivial problem. (Watch out when an engineer or mathematician uses the term 'non-trivial'.)
ALSO:
The law has a couple of added restrictions:
You have to sell the power to someone unrelated to you.
You can only claim it for the first ten years after a facility is placed in service.
There are also some teensy exclusions under Section 45(d)(7). Nothing important, let's move on.
All right, you have a wind farm, What are you waiting for? Start gouging the taxpayers!
The credit is 1.5 cents for every kilowatt hour sold.
Uh-oh, the credit is phased out when the reference price exceeds the adjusted phaseout price.
What is the reference price? The Secretary of the Treasury determines that from average annual contract price for energy sold from windmills in the previous year.
The phaseout price is is 8 cents per kilowatt hour. Sell power for any more and the credit goes away.
He has decided the reference price is 2.57 cents per kilowatt hour.
Both the 1.5 cent credit and the 8 cent phaseout price are multiplied by the inflation adjustment factor, which is 1.1641 this year. So the credit is 1.7 cents and the phaseout price is 9.2 cents. So all that to find out that phaseout does not apply. You would have to sell electricity for more than 9.2 cents a kilowatt hour, which could never happen.
Moving on, Oh damn, line 8 looks tough:
SUBTRACT any grants from the:
United States, a state, a political subdivision of a state, any state or local bond issues, or any subsidy provided directly or indirectly by any Federal, state, local or extraterrestrial program.
(OK, I added 'extraterrestrial' myself to see if you were paying attention.) I guess Oregon residents can kiss their state tax credit goodbye.
More from line 8: Also subtract:
"amount of any other credit allowable for any property that is part of the project".
Darn, it seems the spirit of generosity from Section 103 of the bill didn't trickle down to Section 603. I suppose this means if you have a farm, and your windmill is on that farm, and your house is on that farm, there goes your home mortgage deduction.
Well, what else? Um, this credit is only good for the first ten years after your facility is first placed in service. I'm not sure how this would apply to a wind farm that added a few more towers every year, but OK.
You are almost ready to start gouging the taxpayers. I say almost because there are a few teensy restrictions under Section 45(d)(7).
Do you remember the part that changed "2002" to "2004" in Subparagraphs (A), (B), and (C) of Section 45(C)(3) thereby extending the tax credit two years?
Well, the morons forgot to change Subparagraph (A)(i) of Section 45(d)(7). It still says "1999". This tax credit expired 4 years ago, according this section. I'm not sure I want to be in a cage match with the IRS over this one.
Typo aside, there are a few more simple rules. You can't claim the tax credit sold to a utility on any contract entered into before 1987, unless it has been amended since then.
Not that it could matter. By the way, is there any place to sell electricity besides to a utility?
Funny, Section 45(d)(7)(B)(iii)(I) says that:
"sold to the utility only at prices that do not exceed avoided cost prices determined at the time of delivery."
Avoided Costs are "Costs that could be avoided by not operating a generating unit. These are usually variable costs and fuel costs." They have guaranteed that wind energy is as cost-effective as oil and gas, since you can't sell it for more than it would cost the utility to light another boiler. Even if all the boilers are going, and there isn't another to light, the price is still limited to what it would cost to light this (now imaginary) boiler.
How do you know what the avoided costs are? Time to head over to FERC - The Federal Energy Regulatory Commission. Unsurprisingly, they have regulations about it:
Title 18 PART 292--REGULATIONS UNDER SECTIONS 201 AND 210 OF THE PUBLIC UTILITY REGULATORY POLICIES ACT OF 1978 WITH REGARD TO SMALL POWER PRODUCTION AND COGENERATION
Section 292.204 Rates for Purchases
Well isn't this nice:
(1) Rates for purchases shall:
(i) Be just and reasonable to the electric consumer of the electric utility and in the public interest; and
(ii) Not discriminate against qualifying cogeneration and small power production facilities.
D'OH!
(2) Nothing in this subpart requires any electric utility to pay more than the avoided costs for purchases.
It's almost a relief to get back to Section 45(d)(7). What else could go wrong?
Section 45(d)(7)(B)(ii) says the price must be an 'annual average' of the 'avoided cost price.'
Shoot and Damn, you have to sell it for the average price for the year. Taking a look at the Independent Electricity Market Operator's hourly spot market graph, demand peaks just during the time of day it is windiest. Oh well. I hope at least other people (cough)Enron(cough) can't take advantage of hourly fluctuations in electricity prices.
OK, forget the price, with even a small margin I can make money if I can sell enough power...
Section 45(d)(7)(B)(ii)(I) says the amount can't be more than the greatest amount sold any of the calendar years 1996, 1997 or 1998. Unless my contract says (II) that I already have my estimate of annual electricity production in the contract. Shoot, with this 'Grandfather Law' you can't vote unless your grandfather also voted. Wait, different law. You can't sell more electricity than you sold in 1998.
What else?
Uh, Section 45(7)(B)(iii)(II)
"such amendment provides that energy and capacity in excess of the limitation in clause (ii) may be sold to a third party subject to a mutually agreed upon advance notice to the utility.
(That's a mutually-agreed-upon notice, not a mutually-agreed-upon price.) So I can't sell my extra power myself...but I can let a third party buy it. If only there was a third party that could buy and sell electricity...
Well, you can't blame the goverment for trying to protect us from hordes of unscrupulous wind farmers. They need to save money everywhere, what with the budget deficit. Why, they're going to save a bunch with:
Section 103 - Repeal of Alternative Minimum Tax on Corporations.
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