Tax plan puts South Dakota wind industry on edge

Source: By Patrick Anderson, Sioux Falls Argus Leader • Posted: Wednesday, December 20, 2017

Wind energy companies in South Dakota are facing financial uncertainty from Washington D.C. on the cusp of some of the largest growth in state history.

Already a supplier of hundreds of South Dakota jobs, wind energy is poised to expand its regional presence, drawing deals from tech giant Google, Apex and what will eventually be the largest wind farm in South Dakota history, a $1 billion investment by Xcel energy in the state.

But Congress’ tax overhaul, which is all but certain to go to President Donald Trump’s desk this week, originally looked to water down federal tax credits for wind energy, alarming the industry and potentially endangering its growth.

While it’s still hard to tell exactly how the final bill will affect the wind energy industry, the bill and its negotiation process could hurt manufacturers and service companies in Sioux Falls other parts of eastern South Dakota, say industry advocates.

“We’re going to see the largest construction of wind in South Dakota in the next two to three years,” said Steve Wegman, an analyst for the South Dakota Renewable Energy Association. “What this industry needs, like all industries in their infancy, is stability. And that’s all they’re looking for.”

Layoffs already

Shifting tax policies for wind energy have already been blamed for an exodus of jobs from the state.

Molded Fiber Glass announced plans to close its Aberdeen facility and lay off 409 people, including technicians, floor managers and office staff.

Molded blamed market conditions and “proposed revisions to tax policies” for the decision to close its Aberdeen plant. The loss of its only client, GE, likely hit closer to home than yet-to-be-signed tax proposals from the nation’s capital, as of the Sioux Falls Business Journal’s Monday deadline.

But the company was looking for a new customer before the decision, according to paperwork filed with the state Department of Labor and Regulation.

The Ohio-based company made wind turbine blades for GE, which acquired LM Wind Power in April. LM makes turbine blades and has facilities in Grand Forks, North Dakota.

Questions of future government funding might not be the main reason for the closure of the Aberdeen plant, but many wind companies are taking extra precautions because of the proposals from Congress, said Beth Soholt, a wind energy advocate based in St. Paul.

Soholt is executive director of Wind on the Wires, an advocacy group that works in nine Midwestern states.

“Any business that’s facing uncertainty does a couple of things,” Soholt said. “They look to limit current spending. They put discretionary spending on hold.”

‘It’s a fragile industry’

Wegman estimates the tax proposals in Washington threatened nearly $1.5 billion in investments in South Dakota’s fledgling wind industry, as well as nearly 960 megawatts of new wind energy capacity.

“It wipes it off the map,” Wegman said. “It’s a fragile industry.”

Marmen Energy employs more than 300 people at its wind tower manufacturing facility in Brandon. A local representative for the company expressed disappointment last week in the tax proposals from both the U.S. House and Senate.

In an emailed statement last week prior to Friday’s compromise bill, Marmen plant manager Jim Groninger said both bills would lead to “catastrophic results” for the Brandon plant and the industry in general.

“We chose the great state of South Dakota for many reasons including a pro-wind energy state, a central location to gain access to new market shares and skilled and dedicated workforce availability,” Groninger said. “Needless to say, up to now we have been more than satisfied.”

South Dakota’s wind production pales in comparison to neighboring states, but the Sioux Falls area is home to a number of businesses that build new parts, service old turbines and provide tools and equipment. These businesses, such as Marmen, Dakota Riggers and Tool Supply and Renew Energy Maintenance, employ hundreds locally while serving national customer bases.

Renew provides jobs to more than 250 people, servicing and rebuilding wind turbine parts for some of the nation’s biggest wind companies.

“Our technicians, they travel all over the U.S. and some international work,” Renew spokeswoman Sarah Kreyer said.

Crucial credits on the table

Proposed tax reforms from the U.S. House of Representatives would have sliced away at the Production Tax Credit, a core driver to the development of new wind farms, industry advocates say.

Sending public dollars to wind energy projects based on kilowatt hours produced, the tax credit hung around for years as a question mark for developers, its existence strung together by one-year or two-year extensions.

