Offshore, Project Development, Wind Power

Wind in the Sails of Offshore Wind Farms: Recent Developments in Incentives

On May 11, Sens. Edward J. Markey (D-Mass.), Sheldon Whitehouse (D-R.I.) and Rep. Jim Langevin (D-R.I.-2) introduced the Offshore Wind Incentives for New Development Act or, simply, the Offshore WIND Act. The Offshore WIND Act would extend the 30 percent investment tax credit (ITC) under Section 48 of the Internal Revenue Code (Code) for offshore wind through 2025.

As reported in the press release announcing introduction of the legislation, the Offshore WIND Act is co-sponsored by Sens. Jeff Merkley (D-Ore.), Elizabeth Warren (D-Mass.), Jack Reed (D-R.I.), Cory Booker (D-N.J.) and Sherrod Brown (D-Ohio), and is supported by a number of stakeholders, including the League of Conservation Voters, NRDC, Environment America, Sierra Club, Oceana, Union of Concerned Scientists, Mass Audubon and the Conservation Law Foundation.

Whitehouse and Langevin, two of the sponsors of the Offshore WIND Act, each represent Rhode Island, home to the Block Island Wind Farm, the nation’s first and only offshore wind farm. However, Maryland may soon be following. On the same day that the Offshore WIND Act was introduced, the Maryland Public Service Commission authorized two offshore wind projects with an aggregate wind capacity of 368 MW and awarded offshore wind renewable energy credits to both U.S. Wind Inc. and Skipjack Offshore Energy LLC. Nevertheless, the offshore wind industry faces some headwinds.  

Under current law, a wind project, including an offshore wind farm, would be eligible for the production tax credit (PTC) under Section 45 of the Code if construction of the wind project begins before Jan. 1, 2020. However, to be eligible for 100 percent of the PTC (which for 2017 is at a credit rate of 2.4 cents/KWh), construction of the project must have begun before Jan. 1, 2017. Thereafter, the credit is reduced by 20 percent for facilities that begin construction during 2017, 40 percent for facilities that begin construction during 2018 and 60 percent for facilities that begin construction during 2019.

Alternatively, Section 48 of the Code allows a qualifying wind project, including an offshore wind farm, to elect the ITC in lieu of the PTC. Under current law, the ITC would be available for a qualifying wind project that begins construction prior to Jan. 1, 2020. Like the PTC, the ITC is subject to a phase out. To be eligible for the full amount of the ITC (which is 30 percent of the eligible cost basis of the wind project), construction of the project must have begun before Jan. 1, 2017. Thereafter, the ITC is reduced by 20 percent for facilities that begin construction during 2017, 40 percent for facilities that begin construction during 2018 and 60 percent for facilities that begin construction during 2019. It is expected that offshore wind farms usually would elect to claim the ITC in lieu of the PTC due to their high capital costs.

Although the phase out of these incentives is an industry-wide challenge, it is particularly problematic for offshore wind farms because of the longer planning and permitting times that these projects require. Case in point, sponsors of the Offshore WIND Act point to the Block Island Wind Farm, which began operations in December 2016, despite being initiated nearly nine years ago. As a result, the Department of Energy has found that no additional offshore wind projects are projected to be able to qualify for the PTC or ITC before they expire.

In addition, these incentives are generally limited to offshore wind farms that are located in the territorial waters of the U.S. over which the U.S. has exclusive rights with respect to the exploration and exploitation of natural resources (commonly referred to as the outer continental shelf).

To incentivize offshore wind production, the Offshore WIND Act would extend the full 30 percent ITC to “qualified offshore property” the construction of which begins before Jan. 1, 2026. Qualified offshore property would include any facility (other than certain small wind energy facilities with nameplate capacity of not more than 100 kW) using wind to produce electricity that is located in the inland navigable waters of the U.S. (including the Great Lakes), the coastal waters of the U.S. (including the territorial seas of the U.S.), the exclusive economic zone of the U.S. or the outer continental shelf of the U.S. Thus, the Offshore WIND Act would both extend the start-of-construction deadline and change the requirement regarding the location of an offshore wind farm.

We are hopeful that the Offshore WIND Act and the Maryland Public Service Commission’s approval of two major offshore wind projects will be a tailwind for the offshore wind industry.

Jeffrey G. Davis (left) is a partner in the Tax Transactions & Consulting group in Mayer Brown’s Washington DC office and is a co-head of the firm’s Renewable Energy group.

Isaac Maron is a Tax Transactions & Consulting associate in Mayer Brown’s Washington DC office.

This article was originally published by Mayer Brown and was republished with permission.

Lead image credit: Deepwater Wind | Twitter