Because partnerships between financiers and wind energy producers are so critical to effective use of the PTC, the wind energy industry considers IRS guidance on the permissible parameters for those partnerships with great seriousness. Rev. Proc. 2007 651 purportedly created a safe harbor for partner allocations of PTCs and associated income and loss. Although clothed as a comfort to taxpayers structuring partnerships to build wind farms, the revenue procedure was so restrictive that it was considered contrary to long-standing authority on partnership allocations. After the industry communicated at length with Treasury and the IRS, Announcement 2009-692 was published, revising Rev.
Proc. 2007-65. In loosening the restrictions of the revenue procedure, Announcement 2009-69 recognized the vulnerabilities of the industry as it develops long-term, uncertain, capital-intensive wind energy projects. This report will focus on Rev. Proc. 2007-65 and its subsequent revision in Announcement 2009-69, considering the peculiarities of the wind industry, and the indispensable role of the PTC in its incubation.
B. Emergence of Wind Energy
Wind energy provides only about 2 percent of the total electricity production in the United States, but it provides more than half the total production from renewable sources and almost 40 percent of the total new energy generating capacity in the country. By the end of 2008, the United States had added enough new wind energy capacity to make it the world leader in wind energy production. In 2008 alone, U.S. wind energy capacity increased by 50 percent. In 2009 more than 10,000 megawatts (MW) of new wind energy capacity was added, and as of the first quarter of 2010, more than 35,600 MW of wind energy capacity was operating in the United States, enough to power almost 10 million homes. None of this blossoming of activity would have been possible without the federal government’s careful tending in the form of the PTC.
Wind energy projects are less costly than other types of renewable energy projects because of lower installation costs and operating efficiency.8 Nevertheless, they require large initial financial outlays and many fallow years before turning a profit. The largest costs associated with developing a wind energy project are the costs of building a facility and connecting it to an electricity grid. In a cost-comparison performed by the federal government’s Energy Information Administration, a wind facility’s capital cost is estimated to be $130.5/megawatt hour (MWh), while a coal plant’s capital cost is $69.2/MWh and a natural gas plant’s capital cost is $22.9/MWh. However, a wind facility requires only $10.4/MWh to operate and manage, while a coal plant requires $27.7/MWh and a natural gas plant requires $56.6/MWh.
Despite the high start-up costs for wind energy projects, there has been significant growth in the industry. Thirty-six states have utility-scale wind projects, and 14 of those states have more than 1,000 MW of installed capacity.13 In May 2010, approximately 85,000 people were employed in the wind industry, in areas such as turbine component manufacturing, construction and installation of wind turbines, wind turbine maintenance, legal and marketing services, and transportation and logistical services.
Analysts, industry participants, and the federal government predict more long-term growth in the wind industry. Cumulative wind capacity additions from 2009 to 2012 are predicted to exceed 35,000 MW. According to a report compiled by the Department of Energy and wind trade associations, the United States is on track to meet 20 percent of the nation’s energy demand with wind power by 2030.
Despite eloquent skeptics and difficult gestation, wind energy has attained a secure position in the nation’s energy future, and the PTC deserves a great part of the credit for this.
C. History of the PTC
A central motif in the history of U.S. energy policy is the high cost of building an energy facility.16 In addition to the expenses of land purchase
and the construction of complex, idiosyncratic energy facilities, is the burden of navigating several complicated regulatory systems.17 These costs must be incurred well before the facility begins producing energy, and the facility may be in operation for a long time before the investors recoup the initial costs and realize a profit. But because operating costs are low relative to initial development costs, and energy facility can produce and sell large
amounts of energy at a relatively low additional cost. In economic parlance, an energy facility experiences significant economies of scale.
Because of the economies of scale, energy firms are natural monopolies. If ‘‘a single firm can realize economies of scale throughout a range of production, [and] thus continually lower product cost . . . [then it] is wasteful for a firm to make large capital investments in facilities that will duplicate another firm’s facilities.’’For most of the 20th century, the U.S. government applied this theory by granting electric utilities franchises and regulating them as natural monopolies. As protected monopolies with guaranteed profit returns, the old-line electric utilities had incentives to continually invest capital into energy production and delivery infrastructure. But the government’s protection of the monopolies discouraged new entrants into the energy industry.
Until the 1970s, the energy monopolies relied mostly on fossil fuels for the production of electricity. The U.S. government encouraged this reliance through a tax policy promoting domestic oil and gas reserves and production. The policies contributed to the relatively low price of oil- and gas derived energy and the prevalent usage of oil and
gas throughout the United States. By 1970, energy from oil and gas accounted for 71.1 percent of total U.S. energy production.
The government’s revenue losses from subsidizing the oil and gas industries made the subsidy more difficult to justify as the federal budget deficit soared in the 1970s. The added stimulus of a new environmental awareness and the energy crisis resulted in the examination of the possibility for alternative energy sources. At the time, U.S. electric utilities held a monopoly over the production and transmission of electricity, and there was no natural market for alternative energy production. Even if investors and developers built alternative energy facilities, they could not be sure that they could sell the energy produced at those facilities. Recognizing the need for government intervention, Congress passed legislation to shift the market incentives associated with energy production. The Energy Tax Act of 197830 (ETA) reduced the tax preferences for the oil industry and imposed excise taxes on the use of fossil fuels to discourage their use. It also provided incentives for energy conservation and the development of alternative fuels. In particular, the ETA provided an additional 10 percent investment tax credit for investments in certain renewable energy facilities, including wind facilities.
Congress also passed a piece of non-tax-related legislation ensuring a market for renewable energy. The Public Utility Regulatory Policies Act of 1978 required electric utilities to purchase the energy created by renewable energy facilities at the price the utilities would have paid to create the same amount of energy. The new laws alleviated the extreme market imbalance tipped against alternative energy, but residual biases continued.