“It was a boom-and-bust business for 15 years,” Wegman said.

In 2015, the industry negotiated terms with Congress that would phase out the tax credit by 2020.

The House bill’s original recommendation for the production tax credit would have superseded those terms, cutting the money to wind companies from 2.3 cents per kilowatt-hour to 1.5 cents and changing the qualification rules. The proposed measure would have slashed an estimated $11 billion in support for wind energy companies in the next 10 years, according to congressional researchers.

However, the House proposal didn’t make it to the compromise version of the bill released late Friday, preserving the original terms of the production tax credit phase-out.

But the House bill wasn’t the only proposal wind companies find troubling.

Tax proposals from the U.S. Senate do not include changes to the wind production tax credit, though experts are wary of the bill for different reasons. The compromise tax bill released late Friday includes Senate bill language that goes after the ability of wind energy developers to finance projects by selling renewable energy credits to banks.

The so-called Base Erosion Anti-Abuse Tax (BEAT) would tax foreign sales of such government credits.

South Dakota’s U.S. Sen. John Thune, who serves on the Senate’s Tax Committee, helped negotiate the original terms of the production tax phase-out in the 2015 PATH Act.

Thune has been working to find tax reforms that preserve the promises of the 2015 bill, he said in an emailed statement.

“While still not final, the tax reform bill before Congress will grow our economy and create jobs, and I’m working to ensure the PATH Act stays intact as part of the final bill,” Thune said late last week.

Untapped potential

South Dakota is on the verge of realizing its full potential as a producer and exporter of wind energy, Wegman said. The state’s topography and rural nature make it prime real estate for wind production, but its isolation and lack of infrastructure, especially transmission lines, have slowed progress.

The state’s first wind turbines were built by the city of Howard in 2002, offering just a sliver of the energy capacity provided by some of today’s more sizable projects. The years that followed brought only incremental growth until the Buffalo Ridge II project in 2011 added nearly 100 wind turbines across farmland near Brookings and Deuel.

The project had enough capacity to power more than 65,000 homes.

Even after adding more wind farms in the years since, South Dakota trails other states in the region with 977 megawatts of capacity compared to 2,746 in North Dakota, 3,499 in Minnesota, 1,328 in Nebraska and 6,911 in Iowa.

The state did not grow its wind power capability in 2016.

However, that should soon change.

Among the state’s ongoing wind projects are two wind farms slated for land near Brookings. Both were financed by Google in an effort to offset its energy footprint. The California-based company also paid for wind farms in northwestern Iowa and Oklahoma.

Google is not alone.

Geronimo Energy is working on a wind farm in Clark County that could have the potential to increase the state’s wind energy capacity by as much as 400 megawatts. The estimated economic impact on the local and state economy is $54 million over the next 20 years.

Xcel Energy announced plans to build the biggest wind farm to date in South Dakota, adding 600 megawatts of capacity near Grant, Deuel and Codington counties.

Xcel is also involved in a 300-megawatt wind farm planned for an area near Watertown. The project will be developed by Apex Clean Energy.


While federal tax dollars support the development of large-scale wind farms, those same farms pour billions of dollars back into local economies with jobs, property tax and sales tax payments, and payments to landowners.

Money from wind farms goes to local governments and South Dakota public schools.

But financing is difficult.

Large-scale wind farms are pricey, and financing can be difficult to find, Wegman said. Companies rely on the production tax credit to pay the hefty up-front costs and leverage additional dollars from selling bonds

Wind companies drew about $6 billion in new funding last year from taxpayers. Debt financing amounted to about $3.4 billion in new money, according to researchers with the Lawrence Berkeley National Laboratory.

“It would be like building an apartment building in Fort Thompson,” Wegman said. “There’s a need but do they have the economic wherewithal to pay for it?”

Advocates like Wegman aren’t just concerned about losing the money. The House bill broke the confidence the industry had placed in lawmakers in 2015 after agreeing to wean itself off federal funding.

Even if the final tax bill keeps much of the status quo in terms of wind energy, the industry has new cause to be leery.

“It appears in America, a deal’s not a deal,” Wegman said. “These people agreed to do this.”