When Gov. Ted Kulongoski vetoed a bill this summer that would have slashed Oregon’s tax subsidies for large wind farms, he insisted the reduction went too far and would jeopardize the growth of Oregon’s green economy.
But during the past eight years, while the state has taken applications for $300 million in tax breaks to subsidize the development of the windiest, most transmission-accessible sites, it has yet to do any substantive analysis of how big a subsidy is necessary — if any — to continue attracting investments.
Wind developers such as Iberdrola Renewables, the largest developer of wind farms in the state, say the Business Energy Tax Credit is a decisive draw for them as Oregon competes in a 50-state marketplace. That sentiment is echoed by rural counties, which insist the jobs and tax revenue from wind development are the only thing blowing their way these days.
In contrast, the state’s biggest utilities, Portland General Electric and Pacific Power — which can use the credits to reduce customers’ rates — say the BETC has little or no impact on where they build. And critics argue the state is lavishing scarce tax dollars, more needed for schools and other state services, on a maturing industry that already enjoys substantial federal and local subsidies.
The truth is, there are many factors that drive developers’ siting decisions. But an analysis by The Oregonian suggests the tax credits probably come near the bottom of the list.
Mandated demand for renewable power, viable winds, nearby transmission and proximity to markets with high energy prices such as California drive development. While the BETC certainly has accelerated wind power in Oregon, taxpayers are subsidizing many projects that eventually would be built anyway. Consider:
Even at the reduced level the Legislature was contemplating and Kulongoski vetoed — reducing the maximum tax credits for large wind farms from $11 million to $3.5 million per project — Oregon’s BETC would remain one of the most generous wind farm subsidies of its kind in the nation.
Rules requiring renewable energy production in Oregon, Washington and California have collectively created one of the largest mandatory markets for green power in the country — one that will continue to grow for the next 15 years. Meanwhile, the bulk of the power generated by subsidized wind projects in Oregon is being shipped out of state.
Property taxes are lower in Washington, which gives the state a competitive advantage for investments save for Oregon’s tax credits, developers say. But property tax exemptions in Oregon help level that playing field, and counties and individual landowners have discretion to negotiate fees to make projects more competitive.
This month, Kulongoski ordered a hurry-up analysis on whether the BETC is necessary for renewable energy projects, specifically wind energy. He wants the feedback before the Legislature meets in February.
Sen. Ginny Burdick, D-Portland, a sponsor of the original bill, says she has no problem with the basic strategy of providing incentives.
“But we’re greatly oversubsidizing these things and the benefits are flowing to California ratepayers,” she said. “I don’t think that’s what Oregon taxpayers signed up for.”
Cash on the table
Oregon’s Business Energy Tax Credit isn’t unique. North Dakota offers a more lucrative subsidy, and North Carolina has a smaller but similar incentive. But among front-running states in the country’s wind boom, Oregon’s is the subsidy to beat.
Texas, for example, offers an exemption from its state franchise tax, though state officials say Lone Star State coffers are forgoing little revenue associated with wind farms. Iowa, another leader, offers a production tax credit for small wind farms but not for large, single-owner projects.
Other wind industry leaders such as New York and California offer little beyond a state renewable mandate and a market where energy prices are high.
Oregon, meanwhile, is laying cash on the table, or a near equivalent. The state ponies up a tax credit worth 50 percent of a project’s cost up to $20 million, meaning a maximum credit of $10 million ($11 million, including cost overruns).
Developers can use it to offset their state tax bill over five years or sell it to another entity to raise up-front financing for a project. A $10 million tax credit is worth $6.7 million in cash under Oregon’s pass-through rules.
That sounds like big money, but the Northwest Power and Conservation Council estimates that a $10 million tax credit, when fully reflected in the price of delivered power from a 100 megawatt wind farm, would reduce the price by less than 2 percent. On a larger project, savings are even smaller.
Ernst & Young, the national tax firm, ranks Oregon fifth out of the 50 states when it comes to the attractiveness of its renewable-energy market for developers. Oregon’s incentives help, said Michael Bernier, author of the Ernst & Young index, because they reduce the cost of a project’s output. A $3.5 million subsidy, as the Legislature envisions, would still be “a very good subsidy,” he said, but any reduction would make the state less attractive.
On the other hand, you can’t look at it solely on the basis of tax credits, he said. “It has to be the whole package.”
25% renewable by 2025
Oregon, Washington and California rank in the top six states for wind power being generated or under construction.
Neither California nor Washington offers a tax credit comparable to Oregon’s BETC. And none of the three states offers the best wind resource in the West.
What they do offer is a predictable, growing market for the product. Mandates in all three states require utilities to buy green power and guarantees them recovery of any prudently incurred costs.
Oregon utilities must serve a quarter of customers’ needs with renewable power by 2025. In Washington, it’s 15 percent by 2020, while California requires 20 percent by 2010, increasing to 33 percent by 2020.
To satisfy those requirements, West Coast utilities will need to come up with about 16,000 megawatts of generation from renewable sources by 2025. That’s a staggering amount of electricity — more than double the output of the entire federal hydroelectric system in the Northwest, which includes 31 dams and one nuclear plant.
