Among central U.S. states, Oklahoma has built itself into a wind leader. According to the American Wind Energy Association (AWEA), Oklahoma ranked third nationwide in 2015 for total wind energy generation, which comprised an impressive 18% of the state’s electricity. The state’s incredible wind resource also contributes to economic development, providing annual land lease payments to landowners and supporting nearly 8,000 direct and indirect jobs in 2015. A recent study from Oklahoma State University found that wind companies have paid nearly $134 million in ad valorem taxes to the state since 2004, increasing revenues for local schools and county services.[adright zone=’190′]
Situated between Texas and Kansas, the state flew under the radar as its neighbors accentuated their wind resources. However, faced with massive mounting shortfalls in its state budget, Oklahoma is experiencing some Texas-sized headaches. In fact, some influential lawmakers, such as Rep. Mike Mazzei, R-Tulsa, have considered wind the culprit and want to eliminate the zero-emissions tax credit, more commonly known as a state production tax credit. Whichever you prefer calling it, the incentive is Oklahoma’s only remaining wind energy tax incentive.
Jeffrey Clark, executive director at the Wind Coalition, an AWEA regional partner, explains that several macroeconomic factors occurred that have forced the present-day situation.
“Because of low oil and gas prices, Oklahoma’s budget has been a challenge in recent years,” Clark explains. “And when you factor in the structure of Oklahoma’s energy incentives, it’s had a direct revenue impact on the state budget.”
Zero-emissions tax credit
More specifically, Clark is referring to the state’s zero-emissions tax credit, which was enacted in 2002 before utility-scale wind farms were constructed in the state. The incentive has changed over the years, but it now provides a tax credit of $0.50/kWh of electricity from zero-emissions sources. It can be carried forward for up to 10 years, allowing companies to accumulate tax credits and use them in later years to offset taxes owed. The incentive used to be transferable, Clark says, meaning wind developers could sell the credit to other taxpayers to reduce tax bills. To increase transparency, lawmakers changed the incentive to a refundable tax credit in 2014.
According to the Oklahoma Tax Commission, wind-related tax credits have been growing and cost the state more than $101 million from tax years 2012 through 2014, including more than $60 million in tax year 2015 alone.
And when some state lawmakers, such as Mazzei, saw the increasing wind totals, it didn’t take long to find a solution: Eliminate Oklahoma’s zero-emissions tax credit altogether. And for Mazzei, the sooner the credit is eliminated, the better.
“In 2010, this credit cost Oklahoma $3.7 million, but as of 2015, the cost exceeded $100 million,” he says in a press release. “The whole goal of any tax incentive should be to generate economic benefits that are greater than the cost. When you look at the direct economic benefit from the wind power facilities in 2015, it was $78.4 million and produced only $17.1 million in tax revenue.”
Mazzei continues, “When you take into account the fact that Oklahoma is looking at a budget shortfall of at least $600 million for fiscal year 2017, we clearly cannot afford to wait until 2021.”
The tax incentives have facilitated a significant amount of wind power in the state, Mazzei concedes. “However, in light of the cost versus the benefit, the significant budget constraints facing the state and the many unmet funding needs for core functions, the tax credit needs to end immediately.”[adleft zone=’190′]
A continual fight
The recent acrimony over wind energy and tax incentives is not new. In fact, energy tax incentives have been a frequent bone of contention over the years.
In the last legislative session, lawmakers were considering three bills to scale back an existing tax credit of $0.50/kWh for generating electricity from wind and a separate bill to establish a 75% natural gas energy standard by 2020, notes Keith Martin, a partner at law firm Chadbourne & Parke.
One of the wind bills would have cut off tax credits for new wind facilities placed in service after 2016. Another would have reduced the tax credit by 25% starting in July of that year. The third would have denied any tax credits on wind electricity generated after 2017 unless the state legislature reauthorized the tax credit after hearing from an evaluation body it set up to look at state tax incentives, says Martin.
Fortunately for the wind industry, the bills missed a procedural deadline to move to a third reading. However, the bills’ reprieve was short-lived, as hawks such as Mazzei had already sounded the alarm.
As it is, the wind industry has already offered to make concessions. Clark says the industry voluntarily gave up half of its state incentives in the 2015 legislative session, immediately ending a five-year property tax exemption for wind farms. Now, the coming fight over the production tax credit (PTC) may leave Oklahoma without any incentives to lure wind development. It’s a classic chicken-and-egg scenario, according to Clark.
“On the one hand, Oklahoma wants to stay competitive with wind,” he says. “On the other, they really want to reduce those impacts to that state budget.”
David Burton, partner at law firm Mayer Brown, offered North American Windpower a potential solution back in July.
“One solution would be to simply cap the aggregate amount of the credit and limit eligibility to a first-come, first-served basis.”
However, Burton noted, the problem with this approach is that the credit would have less appeal to developers and investors because of the uncertainty surrounding when the credit reserve would be depleted.
To address this concern, the state could design a program in which projects apply for the PTC in advance to reserve a PTC at a projected level of production. The program would have to balance the developers’ ability to reserve the credit before committing themselves to a project; the caveat would be that highly speculative projects should not be incentivized at the expense of more likely projects.
If a highly speculative project displaces a more likely project on the reservation list, and then the speculative project does not get built and the lack of a reservation discourages the developer of the likely project, then the policy will have failed to have effectively stimulated construction of either project.
On the other hand, Burton advised, the legislature should avoid neutering the policy by requiring developers to progress their projects too far to qualify for a reservation – which would discourage entrepreneurial developers from selecting sites in the state providing the PTC.
The Wind Coalition will continue to work with Oklahoma on potential alternatives, notes Clark.