Windfarm Windfall

[January 16th, 2008]

The Oregon Department of Energy is experiencing a gold rush as it tries to set rules for new green energy-related tax credits.

Driving the flurry of interest from potential investors and developers is a law passed last year that expanded the state’s Business Energy Tax Credits, or BETCs.

Those credits reward companies for making energy-efficient investments, such as motion-sensitive lighting, solar panels or building new construction to the green standard for Leadership in Energy and Environmental Design, or LEED.

State lawmakers doubled the maximum value of credit-qualifying projects to $20 million and nearly tripled the allowed tax credit from $3.5 million to $10 million, to be used over five years.

“This was a big increase,” says Mike Grainey, director of the Department of Energy, which administers the credits.

The result: Oregon companies trying to position themselves to exploit the credits, and dozens of inquiries nationwide from “green” manufacturers such as solar-panel manufacturers.

To some, that’s good news. “It’s gratifying to see that the credits could bring manufacturers who would benefit Oregon’s economy,” says state Sen. Ginny Burdick, (D-Portland) who chairs the Senate Revenue Committee.

The credits are so enticing they could far outstrip the projected fiscal impact of $12.6 million for 2009—which already was a 25 percent increase over 2006. And that has some tax-credit critics fuming.

“We’re rewarding people for making investments that in many cases they would have made anyway,” says Chuck Sheketoff of the Oregon Center for Public Policy.

Grainey’s agency has already established rules for how companies can qualify for credits when they take various energy-saving steps. But the big unresolved question is how to treat big projects, such as the wind farms sprouting across Eastern Oregon.

For instance, Portland’s Horizon Wind Energy recently completed building the 100-megawatt Elkhorn Valley Wind Farm in Union County.

In an October letter to the energy department, project manager Hilary Foote wrote that Horizon plans to double Elkhorn Valley’s size: “A second 100 MW Oregon project is slated for construction beginning in the spring of 2008.”

The state energy department is trying to decide how to treat such “phased” investments. If the department considered Elkhorn Valley’s two contiguous phases to be one project, Horizon would be eligible for only one BETC, worth $10 million.

If Elkhorn Valley’s second phase is considered a separate project, the company could get a second $10 million credit, although that would be a fraction of the $180 million Horizon says it costs to build a 100-megawatt wind farm.

Grainey says his agency hopes to resolve its final definitions by Feb. 1 in a way that will be fair to developers but prevent solar panel manufacturers or future wind farms from splitting projects into increments to maximize their tax breaks.

“If the phases of a particular project are reasonably separate in terms of timing or function, they could qualify for separate credits,” Grainey says.

Because Eastern Oregon is one of the country’s hottest wind-farm development sites, and because solar panel makers are also interested, that is of keen interest to developers—and could have a large fiscal impact on the state in the form of forgone taxes.

Critics such as Sheketoff worry that the credits are simply rewarding companies for doing what laws already require, and in some cases what the market demands—much like Oregon’s pollution-control tax credits rewarded polluters for complying with environmental laws.

In the case of green energy, a new law requires by 2025 that 25 percent of the electricity consumed in Oregon must be produced from sustainable sources. Currently, wind is the most economical large-scale sustainable energy source.

Consumers, however, already pay a premium for green energy, and some wind projects also already get large property tax breaks through the state’s Enterprise Zone program (see “Not So Twilight Zones,” WW , March 21, 2007).

“The BETCs are an example of a program gone awry,” Sheketoff says.

Grainey acknowledges concerns that a whole slew of planned projects could cost the state much more than an additional $12.6 million annually. But he’s confident the rules his agency develops will prevent abuse.

“It’s too soon to tell what this [program] will cost,” Grainey says. “But I know the alternative: There are already two coal plants proposed in Washington and a nuclear plant just 12 miles east of the Idaho border.”