A renewable production tax credit can be thought of as a reward that the federal or state government pays to companies that generate energy from renewable sources such as wind power.  The federal goverment currently offers a renewable production tax credit of 1.8 cents per kilowatt-hour. 

This tax credit should not be confused with an outright payment for the production of renewable energy.  As a tax credit, it can only be used to reduce the amount of taxes a firm owes  For example, if a firm produces 1,000,000 kilowatt-hours of energy from a wind turbine, that firm could reduce the amount of taxes it owes to the federal government by $18,000 ($0.018 x 1,000,000). 

This federal tax credit was put in place in 1992 and originally only applied to energy production from wind farms, granting a tax credit at the rate of 1.5 cents/kWh to be adjusted annually for inflation (currently at 1.8 cents/kWh). Since then, it has expired and been renewed several times. The most recent renewal, which took place in Sept. 2004, extended the enrollment period until the end of 2005 and broadened the eligibility requirements to include solar, geothermal, and biomass electricity production as well some other less common forms of renewable electricity generation, such as bio-digesters.

Production tax credits can hold significant value to renewable energy producers under the right circumstances. One serious limitation is that any credits in excess of a firm's tax liability are lost.  However, if a company is able to use all of their credits, a production tax credit can essentially decrease their renewable energy production costs by the amount of the credit.  For example, a wind farm that produces electricity at a cost of 4.0 cents per kilowatt-hour could use the credit to effectively reduce that cost to 2.2 cents per kilowatt-hour, making the wind farm much more competitive with traditional coal-fired or gas-fired electricity generators.

It is important to note that this tax credit is a corporate tax credit, meaning that it does not apply to residential renewable energy production. Additionally, participating wind facilities are only eligible to receive the credit for their first ten years of power production, which is much shorter than the lifetime of the average wind farm (20-30 years). For the newly eligible technologies mentioned above, this time period can vary, as can the production credit rate, depending on the renewable technology being used.

Currently no states offer production tax credits of their own, most likely because there is already a federal incentive in place.   In addition, lower state tax rates makes it more difficult for producers to take full advantage of the resulting tax credits. However, some states offer renewable equipment purchase tax credits, where the purchaser of an energy system can receive a credit equal to a percentage of the system purchase price.   A few states, such as Minnesota even offer production payments meant to include those not eligible for federal programs.  At the moment, Michigan does not offer any similar incentives.

You can search for more information on the Federal Renewable Production Tax Credit and state production incentives and tax credits at the Database for State Incentives for Renewable Energy (DSIRE) and at the American Wind Energy Association webpage.

Wind Power in the Western Upper Peninsula