A cleaner power grid is underway, unlikely to stop

wind farm april elp 2

The “greening of the grid” is well underway, ScottMadden Partner Todd Williams said Dec. 12, and that’s largely thanks to trends toward increased use of natural gas, more use of renewable power and less use of coal-fired power.

The power industry management consultant made his comments at the half-day GenForum at POWER-GEN in Orlando, Florida. The half-day GenForum was organized by GenerationHub and helped kick off the PennWell POWER-GEN Week.

Speakers at the GenForum seemed to agree that the trend toward lower-carbon power generation will continue regardless of the turnover in presidential administrations.

Currently 29 states, three territories and the District of Columbia currently have a renewable portfolio standard (RPS). In addition, renewable generation is becoming more economic even without subsidies.

Eight more states have renewable portfolio “goals,” Williams added.

On the RPS front, New York and California are planning to go 50 percent renewable by 2030. Oregon wants to have its large utilities 50 percent renewable by 2040. Hawaii is the most ambitious of all of with its plan to gradually go 100 percent renewable by 2045.

While tax credits are the “icing on the cake” for renewable power, they are not the cake, Williams said.

Williams said there are lessons to be learned from Hawaii and Germany. These two locales are worlds apart but have had similar experiences, Williams said. Both have more than doubled their use of renewable generation between 2007 and 2014, and their grids continue to operate well, Williams noted.

Akin Gump tax lawyer Scott Cockerham noted that renewable projects can choose between two major benefits: the production tax credit (PTC) or investment tax credit (ITC).

Solar projects are limited only to the ITC, but wind, biomass, geothermal, hydro and others can pick between ITC and PTC, Cockerham noted.

The PTC is currently undergoing a gradual phase-down. The current inflation-adjusted PTC is 2.3 cents/kWh based on energy sold.

Projects that begin construction in 2016 can claim 100 percent in 2016. But projects that start construction in 2019 can claim only 40 percent of the PTC, Cockerham said.

The PTC continues for 10 years once the project is placed into service. Eligible taxpayers can elect to claim the ITCs or the PTCs.

The ITC is based upon 30 percent of eligible cost basis. Tax credits are generated 100 percent on the placed-in-service date – with certain exceptions for sale-leasebacks.

The ITC is available for equipment used to generate electricity and a various other energy-related purposes. (The ITC cannot be claimed for using solar energy to heat a swimming pool.

Those using the ITC in lieu of the PTC can claim 30 percent credit for projects that start construction in 2016, but only 12 percent for projects that start construction in 2019, said the Akin Gump attorney.

The Internal Revenue Service has issued several official “notices” on the renewable energy tax credits since 2013. These notices seek to clarify when a renewable project begins construction and when it is “placed into service.”

Two ways to start construction include the “physical work test” and the 5 percent safe harbor spending for costs.

Generally, construction starts when “physical work of a significant nature” begins, Cockerham said.

As a rule of thumb, more work is better than less. “You can’t just build a fence” around a wind turbine site and say you have started construction, Cockerham said.

On the cost front, the IRS considers construction started when the taxpayer incurs 5 percent or more of the total cost of the facility.

The project developer must also show “continuous” efforts toward construction and completion. The project must enter construction within four calendar years after the calendar year that work began or by Dec. 31, 2016.

For example, a project that began work on Jan. 15, 2016 and is placed into service by Dec. 31, 2020 is OK. But a project where work began on Jan 15, 2015 and placed into service on Jan. 1, 2020, is NOT OK, Cockerham said.

The IRS will consider excusable delays such as natural disasters and labor stoppages, Cockerham said.

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