U.S. Tax Credit Powers Wind-Farm Upgrades

By REBECCA SMITH
Oct. 7, 2016 7:51 p.m. ET

Wind-power producers are rushing to take advantage of a green energy tax credit extended by Congress—and, in a new twist, many are using it to renovate existing wind farms, not just build new ones.

The Production Tax Credit, which was renewed by lawmakers last December, allows qualifying wind farms to reap tax benefits based on their output for a 10-year period. The credits, which can be shared with investment partners, reduce federal tax bills.

Some wind producers, encouraged by turbine makers, are deciding to “repower” existing wind farms to tap the tax credits, including NextEra Energy Inc., which has 110 wind farms in 19 states and Canada. NextEra reaped $73 million in Production Tax Credit subsidies in the first six months of the year.

Armando Pimentel, chief executive of NextEra Energy Resources, the company arm that develops renewable power, recently told investors that while retrofitting “certainly wasn’t something we were thinking about six months ago,” he believes it may now make sense for nearly a third of the company’s 13,000-megawatt wind portfolio.

In rough numbers, a 100-megawatt project with modern turbines and strong winds might produce $10 million a year in tax credits, according to an analysis by Fitch, the credit rating firm. The current government credit is 2.3 cents per kilowatt-hour of electricity produced, but it is adjusted for inflation and has jumped 53% since it began in 1992.

Upgrading wind farms makes sense for wind producers because modern turbines generate far more electricity than those built two or three decades ago. That means some existing wind farms will get overhauled to generate more renewable power, while others will produce the same amount of electricity but with fewer turbines.

Renovating an existing wind farm is also often simpler than building a new one—they are already connected to transmission lines and have zoning approvals—so the projects often make better financial sense than starting from scratch, said Nick Knapp, managing director of investment bank CohnReznick Capital Markets LLC.

The market for refurbished capacity represents an enormous opportunity for turbine manufacturers.

“Manufacturers of wind turbines are the ones that initially looked at this and they are approaching companies with older wind farms and offering to help them revamp their portfolios,” said Marlene Motyka, a U.S. alternative energy expert at Deloitte.

Existing facilities qualify for the tax credit if refurbished enough to satisfy IRS rules, which require investments to equal 80% of the market value of the facility being replaced.

Michael Bernier, senior manager of tax credits and incentives at EY, the former Ernst & Young, estimated that 15% of the U.S. installed base of 75,000 megawatts of wind capacity is ripe for retrofits. That is mostly turbines erected before 2006 that have exhausted their tax credits or other incentives and are showing signs of wear.

There are currently about 18,000 megawatts of new wind capacity under construction or in advanced stages of development in the U.S., according to the American Wind Energy Association.

Not everyone believes the retrofits are always worthwhile, however.

Wind turbine makers “are pushing it pretty hard but we’re struggling to see the benefits” of retrofits so far, said Jim Torgerson, Chief Executive of Avangrid Inc., which owns 53 wind farms in 18 states and eight utilities. “You’ve got to look at it wind farm by wind farm and look at the age of your assets to see if it makes sense.”

One complication, experts note, is that electrical output often is sold to utilities or green-minded corporations under fixed-price contracts, and retrofits sometimes open up the contract terms to renegotiation.

In a report last year, the U.S. Government Accountability Office said the Treasury has forfeited more than $8 billion in revenue as a result of the tax credit, and faulted Congress for repeatedly renewing the credit without requiring any agency to study its impact on renewable-energy development.

Sen. Chuck Grassley (R., Iowa), whose home state has benefited from billions of dollars in wind energy investments, was among the members of Congress who voted to extend the tax credit last year. In a statement, Sen. Grassley said the production tax credit has proven to be “a success story beyond what I could have anticipated in 1992,” both for the economic stimulus to rural areas and as a tool to advance an alternative to fossil fuels.

David Richardson, a managing director at Impax Asset Management in New York, a big investor in renewable projects, said wind farm re-powering is likely to increase.

“Some of the best sites are the ones that were developed first and are now suitable for upgrades,” said, Mr. Richardson, whose company has $6 billion in assets under management. He said he is taking a hard look at California, which developed wind capacity early in places such as the Altamont Pass, and thus offers good re-powering prospects.