WIND

US boosts developers with tax credit flexibility

Guidance on tax credits from the US Treasury Department and Internal Revenue Service on 22nd March should give offshore wind developers greater flexibility in how they take projects to financial close — and make them look at their SCADA systems with fresh eyes.

RICHARD HEAP

March 26, 2024

  • US federal government has published tax credits guidance
  • Developers gain flexibility to support ‘energy communities’
  • Offshore developers can claim credits based on their SCADA

 

There’s an old movie trope where the nerdy character takes off their glasses and suddenly becomes super-sexy. I’ve always had a problem with this cliché for two reasons. First, it felt horribly ableist even before I was aware of that word; and second, it never worked when I took off my glasses.

However, as much as I hate it, this is the best simile I can find to illustrate something that happened in the US offshore wind sector on Friday 22nd March. This movie stars SCADA systems as the ‘hot nerd’.

In short, the Treasury Department and Internal Revenue Service shared additional guidance about how offshore wind developers could secure bonus tax credits for their projects. They explained that companies could qualify for those bonus credits based on the headline capacity of the project as long as the supervisory control and data acquisition (SCADA) system is located within a qualifying ‘energy community’.

Sure, it’s a technical point, but it means that SCADA systems can play an important role in helping developers to gain bonus tax credits, which could affect the financial viability of their schemes. The SCADA system doesn’t attract any headlines in the project planning stages, but this guidance means it can play a key role in securing the financial viability of offshore wind projects.

Or, to use that movie ageing trope, SCADA systems can now shed their metaphorical glasses and have developers realising how important they can be for projects’ financial viability: “Wait, they were beautiful all along!”

After two tough years where inflation has shown up the folly of power prices agreed in ‘race to the bottom’ auction processes, the prospect of extra tax credits for US offshore wind projects can only help projects to reach financial close.

What the rules say

This guidance shows that renewable energy developers can gain a bonus of 10% on production tax credits at their projects, or up to 10 percentage points on investment tax credits, if the projects or associated facilities are located in communities that have historically relied on the energy industry for investment and jobs. This applies to both onshore and offshore renewables projects.

This follows legislation introduced by the Inflation Reduction Act in mid-2022, where these so-called ‘energy communities’ are defined in one of three ways:

  1. Former coal mining communities: Areas where a coal mine was closed after 1999 or a coal-fired power plant was closed after 2009.
  2. Jobs and taxes: Areas with significant employment and local taxes from the fossil fuels sector, and higher-than-average unemployment.
  3. Brownfield sites: Areas with brownfield sites, which means sites that has contamination from hazardous materials or other pollutants.

Federal government gave initial guidance about what ‘energy communities’ means in April 2023, and this March 2024 guidance elaborates on that.

For offshore wind specifically, it has introduced more flexibility for the ability to claim tax credits for offshore wind projects. It said developers would be able to qualify for those bonus tax credits as long as the SCADA system is located in a port in an eligible ‘energy community’.

SCADA systems have been called the nerve centre for an offshore wind farm as they link up the individual turbines, substations and meteorological stations in a central hub; record activities on a regular basis to ensure that the project is working efficiently; and enable owners and operators to fix problems. The Treasury and IRS said their guidance recognised the importance of onshore SCADA systems in ensuring the viability of offshore wind farms.

The guidance also gave developers more flexibility to gain tax credits based on other aspects of their onshore interconnection infrastructure. It said that “where a project has multiple points of interconnection… those projects may now look to any land-based power conditioning equipment up to those points of interconnection for purposes of determining energy community status”.

Industry onlookers have welcomed the flexibility this should give developers to secure the bonus credits. Liz Burdock, founder and chief executive of industry association Oceantic Network, said it would create an easier route to market for many US offshore wind projects, as well as “laying a robust foundation for supply chain advancement” that should bring down costs in the longer term.

Jason Grumet, chief executive of the American Clean Power Association, praised the guidance and said it would encourage “significant private sector investments and new jobs in historically disadvantaged communities”.

That may also protect the Biden administration from some of the criticism that we expect from US offshore wind’s opponents about a tax credits giveaway.

For now, these revised rules should get developers looking at projects afresh.