A taxpayer that produces electricity from a qualified energy source, including wind, at a qualified facility that sells the electricity to an unrelated person is entitled to a federal income tax credit equal to a specified amount (PTC). The credit for wind-produced electricity is equal to 2.1 cents times each kilowatt hour of electricity sold during the tax year for a period of ten years. One of the key issues associated with the PTC is the requirement that the electricity be sold to an unrelated taxpayer in order to claim the credit. Recently, there has been a big stir in the wind community as certain areas of the country are seeing a surplus of energy generated from wind resources and questions have arisen regarding what to do with the electricity.
Current technology makes it difficult to store electricity produced from wind and when the grid cannot absorb it, a real problem can arise. Under circumstances where excess electricity supply occurs, negative electricity prices can occur with no off taker for the electricity. Wind farms in these situations often have to give away or pay someone to take the electricity off their hands. From a tax perspective, a key question arises as to what happens to the PTC. In the truest sense, there is no “sale” to a third party when this occurs and practitioners are left wondering if the PTC is available in this situation.
Also what happens when a wind farm is required to curtail or end production? The Bonneville Power Administration in Oregon is trying to curtail wind production at wind farms this spring so it can increase hydropower output to protect salmon and other fish as a result of a large snowpack that has increased river levels. If the wind farms in the Northwest are required to limit operations, there would be a reduced or eliminated PTC. One question that has come up is what if the electricity runs with no off taker and a payment is received for not selling the electricity? Would a PTC still be available?
Until investment is made so that these surpluses can be absorbed into the national grid, this phenomenon is likely to occur more often. Leading tax practitioners are hoping, the IRS can weigh in and provide some clarification and relief to wind farms until the transmission problem is solved.