By David E. Thring langmichener.ca
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Renewable Portfolio Standards
Emission Reduction Credits
Provisions in the Income Tax Act (Canada) (“ITA”) allow most expenditures made to develop a test wind energy project to qualify as a “Canadian renewable and conservation expense” (“CRCE”).
Under the ITA, “Canadian exploration expense” (“CEE”) includes any CRCE incurred by a taxpayer. Consequently, a corporation that is developing a wind farm can issue flow-through shares to investors. The corporation can renounce CEE incurred by it and, subject to certain conditions in the ITA, the owners of the flow-through shares will be deemed to have incurred CEE renounced by the corporation and will be able to deduct 100% of CEE allocated to them from their other income.
Expenses that are eligible to qualify as CRCE include the cost of feasibility studies and wind studies, the cost of preparation and negotiation of power purchase agreements, site approval and certain site preparation costs, and the cost of test wind turbines. The number of test wind turbines that can be installed at a site is limited to intervals or space between turbines of not less than 1.5kilometers for a test period of at least 120 days before in-fill wind turbines may be installed.
The wind power production incentive (“WPPI”) is paid by the federal government to developers for the first 1,000 MW of newly installed wind energy generation capacity between 2002 and 2007.
The WPPI incentive can be claimed for every kilowatt hour of net production during the first 10 years of production at the rate of $0.01 per kilowatt hour if the project is commissioned before March31, 2006, and $0.008 per kilowatt hour if the project is commissioned after March 31, 2006 but before March 31, 2007. Industry participants are hopeful that the federal government will extend or increase the WPPI.
Under the federal government’s market incentive program (“MIP”) electrical utilities, retailers and marketers can apply for reimbursement for market-based programs that promote the sale of electricity from wind energy to residential and small business customers. The federal government will provide a short-term financial incentive of up to 40% of the eligible cost of an approved project, to a maximum contribution of $5 million per program. This particular incentive may be of more interest to a purchaser or distributor of electricity generated by a wind farm, rather than the owner or developer.
Renewable portfolio standards
The federal government’s “purchase of electricity from renewable resources” (“PERR”) program aims to provide leadership towards the development of consumer markets for electricity generated from wind and other renewable sources. This initiative commits the federal government to purchase electricity from these sources for use by federal facilities.
The Ontario government has set targets of generating 5% (1,350 MW) of Ontario’s total energy capacity from renewable sources by 2007, and 10% (2,700 MW) by 2010. A recent Request for Proposal seeking an additional 300 MW of new, renewable electricity capacity for Ontario constitutes the first step towards attaining these renewable energy targets.
The government of Ontario has also recently amended the Electricity Act, 1998 to restructure Ontario’s electricity sector, encourage the expansion of electricity supply and capacity, including supply and capacity from alternative and renewable energy sources such as wind energy, facilitate load management and electricity demand management, encourage electricity conservation and the efficient use of electricity, and regulate prices in parts of the electricity sector.
Under the ITA, an accelerated depreciation rate of 30% per annum is available, subject to various qualifications and limitations, for capital assets which qualify under Class 43.1 and are used to generate energy from renewable and alternative energy sources in Canada.
Ontario has recently announced its intention to retroactively revoke tax incentives to generate electricity from renewable sources that had been passed into law in 2002. The 2002 legislation had provided accelerated asset depreciation and a 10-year tax holiday from income and property taxes for corporations that generate electricity from renewable sources.
Just two tax incentives for such activities will remain in Ontario. First, capital properties bought between November 25, 2002 and January 1, 2008 that are used to generate electricity from renewable sources are excluded from the computation of capital tax. (Capital tax is generally payable by corporations with taxable paid-up capital in excess of $7.5 million at a rate of 0.3% of the corporation’s paid-up capital, liabilities, retained earnings and other surplus accounts). Second, an owner of a generating facility that delivers electricity to either the grid controlled by Ontario’s Independent Electricity Market Operator or to any other person in Ontario, is entitled to a rebate of retail sales tax paid upon tangible personal property incorporated into such a facility.
Emission reduction credits
It is anticipated that markets for emission reduction credits (“ERCs”) may develop to allow trading in ERCs in North America, and that this may occur whether or not the U.S. formally adopts the Kyoto Protocol. Generating electricity from renewable sources such as wind can create ERCs by displacing electricity generated from fossil fuel sources. The ERCs can then be purchased and used by businesses that generate and emit greenhouse gases – CO2and other gases – to effectively lower their overall emission levels and to meet regulatory or industry standards. Consequently, ERCs represent a potential revenue opportunity for developers of wind energy projects, but the market is at an early stage of development.
The federal and Ontario governments have created financial incentives that will be attractive to developers of wind energy projects. Non-financial incentives, such as relaxing of environmental review thresholds and facilitating grid access for wind generation projects, would also be of considerable assistance. These initiatives are welcome and reflect a commitment by governments to develop a clean, sustainable energy supply that can supplement nuclear and fossil fuel energy sources. It should also be noted that this paper has only discussed financial incentives available in Ontario. Other provincial governments have introduced a variety of incentives to stimulate development of wind energy projects including, for example, the refundable tax credit, which is available in Quebec.