Moreover, most renewable power sources produce only intermittently. To meet one megawatt of the renewable mandate in Oregon, utilities must build or buy 3 megawatts of wind capacity.
It’s windier in other western states, notably Wyoming and Montana. And developers suggest those projects will be more competitive in the absence of state tax subsidies.
But capturing distant resources will require expensive transmission expansions. Portland General Electric, for example, estimates the price of wind power imported from Wyoming will be double that of the same electricity generated by less productive turbines in Oregon, once transmission costs are factored in.
“It’s not cost effective at this point when you have to reach that far,” said Jim Eden, a consulting transmission engineer at PGE. What that means, he says, is “make best available use of all close-in resources first, then move outward.”
The Northwest has its own transmission bottlenecks. But the Bonneville Power Administration is pursuing projects to increase capacity, and has enough requests in hand to predict that wind power on its lines will double by 2012 and again by 2016.
Going to California
California already is a dominant driver of the Northwest’s wind market. That’s little surprise, since the heart of the region’s wind resource sits at the on-ramp to the high-voltage highway built to transfer hydropower to power-hungry metro areas of California.
With bigger demand and rates that are 70 percent higher than in Oregon, California utilities already buy nearly half the power generated by Northwest wind farms, according to the Northwest Power and Conservation Council.
Oregon’s operating wind farms export more than half their output, much of it to California. And the biggest project on the drawing board — the massive Shepherd’s Flat wind farm in Gilliam and Morrow counties — is already pledged to Southern California Edison. SCE officials call the project “the crown jewel in our renewable energy portfolio” because of its size, competitive price and the fact that it required no transmission upgrades.
“Lets face it, the customers are in California,” said Tim McCabe, a former PacifiCorp executive who now heads Oregon’s economic development arm, the Business Development Department. “To be realistic, that’s what (developers) are shooting for.”
There are limits to California’s appetite. Connecting transmission is already congested and California lawmakers have argued over how much of that state’s renewable mandates can be satisfied with imported power or renewable energy credits.
On the other hand, even the 25 percent limit on imported renewables contemplated this year would leave an immense demand for power. And BPA officials say California utilities have been reshuffling their existing capacity to accommodate wind power.
Oregon’s subsidy system makes no distinction on where the power is used, which would likely violate interstate commerce, according to the Oregon Department of Justice. Renewables advocates argue that the question is moot, as Oregon is part of an energy system that spans the western states.
Arlo Corwin, director of western region development at Horizon Wind Energy, says that despite big West Coast demand, the bidding process to supply regional utilities is intensely competitive.
“I fundamentally disagree with the notion that we are in a seller’s market,” he said.
Not apples to apples
One of the chief rationales for large wind subsidies is that Oregon is in head-to-head competition with comparable projects in Washington. Lower property taxes in Washington tip the scales in that direction, developers say, save for the BETC.
“Our calculations have shown that all else being equal, without the BETC, on average, Washington has approximately a $7 million to $8 million competitive advantage over Oregon,” Corwin said.
Iberdrola, the wind developer, used the same number in a half-page summary that was sent to Kulongoski comparing its property tax burdens on two existing projects on either side of the river. The governor, in turn, repeated the figure when vetoing the bill to reduce wind BETCs.
But the property tax advantage isn’t that clear cut.
No two wind projects are strictly comparable. Economics vary based on size, wind strength, constructability or distance from transmission. Property tax bills, even on a comparable, per-megawatt basis, vary widely.
Washington tax authorities assess wind farms based on the income they generate or comparable values, with more limited depreciation than Oregon’s method offers. Tax rates in Klickitat County, home to several Washington wind farms, can vary by as much as 50 percent based on the taxing district in which the turbines are located.
Most of the new wind farms in Oregon, meanwhile, are being built under the state’s strategic investment program, which allows counties to limit their assessment to the first $25 million of a project’s investment. Savings are considerable on projects that cost $200 million to $500 million.
Developers are still required to pay community service fees equal to 25 percent of the abated tax, but county officials also have wide discretion to negotiate development fees to be more competitive.
According to Union County Assessor Linda Hill, the investment program gives developers a great deal.
“They will always complain unless they’re paying nothing,” Hill said. “You wouldn’t see all these wind farms going up if it wasn’t hugely profitable. They continue to complain, but they continue to build.”
To date, Washington and Oregon are generating almost identical amounts of wind power. Oregon has captured more projects since 2007, when the BETC was expanded. But Washington has hardly been dormant, and it, too, has a backlog of projects in development.
“We are somewhat jealous of the BETC, because she’s a mistress we don’t have,” said Tim Stearns, a policy adviser with Washington’s Department of Commerce. “But I don’t think its significantly affected the location of large-scale wind projects in the Northwest.
“If you don’t have a good site and you don’t have a transmission path, you don’t have a project.”
Ted Sickinger, The Oregonian – http://www.oregonlive.com/business/index.ssf/2009/11/tax_dollars_blow_away_in_wind.html