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Never-Used Tax Credit Could Jumpstart U.S. Offshore Wind Energy—if Renewed

A tax break that could help get America's first offshore wind farm up and running has been available for two years. But no one can qualify for it.

Nov 10, 2011
Offshore wind power developer Deepwater Wind installs a meteorological tower on

Congress is considering overhauling a never-used tax credit for offshore wind energy instead of letting it expire at the end of next year, as was originally scheduled.

The U.S. still doesn't have a single turbine in its waters—compared to the 1,250 turbines spinning at nearly 50 offshore wind farms in Europe. Several U.S. industry leaders and analysts told InsideClimate News this is unlikely to change unless the untapped incentive is renewed.

The tax break, available since 2009, gives offshore wind developers a credit worth 30 percent their project costs if they begin construction by 2012. It was meant to help the dozen or so proposed wind parks get off the ground after the credit markets seized up.

But no wind developer has been able to take advantage of it because they don't have approvals required under federal law. An uncertain permitting process in Washington has left projects in regulatory limbo for as much as a decade.

In part due to the permitting snags, "no bank has stood up and said they'll finance offshore wind" in the U.S., said Peter Mandelstam, founder and president of NRG Bluewater Wind, a subsidiary of New Jersey power producer NRG Energy.

NRG Bluewater is now one of a handful offshore wind developers that's literally banking on Congress to preserve the tax credit as the Obama administration moves faster to approve projects. His firm has been trying to build a $1 billion-plus, 450-megawatt wind park off the coast of Delaware for five years now. Strong and steady winds at sea can generate more carbon-free electricity than wind blowing on land, but offshore turbines are expensive—at least 50 percent more to build than those on land.

Our project is "not financeable" without a government kickstart, Mandelstam said.

Capping Megawatts, Scrapping End Dates

A new bipartisan bill, introduced in both the U.S. House and Senate, would keep the credit without any penalty for offshore permitting hiccups. It would do so by scrapping the subsidy's expiration date and offering the same tax break for building America's first 3,000 megawatts—however long that takes—enough to power more than one million typical U.S. homes. (The U.S. has nearly 43,500 megawatts of installed wind capacity, second behind China and all from turbines on land.)

Capping megawatts, rather than setting a cutoff date, ensures that developers "are not under the gun in making it through a regulatory process that we largely do not control," said Jeffrey Grybowski, chief administrative officer at Providence, R.I.-based Deepwater Wind. The wind developer has proposed building three 1,000-megawatt wind parks along the Atlantic Coast and a 30-megawatt demonstration installation, known as Block Island, off Rhode Island.

"No project has made it into construction in the United States, so we are still very much uncertain about how long the regulatory process will take us all," he said.

Cape Wind might be the most famous example of the industry's regulatory mess. The 130-turbine wind farm in Nantucket Sound, Mass., still bears its ten-year-old tagline "America's First Wind Farm," though many doubt if it will live up to its name.

Despite landing a "power purchase" agreement last year with the regional utility National Grid to buy half of Cape Wind's electricity—and becoming the first project to get all of its federal permits in January in the face of powerful local opposition—it continues to be saddled with regulatory woes. Most recently, a federal appeals court overturned the Federal Aviation Administration's conclusion that the turbines pose no threat to planes.

Other projects, like NRG Bluewater's Delaware wind park, may fare better on the regulatory front in the end, experts say.

NRG Bluewater lined up a buyer for half its electricity in 2008, though getting all its permits is still a few years away. Nor has NRG Bluewater raised enough money from private investors, whose participation is key in covering the 70 percent financing gap left by the tax credit.

Matt Kaplan, a North American wind analyst at IHS Emerging Energy Research, said removing the tax credit's end date could help lure investors by guaranteeing the government's support even if projects gets held up by bureaucracy or politics.

"Having a long-term incentive for offshore wind would help ... investors to feel a bit more comfortable with knowing what they can expect out of these projects," he said.

But even if the bill passes Congress, attracting financing will remain a challenge for never-before-seen wind farms in America, said Amy Grace, a North American wind analyst with Bloomberg New Energy Finance. Most financiers prefer to invest only after the first generation of projects proves successful, she said. "Most banks want to be the first to invest in your second project."

Still, the subsidy gives the industry at least a shot, she said. "The tax credit won't guarantee investment in the industry. But not having the tax credit will guarantee no investment in the industry."

Why The Legislation May Have a Chance

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