This Could Be Big — Refundable Federal Tax Credit Could Remove Barrier to Community Wind

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Since it will take a battle to extend federal tax credits for wind power anyway, why not make community wind development easier at the same time?

Last month, President Obama’s Treasury Department released proposed reforms to a number of business taxes including the federal Production Tax Credit (PTC) for wind power projects. The reform proposal would make the tax credit permanent, but more importantly, it would make it refundable.

A regular tax credit reduces the amount of taxes a business or person pays dollar for dollar, down to zero. In the case of the PTC, it provides 2.2 cents for every kilowatt-hour produced by the wind power project, over 10 years. But for the many individuals and businesses that don’t owe a lot of taxes, they have limited use. That’s why there’s an entire “tax equity industry” made up of large banks and Wall Street firms that partner with wind and solar developers to reduce their tax bills. The drawback of these partnerships is that as much as half of the tax credit’s value is consumed by the Wall Street firms and not the renewable energy project.

With a refundable tax credit, wind and solar project owners wouldn’t require big tax bills or Wall Street to finance projects. Instead, any participant in a community renewable energy project would receive a check equal to the tax credit’s value.

The implications are significant. The South Dakota Wind Partners project, for example, collected over 600 owners for 7 wind turbines, thanks to a temporary option to take the federal PTC as a cash grant. Brian Minish, who helped develop the South Dakota Wind Partners community wind project, says that a refundable tax credit will similarly make a community wind project easier: “The refundable PTC is much better then the current PTC structure in that we don’t need to find tax equity investors and we don’t need to pay them a premium return. This would allow more common investors to participate in community wind projects!”

Since community-owned wind projects create up to twice the jobs and over three times the local economic impact compared to absentee-owned projects, small policy changes that make community ownership easier can have a big impact.

There are other solutions afoot for community wind, including the Community Wind Act. This U.S. Senate bill would allow distributed wind projects — 20 megawatts and smaller — to take the upfront Investment Tax Credit instead of the PTC. The change provides one big advantage: community wind projects have a harder time getting capital, so upfront cash helps secure financing.

Legal and tax barriers have created an uphill struggle for community ownership of renewable energy, so it’s nice to see improvements on the radar of the Obama administration and in Congress.

This post originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance.

Images: community wind farm & cows and community wind farm via Shutterstock