House Votes Tax Incentives For Power Projects

House Votes Tax Incentives For Power Projects

August 01, 2001

The lower house of the US Congress voted for $33.5 billion in new energy tax incentives shortly before leaving Washington for the August recess.

The outlook for the package in the Senate is unclear.

Senate leaders have said there is no room in the budget this year for any further tax relief, but they are trying at the same time to find “offsets” or ways to raise revenue that might pay for some new energy incentives.  No decisions will be made until the fall.  In the meantime, the tax incentives in the House bill are at least in play.

Section 45

The House bill would extend section 45 tax credits.  These are credits of 1.7¢ a kilowatt hour for generating electricity from wind, “closed-loop” biomass and poultry litter.  The current deadline for placing projects in service to qualify for credits is December this year.  Credits run for 10 years after a project has been placed in service.  The amount is adjusted each year for inflation. “Closed-loop” biomass refers to trees or other plants that are grown exclusively for use as fuel in power plants.

The House voted to extend the deadline for placing projects in service to December 2006.  The extension applies to wind and biomass projects, but not to poultry litter.

The House also voted to allow credits for the first time to persons who use “open-loop” biomass or landfill gas to generate electricity. “Open loop” biomass is defined as “solid, nonhazardous, cellulosic waste material which is segregated from other waste materials” and that falls into one of three categories.  The categories are certain forest wastes, “solid wood waste materials” (like crates and construction wood wastes), and waste from “agriculture sources.” Municipal solid waste of the kind that is usually disposed of in landfills, old growth timber and paper that is commonly recycled are not “open-loop” biomass.

In the past, the taxpayer had to build a new facility to qualify for tax credits.  However, under the House bill, existing open-loop biomass and landfill gas facilities would qualify for five years of credits after the bill is enacted.  Credits for such facilities would be at two-thirds of the normal rate.

Cogeneration

The House voted to allow a 10% tax credit for investment in new cogeneration facilities, called “combined heat and power systems.” The tax credit is 10% of the capital cost of the project.

To qualify, a cogeneration facility must produce at least 20% useful thermal output, and it must have an energy conversion ratio of at least 70%.  That means the energy content of the electricity must be at least 70% of the energy content of the fuel used to produce it. (The conversion ratio is 60% for smaller projects of 50 megawatts or less in size.) The 20% thermal output test may be hard for many companies to meet.  The test to be a qualifying cogeneration facility under the Public Utility Regulatory Policies Act used to be only 5% useful steam output, and this was often difficult to reach.

Some projects will have to choose between tax credits and slower depreciation.  Any taxpayer who claims a tax credit on his project could not depreciate it faster than over 15 years using the 150% declining-balance method.  Thus, there would be no tradeoff for most gas- and coal-fired power plants, but there would be for projects that use waste fuels.

The credit can only be claimed on new projects placed in service during the period 2002 through 2006.

Clean Coal

The House voted two new tax incentives for investing in new “advanced clean coal technology facilities.” The two incentives are an investment tax credit for 10% of the capital cost of the project and a production tax credit whose amount varies from 0.1¢ to 1.4¢ a kilowatt hour of electricity, depending on the Btu content of the coal, the heat rate of the power plant and the year the project is placed in service.  Production tax credits could be claimed for 10 years after the facility is placed in service.

The list of what qualifies as an “advanced clean coal technology facility” is almost impossibly complicated.  The following technologies qualify potentially: advanced pulverized coal, atmospheric fluidized-bed combustion, pressurized fluidized-bed combustion, integrated gasification combined-cycle plants, and other technologies that have a carbon emission rate that is at least 15% less than conventional technology.  The project must reduce at least one kind of air emissions — sulfur dioxide, nitrogen oxide or particulates — below levels set in the bill.  There are also limits on the number of megawatts of installed capacity of each type of new technology that would qualify for credits.  For example, the limit for pressurized fluidized-bed combustion is 1,000 megawatts.  There is a separate limit on all projects of 7,500 megawatts.  A project would have to be certified by the IRS before the owner could claim tax credits.

The project could be a new power plant or a retrofit or repowering of an existing facility.

Section 29

The House voted to allow more time for taxpayers to place some oil and gas projects in service to qualify for section 29 credits.

Section 29 credits are tax credits for producing gas from coal seams, tight sands, Devonian shale, geopressured brine and biomass or for producing synthetic fuel from coal.  The tax credit was $1.059 an mmBtu for such fuels (other than tight sands gas) produced during calendar year 2000.  The amount is adjusted each year for inflation.  The credit was originally enacted in 1980 after the Arab oil embargo as an inducement to Americans to look in unusual places for fuel.  Credits run currently through 2002 on most gas projects.  However, the wells had to have been drilled by 1992 to qualify.  Credits for most syncoal projects and many landfill gas projects run currently through 2007.  Landfill gas and syncoal projects had to be in service by June 1998 to qualify.

The House voted to allow more time to place some new projects in service.  Taxpayers can drill new wells for producing oil from shale or tar sands or for producing gas from coal seams, tight sands, Devonian shale and geopressured brine.  Fuel from such wells drilled after the bill is enacted through 2006 would qualify for credits for four years, but not beyond 2009.  The credit would be 51.7¢ an mmBtu.  It would be adjusted for inflation starting in 2003.

Taxpayers could also build new landfill gas facilities.  Credits could be claimed on landfill gas projects put into service any time after June 1998 through 2006.  The credits would run for five years at 51.7¢ an mmBtu.  However, the credit would be only 34.5¢ an mmBtu in cases where the landfill is subject to federal new source performance standards.  Both amounts would be adjusted for inflation starting in 2003.

There is no extension for syncoal projects.

There would be an annual limit on the amount of production on which credits can be claimed from each new well or landfill gas facility.  The limit is 200,000 cubic feet of average daily output.

Indian Reservations

Projects on Indian reservations qualify currently for special rapid tax depreciation and wage credits tied to the number of Indians hired to work on the project.  A project must be operating by December 2003 to qualify.  The House voted to extend this deadline by another three years through December 2006 for power plants, gas pipelines and a few other assets.

Transmission Grids

The House voted to let any utility that transfers its transmission grid or shares in a transmission subsidiary to a regional transmission organization or other independent transmission company treat the transfer as an “involuntary conversion.” The transfer must occur before 2009.  Treatment as an involuntary conversion means the utility would not have to pay tax on any consideration it receives in return.  However, it would have to invest the consideration in other utility property within four years. “Utility property” is defined broadly to include power plants and gas pipelines.

Other Provisions

The House voted for a series of other tax changes that affect segments of the power industry.

It voted to let gas companies depreciate their gathering lines at gas fields over seven years and their distribution lines to customers over 10 years using MACRS depreciation.  The IRS has taken the position in court that such gas lines must be depreciated over 15 years.  The House action would apply to gas lines put in service after the House bill becomes law.  The House expressed no view on what the proper treatment was in the past.

The House adopted a compromise that municipal power companies negotiated with the investor-owned utilities concerning when municipal utilities that expand outside city limits in search of electricity customers would be allowed to continue using tax-exempt debt to finance their equipment.  The investor-owned utilities complained that they are at a disadvantage when competing against municipalities because they must use taxable financing.  The municipal power companies complain, in turn, that private electricity suppliers are poaching their larger customers, thereby undermining their ability to service their existing debts and forcing them to try to broaden their customer bases.

by Keith Martin, in Washington