The US government offers a tax credit of 1.7 cents a kilowatt hour for generating electricity from wind. The tax credits must be reduced to the extent the project benefits from government grants, tax-exempt financing or other tax credits.

The wind industry has been working hard at the state level to persuade legislatures to enact their own tax credits to encourage windpower development.

The IRS had been of the view that these state credits reduce the federal credit. It is not clear the IRS is right when the state credit is tied to the amount of output at the power plant rather than its cost. Cost-based credits clearly reduce the federal credit.

At last count, five states — Arizona, Hawaii, Montana, North Carolina and Oregon — allow a tax credit that is a percentage of the cost of a wind project. Minnesota has a tax credit that is tied to output. Tax credit proposals are pending in North Dakota and Pennsylvania.

In late October, the IRS released a private ruling in which it said that the owner of a wind project did not have to reduce his federal tax credit on account of receiving “renewable energy credits” — or RECs — from the state where the project is located. The state requires local utilities to accumulate a certain number of RECs each year. Generators of electricity using renewable technologies are awarded credits by the state and then sell them to utilities. The credits are based on output.

Investors in windpower projects should be careful to check for state credits as part of their due diligence.