The House of Representatives last Thursday passed a tax overhaul bill that slashes incentives for wind power projects, turning the focus to the Senate, which is considering its own tax reform legislation that would leave those incentives in place.

“There is $50 billion of investment at risk,” Evan Vaughan, spokesman for the American Wind Energy Association (AWEA), told Utility Dive.

While the House bill poses a considerable threat to the wind industry, analysts contacted by Utility Dive believe the friendlier Senate version will prevail, at least when it comes to wind-specific items. But broader changes that exist in both bills could have a mixed impact on the wind power sector.

AWEA tracks wind power development in the U.S., and at the end of the third quarter, there were 29,634 MW of projects under construction or in advanced development. That is the largest number of projects in the development pipeline since AWEA began tracking projects. AWEA CEO Tom Kiernan said the bill would “kill” over half the planned wind farms.

Lumpy development flow

The flow of U.S. wind power development has been lumpy over the past couple of decades as developers have rushed projects into development to beat the expiration of the production tax credit (PTC), which has had a two-year shelf life and has gone through a biennial ritual of expiration and renewal since 1992. That cycle was broken in 2015 when Congress extended the PTC (and the investment tax credit for solar power) by five years, on a schedule that calls for the PTC to end in 2020.

The House tax reform bill (HR 1) keeps that schedule and the PTC itself intact, but changes two crucial details. It retroactively ends the inflation adjustment and it changes the definition for construction start.

Removing the inflation adjustment rolls back the PTC to 1993 levels, lowering the value to 1.5 cents/kWh from the current 2.4 cents/kWh.

The construction start date sets an eligibility deadline for the PTC. That is particularly important in the current environment because developers have been rushing to get their wind projects into construction ahead of each step-down. In 2018, for example, the PTC credit is set go down to 60% of the value of the credit.

The Internal Revenue Service administers the PTC and sets the eligibility requirements. Under existing IRS rules, there are two ways to qualify for the PTC: physical work of a significant nature or the 5% safe harbor rule. Most developers have taken the safe harbor option, under which a project qualifies for the PTC if the developer spends 5% of capital costs by the eligibility deadline.

The House tax bill retroactively removes the safe harbor option, meaning that developers that have already qualified for safe harbor would have to requalify under the revised rules of the new tax bill, and that would put them into the next step-down to the PTC, cutting the tax credits they would receive by 20%. “In effect, it is a retroactive tax hike,” Vaughan said.

The bill also raises the bar for physical construction eligibility, requiring proof of actual work and that the work be continuous. Those provisions are “unsettling and would knock out a lot of projects,” Keith Martin, co-head of U.S projects at Norton Rose Fulbright, told Utility Dive.

Market chills

Just the threat of those potential rule changes has been enough to give the market chills. “Financing for wind projects has been frozen until this is settled,” Martin said. The usual pace for wind power project financing is $3 billion to $4 billion a year. Last year, $6 billion of wind project financing closed, Martin said.

Developers with wind projects in the pipeline might take some hope in the language of the House tax committee report that Martin says “walks back” some of the construction rules by explaining that the bill “is intended to codify” existing IRS policies.

Under existing policies, the IRS requires continuous work on projects after the year in which construction started, but the agency does not make a developer prove that for projects that are completed within four years.

That interpretation is not included in the final bill, which would require developers to show continuous construction for all projects, so the report and the bill are in conflict. Often such conflicts are resolved with a manager’s amendment. In this case, the manager, Kevin Brady (R-TX), chairman of the Ways and Means Committee, did not offer an amendment, but said any cleanup would be done in the final version that emerges from the conference with the Senate, Martin said.

Irreconcilable differences?

The House Tax Cut and Jobs Act passed on a divided vote. Thirteen Republicans voted against it, and no Democrats voted in favor. The Senate has its own version of tax reform that contains a lot of the same broad changes but with significant differences, particularly with respect to wind power. The Senate bill does not make any changes to the PTC. And the Senate, with 52 Republicans, also has a much tighter margin for passage of its tax legislation.

“The windy nature of Senate Finance Committee Republicans made the House proposal to prorate the PTC a likely nonstarter,” Timothy Fox, vice president at Clearview Energy Partners, told Utility Dive.

Fox is referring to the fact that many of Republican leaders on the tax committee are from western states where a boom in wind power has boosted jobs and tax revenues. Members such as Chuck Grassley of Iowa, who was the author of the PTC, and Orrin Hatch of Utah, who chairs the finance committee, have been public about their support for wind power and the PTC.

Fox said that if the Senate succeeds in passing its tax bill — and that remains an “if” in his mind — the “upper chamber’s much narrower two-vote margin of error could give it leverage in negotiations with the House.” That “suggests favorable odds that the ITC and PTC may avoid early termination or reduction,” he said.

Norton Rose Fulbright's Martin also sees the Senate version coming out ahead. “There is a reasonably good chance the Senate version will prevail, but it is important not to be complacent,” he said.

“I don’t think anything escapes the Senate that takes aim at wind,” Allan Marks, a partner with Milbank told Utility Dive. But there are also issues that affect a wider swatch of the public — such as healthcare, deductions for state and local income taxes and budgetary limits — that could derail efforts to reconcile the House and Senate bills.

“Ultimately, we think the significant differences between the House bill and the Senate proposal reinforce our dim prospects for tax reform, instead of tax cuts,” Fox said.

Even if a tax bill is voted into law and the PTC is preserved intact and without changes, the wind power industry might not escape unscathed.

The wind power engine

If the PTC has been the engine behind the boom in wind power, the tax appetite of tax equity investors has been the fuel.

Wind power developers who lack sufficient earnings to take advantage of the PTC can pledge over ownership of projects to financial institutions. Because these institutions are now the owners, they get the tax credits and can use them until ownership reverts back to the original project sponsor in 10 years.

Both the House and Senate tax bills appear to be on the same page with respect to cutting the corporate tax rate to 20% from 35%.

“That could cut two ways,” Marks said. There could be “dramatically less demand” for tax credits, but if tax reform raises overall economic growth, that could spur the need for more power, he said.

It is possible, however, that a 20% corporate tax rate, as proposed in the tax bill, could result in a significant decline in tax appetite, that is, the ability to use the tax benefits of equity ownership. Hugh Wynne, an analyst at investment advisory firm SSR estimates that a 20% corporate rate could reduce the tax appetite of major tax equity providers by 40%. That could lead to a crunch in the tax equity market.

Wind power developers unable to access tax equity could be forced to raise their prices by as much as 80%, Wynne estimated, and that could also shift the advantage to larger developers able to use the tax credits internally. On the bright side, lower corporate taxes could increase the value of existing wind projects.

“Lower tax rates increase the after-tax value of the operating cash flow received by tax equity investors,” as does the value of the remaining cash flows that go to the developer, Wynne told Utility Dive.

It would seem at this point in the development cycle for wind power projects that Janice Joplin’s advice applies: "Get it while you can." It's all about the timing.