Oklahoma tax fight is a taste of battles to come

O-O-O-O-Oklahoma, where the wind farms spin upon the plain,
And lawmakers gas but do not pass,
a tax bill to stop credits again.
O-O-O-O-Oklahoma, ev’ry night Invenergy and friends,
Go to bed and think: ‘Will the state sink,
our plan before the PTC ends?’

When I win the contract to re-write ‘Oklahoma!’ – hey Rodgers & Hammerstein estate, call me – I’ll make it about wind farms. The state’s approach to wind is as dramatic as any Broadway musical.

This week, the state Senate voted against a plan to end a lucrative tax credit for the wind sector. Under current rules, project owners earn ‘zero-emission tax credits’ that they can redeem to cut their state tax bills. This was introduced in 2003 to support the fledgling wind industry. It was ruled out for new projects from last July.

However, this week the Senate rejected a plan to take these cuts further and retroactively change the rules for working wind farms.

Some in state government wanted to cut these tax benefits to save $500m over ten years to plug an $870m hole in the state budget. It was rejected, rightly in our view. This would have done huge harm to the business models of wind farm owners in Oklahoma; to the confidence of investors; and would have led to legal action too.

This is significant for the wind industry as it gives a taste of battles yet to come. Yes, the business case of wind is getting stronger, as the cost of producing electricity from wind farms falls.

But the upshot is that states will look at whether incentives they are giving the wind industry are too much. We’ve seen retroactive changes in countries like Spain with disastrous results, and we’ll surely see it at state level too. In fact, it’s often the most generous governments that then have to act the toughest. This is because generosity attracts business – but can require bigger cuts later.

In the case of Oklahoma, this also creates difficulties for one of the country’s biggest wind projects: Invenergy and American Electric Power’s $4.5bn 2GW Wind Catcher.

The companies are hoping to win final backing by the end of June, which is key if they are to complete it in 2020 to win full backing from the wind production tax credit. They also need to secure regulatory backing in Arkansas, Louisiana and Texas.

But Wind Catcher has been held up by the thorny question of ‘cost recovery’ by the developers in Oklahoma. Invenergy and AEP say that consumers should foot the bill for the $4.5bn development because it would generate greater savings than that for the public, but a judge ruled against them in February. AEP has been working hard to win backing from various groups but the regulators are key.

No doubt it’ll be a big talking point at AWEA Windpower next week.

There will probably only be a limited amount we can read into the final decision at Wind Catcher when it comes out.

This is the largest single-site wind farm planned in the US, and so there is a sense in which any decision here is exceptional and a one-off. But it will indicate how favourable Oklahoma is likely to be for wind investors in future, and how tough states will be when it comes to offering support to wind firms.

And this is the challenge for investors in the coming years.

In states like Oklahoma, it is well-established that wind farms can bring financial benefits; and that this sector is a serious competitor to the oil and gas industries. But investors have to keep making the point that the sector still needs political backing, even if this doesn’t take the form of new financial subsidies; and that wind developers will only continue to be active in states that don’t change the rules of the game during the lifespan of their schemes.

Good sense has prevailed in Oklahoma once this month, but we'll see other states look to retroactively change support mechanisms; and, when we do, the industry must be ready to fight its corner.

Not a sexy message – it's hardly the stuff of a rollicking Broadway number – but important nonetheless.