Proposed changes to rein in state tax incentives for renewable energy projects would do little in the short run to reduce subsidies going to the large, utility scale wind farms that are capturing the lion’s share of the incentives.
The 13 proposed large-scale wind farms that have submitted applications for Oregon’s Business Energy Tax Credit would be eligible for up to $118 million in subsidies under an alternative tax credit regime proposed earlier this month by state energy and economic development officials, according to a state report.
That’s just a 9 percent reduction from the $130 million in subsidies the 13 projects are eligible for under current rules. And it is far more generous than the 65 percent reduction that would have taken place under a bill to reform the tax credits passed by the Legislature earlier this year but vetoed by Gov. Ted Kulongoski.
Even so, a trade group for the renewables industry has warned the governor and key legislators that any attempt to apply changes retroactively and reduce incentives for projects that have already applied for the credits would invite lawsuits.
The BETC program has become increasingly controversial as the costs have ballooned and lawmakers look for ways to balance a strained state budget. Investigations by The Oregonian have found that state officials intentionally downplayed the cost of the tax credits before the Legislature voted to substantially increase them in 2007; that millions of tax dollars went to projects that went bankrupt or never produced energy savings; that many of the projects being subsidized would eventually be built with or without the subsidies; and that much of Oregon’s subsidized wind power is being sold to customers out of state.
Kulongoski vetoed the Legislature’s reform bill because he said it would undermine the growth of Oregon’s green economy at a time when the state — and rural counties in particular — are desperate for new jobs and tax revenues.
But last month he asked state energy and economic development departments to evaluate the BETC program and make recommendations for potential changes that could inform debate when the Legislature convenes in February.
The departments’ report, delivered in early December, reached an obvious mathematical conclusion: Oregon’s tax credits are becoming a smaller percentage of wind farm costs as the size of those projects grows. The report also included a 36-page list of the subsidy programs offered by Oregon and five other western states.
But the report didn’t analyze how incentive programs in different states would apply to a comparable project, or how Oregon’s subsidy system stacks up. The fundamental question of whether the subsidies are necessary was not addressed.
Mark Long, director of the Department of Energy, said a state-by-state comparison proved too complicated. The viability of a wind farm, he said, depends on a variety of factors, including local wind conditions, available transmission and state renewables mandates.
“We did some informal referencing with other states and we came up with 483 different (incentive) scenarios,” Long said. “We didn’t feel there was a good apples-to-apples comparison with other states based on how their programs operate.”
The department’s report suggested that wind energy is maturing and proposed an alternative formula to calculate the tax credits that would phase them out over five years.
It also recommended that the state adopt a biennial cap to limit renewables tax credits to between 1 and 4 percent of energy suppliers’ 2008 revenues in Oregon. That translates to a cap on renewables credits between $73 million and $292 million per biennium, the report said.
Long said the phase out, coupled with the cap, would control state subsidies for renewables projects as wind farms moved to the point where they could stand on their own.
“Our conclusions were that this level of incentive is necessary” he said. “We think this has provided that level of analysis.”
Sen. Ginny Burdick, D-Portland, who sponsored the Legislature’s bill to reduce the BETC, said the governor’s endorsement of the proposals is a good starting point for new discussions about the program, but certainly not a final product.
“I’m strongly supportive of the environmental goals of green energy,” she said, “but my main concern is to stop a runaway gravy train.”
Here’s how the various incentive regimes play out:
Under Oregon’s existing BETC program, wind farm developers can apply for 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). They can use the credit themselves over five years or sell it to a third party to raise upfront cash for their projects.
The bill passed by the Legislature earlier this year and vetoed by Kulongoski would have reduced the maximum credit to $3.5 million, the same level of subsidy the program offered before the BETC was increased in 2007.
Under the new proposal, wind developers would be eligible for a subsidy equal to 5 percent of their project costs up to $200 million, meaning a maximum BETC of $10 million. The percentage would decline by 1 percent a year over five years, phasing out altogether in the sixth year.
The agencies’ report to Kulongoski compared the existing incentive with the proposed incentive model for 55 projects, about a third of which have already received their tax credits.
The largest impact of the change was on small projects. On a $25 million wind farm, for instance, the tax credit would decline from $11 million under the existing system to $1.3 million. That change would make it less appealing for project developers to break up their projects into multiple applications to maximize their credits — a practice state officials are anxious to eliminate.
The proposal has a more limited impact — in the short run at least — on subsidies for large projects that have been capturing most the subsidies.
The report identified 13 large-scale wind farms, either proposed or under development, that have submitted pre-applications for the BETC. Under the proposed formula, the projects would be eligible for up to $118 million in subsidies, compared with $130 million under current rules.
The average cost of those projects was more than $300 million. Even in the fourth year of the phase out period envisioned by state energy officials, a project of that size would be eligible for a $4 million subsidy.
In a letter sent to the governor and key legislators last week, the Renewable Northwest Project, a trade group for renewables developers, said the state should consider a maximum $7 million subsidy for large wind farms next biennium.
But the groups also urged lawmakers not to make any changes retroactively, or “reverse its commitments” to projects that had applied for-pre certification with the state.
“Reversing a promise,” RNP warned, “would invite lawsuits.”
At least one tax activist, meanwhile, called the report “a greenwash job.”
“It would take four years for the subsidy to be reduced to the amount that (the governor) vetoed in the bill,” said Jody Wiser, who heads a group called Oregon Tax Fairness. “I think it was supposed to make us nod our heads and say it’s okay. But it’s not.”
Ted Sickinger, The Oregonian – http://www.oregonlive.com/business/index.ssf/2009/12/phasing_out_wind_farm_tax_cred.html