CPI’s recent study, Supporting Renewables While Saving Taxpayers Money, showed that U.S. governments could save a lot of money by adjusting how tax incentives for renewable energy are delivered. In particular, we showed that a $21/MWh taxable cash incentive for production (TCP) for wind could provide the same support to wind projects as the current $22/MWh production tax credit (PTC) and almost halve the cost to federal and state governments.
The PTC is set to expire at the end of this year. The Senate has proposed extending it by one year, but at a cost to government in excess of $12 billion – a heavy lift given budget constraints. Replacing the PTC with a TCP could reduce that cost to $7.5 billion. A similar reduction in cost would apply to any proposal to extend the PTC, including the recent proposal by the American Wind Energy Association to phase-out the PTC over six years.
How does this work?
Well, wind project developers have limited tax liabilities. That means that by themselves, most project developers can’t use federal tax benefits until years after they are received, eroding almost two thirds of the incentive value. In order to get more out of these incentives, project developers bring in outside investors who have greater tax liabilities. This is called tax-equity financing. However, tax equity financing is more expensive and complex than conventional finance, and erodes about a third of the incentive value.