“… the production tax credit will cost taxpayers $4.3 billion in 2021 and a cumulative $33.8 billion in the ten-year period from 2020 to 2029. After nearly 30 years, the wind industry’s reliance on the PTC has grown as has its cost to US taxpayers.”
The Production Tax Credit (PTC), first established under the Energy Policy Act of 1992, is a driving force for constructing otherwise uneconomic industrial wind turbines for electric generation. A per-kilowatt-hour credit, initially set at a lucrative 1.5¢, adjusted annually for inflation is 2.5¢ today.
The credit covers the first ten years of wind-turbine generation. The monetization occurs when wind developers sell the tax credits to federal tax-owing corporations, which offsets a significant percentage of the project’s capital costs.
Depending on actual power generation, and with very low marginal costs, wind energy can be sold at very low, and even negative, prices, ruining the economics of traditional power generation. The trade of intermittent for baseload generation capacity is also of major importance, introducing reliability issues during times of peak demand when the wind might not be blowing.
1.1 PTC Phase-down
In 2015, Congress took steps to finally phase-out the PTC. After 23-years, many argued that it was time for the wind industry to function without continued public support.
Under PATH (Protecting Americans from Tax Hikes Act of 2015, Pub. L. No. 114-113, Div. Q, 129 Stat. 2242), wind facilities that began construction before January 1, 2017, were eligible to receive 100% of the PTC.
After that, projects that started construction in 2017, 2018 and 2019 could receive 80%, 60% and 40% of the wind PTC, respectively, after which the PTC was to be eliminated.
1.2 The ‘begin construction’ Issue
When Congress passed the 2012 American Taxpayer Relief Act (ATRA), the wind industry won a critical concession from Congress with the introduction of the “begin construction” provision. With this change, wind projects need only begin construction before the PTC expiration date in order to claim the subsidy, rather than having to be placed in service by that date.
Under the IRS guidance, developers could show they began construction in one of two ways. They could either begin actual physical work of a significant nature by the deadline or, alternatively, they could incur a non-refundable expenditure representing 5% of the facility’s total cost (safe-harbor definition).
In either case, once construction begins developers are required to show “continuous progress” towards completion as a backstop to ensure projects were not delayed for indefinite periods and still try to claim the subsidy.
1.3 Why did the IRS Create the 4-year Window?
In a clarifying notice issued in September 2013, the IRS stated it would not closely scrutinize development schedules or monetary outlays to confirm compliance with the continuous progress test so long as projects were placed in-service by January 1, 2016, which was the next date the PTC was to expire prior to the phase-down being adopted.
The two-year window was later extended to four years after the PTC phase-down was enacted.
1.4 Is the “continuous progress” Test Still Required?
Yes. In fact, the continuous progress test is arguably the only test that matters.
Under IRS guidance, developers were expected to earnestly start construction by a date certain (end of 2016) and maintain records that showed they were actively working toward completing the project. The four-year window relieved developers of having to closely track and report their progress to the IRS in order to prove progress was ongoing.
The development window also provided developers with some certainty in the event of a challenge to their progress claims. If a project is placed in service within the 4-year window, the PTC would be awarded with no questions asked.
1.5 What If a Developer Misses the 4-year Window?
For developers that maintain their paperwork and are able to demonstrate continuous progress toward the in-service date, the IRS would likely still grant the PTC even if the project takes longer than four years.
However, developers that start projects in 2016 (either under the physical-work test or safe-harbor test) and then ‘back-burner’ the project before restarting construction should not be able to pass the continuous progress test and will miss the four-year window and earn a reduced PTC.
The IRS rules allow for excused delays relating to events outside a developer’s control including weather conditions, natural disasters, and delays in obtaining permits or licenses from federal, state, local, or Indian tribal governments.
1.6 All Energy is Subsidized. Why Complain about Wind?
Many argue that all federal subsidies for energy be eliminated. In the case of renewables, the scale of the subsidies is enormous relative to how much they contribute to our energy portfolio. To be clear, no traditional source of electric generation has ever earned an open-ended, unlimited tax credit comparable to the PTC for every kilowatt hour of energy put on the grid.
According to the U.S. Treasury, the production tax credit will cost taxpayers $4.3 billion in 2021 and a cumulative $33.8 billion in the ten-year period from 2020 to 2029. Adding the cost of the investment tax credit (ITC) for solar and for offshore wind,  these figures jump to $9.1 billion in 2021 and more than $60 billion cumulatively through to 2029.
The PTC and ITC combined represent the most expensive of all federal energy subsidies for a small fraction of the total energy pie. The next closest is the Excess of Percentage Over Cost Depletion for fossil fuels at $10.6 billion through to 2029. Eliminate all subsidies and the oil and gas industries will continue virtually unabated, while industrial wind and on-grid solar would atrophy.
After nearly 30-years, the wind industry’s reliance on the PTC has grown as has its cost to US taxpayers. Part II tomorrow will describe the current status of industrial wind’s PTC; Part III looks at the future of industrial wind in a subsidy-neutral world.
 The American Recovery and Reinvestment Act of 2009 allowed wind developers to take the ITC instead of the PTC, which comes into play with the much higher cost of offshore wind projects.