Industry downcast as US Treasury omits tax credits to third party offshore wind grids

US Treasury Department guidance issued last month clarified that subsea cables and onshore power treatment facilities are integral parts of an offshore wind generation project, and so are eligible for investment tax credits (ITC) included in the landmark Inflation Reduction Act (IRA).

The credits were not extended to third-party ownership of trunk line or offshore transmission connecting multiple projects into a system, however, disappointing industry.

“This was disappointing, because IRS [Internal Revenue Service] precedents allow in non-offshore wind circumstances separate ownership of key parts of energy systems,” he added.

The IRS is the tax collection and policy making arm of the Treasury Department.

Offshore transmission

Variously referred to as a trunkline, backbone, or mesh, an offshore transmission system would connect multiple projects via submerged high voltage direct current (HVDC) lines and tie them to the onshore grid using fewer export cables. Its benefits are widely recognised by industry and states.

“That value consists of lower costs, by maximising the value of each point of interconnection on the grid and sharing the costs of delivering wind to load, reduced environmental and community impacts, by minimizing the number of cables,” said Bruno.

Such systems would also add grid capacity, flexibility, and efficiency to existing transmission.

The lack of ITC could hinder development, however.

The state instead awarded a project for onshore infrastructure that would bring multiple project radial lines into the same point of interconnection (POI).

“If government is providing financial support via the ITC to a generator lead line attached to a single offshore wind generation project, from a policy perspective, that ITC support should encompass a transmission system,” said Bruno.

“The risks of developing each are similar and the benefits of a transmission system are more substantial.”

Transmission exclusion

Transmission has historically been excluded from gaining federal tax incentives, a precedent upheld by the IRA.

Treasury’s guidance considers subsea cables and onshore power facilities as integral to the project and requires that they have the same owner as the wind farm itself.

This effectively excludes third-party ownership, but there is room for multiple projects to collectively own an at-sea grid in what is known as tenancy-in-common.

“If you had a transmission line that served multiple projects, and you had a tenancy-in-common structure, it's possible that that might work,” said Martin.

“But it would require threading some tax issues and regulatory issues,” he cautioned.

Theodore Paradise, partner for Energy, Infrastructure, & Resources at law firm K&L Gates, said “a shared planned project is one path, but complicated.”

HVDC advantage

Paradise instead suggested there’s a few ways to think about HVDC given its unique characteristics of providing traditional generation functions beyond simple transmission. “An AC [alternating current] system just delivers power, while an HVDC system can provide black start, help with frequency, and voltage regulation,” he said.

‘Black start’ refers to restarting the grid after a blackout event, a complicated move that involves slowly reintroducing power into the grid to get the system flowing.

The transmission technology’s characteristics might not be enough to move it into another class of energy property, though, he said, and that seeking “stand-alone HVDC is asking for Treasury to move off where they have been in the proposed regulations."

Another potential path Paradise highlighted “is to reconsider whether HVDC systems might be in ‘functionally interdependent’ rather than ‘integral’ to the wind farm. That’s an area that needs more exploration to see if the distinction may make a difference in allowing for separate ownership.”

It’s “going to take some creative thinking,” he said. “Even if Treasury doesn’t move off this interpretation, the significant benefits of planned HVDC systems shown in several studies may nevertheless make them more attractive and cost effective at scale for states,” Paradise noted.

Even if Treasury stands firm on excluding offshore transmission from IRA investment tax credits, the benefits might be sufficient to spark forward momentum.

From an investor perspective, the offshore transmission opportunity is “the ability to get in at the early stage of a remarkably important industry that will grow enormously over the coming decades, and with returns, that if the project is successful, are anchored in in the rate base,” said Anbaric’s Bruno.

“The successful project represents a 25-to-30-year contracted rate of return, which is attractive,” added Bruno.

“While it [ITC] is important, it's a nice to have, not a must have,” he said.