New Mexico Attracts Jobs and Revenues with Renewable Energy Tax Credit

New Mexico has abundant fossil fuel resources: in 2013, it ranked sixth in the nation for crude oil production, seventh for natural gas and twelfth for coal. It also has some of the best solar and wind energy resources in the United States. Over the past decade, New Mexico leaders have positioned the state as a major growth area for renewable energy by developing effective policies and programs, along with financial and other incentives, including a state-level renewable energy production tax credit. These policies have attracted millions of private and federal dollars, generated construction and manufacturing jobs, and boosted state revenues from land leases for renewable energy projects. They are also helping diversify New Mexico’s electricity production, thereby reducing the potential impacts if the price of fossil fuel-fired electricity increases in the future.

Production tax credits (PTCs) give investors an incentive to build or finance renewable energy projects. They typically are offered for a fixed period to help new industries scale up. Unlike investment tax credits, which reward investors for building a project and typically are paid up-front when the project is put into service, PTCs are paid over time and are based on the amount of electricity generated.

Offering a PTC helped New Mexico compete with other Western states for energy investments. Those states are major energy producers with excellent wind, solar, and/or geothermal resources. In particular, Colorado has a well-developed green economy, a skilled labor force, and world-class research institutions that make it a regional leader in clean energy and environmental technologies. To attract investments in its clean energy sector, New Mexico needed to provide equally attractive business conditions for renewable energy companies.

Attracting Wind Developers

In 2002, New Mexico’s public utility commission adopted a Renewable Portfolio Standard that required investor-owned utilities to generate 5 percent of their electricity from renewables by 2006 and 10 percent by 2011. Five years later the legislature increased New Mexico’s renewable electricity targets to 15 percent of electricity by 2015 and 20 percent by 2020. Before it set those targets, New Mexico had very little renewable energy online, so the state had to scale up renewable energy production rapidly.

To attract energy developers, the state hired an international firm to produce “investment grade” maps of the state’s wind resources. This data gave companies reliable information to make decisions for siting wind projects. The state then offered wind and biomass energy producers a PTC of $0.01 per kilowatt-hour against their corporate taxes. To qualify, companies had to develop at least 1 megawatt of generating capacity before January 1, 2018. (This size requirement ensured that the credit would support construction of commercial-scale projects.) Each qualifying project could earn credits for producing up to 400,000 megawatt-hours of electricity annually over its first 10 years of operation. Solar energy was later added to the state’s PTC, so that solar producers can now receive credits that average $0.027 per kilowatt-hour for their first 200,000 megawatt-hours per year, generated over 10 years.

In the first 10 years in which New Mexico offered the production tax credit, developers built 10 wind energy projects with 794 megawatts of generating capacity and 21 solar projects with 232 megawatts of capacity. Additional projects on a waiting list of tax credits would provide another 677 megawatts of wind and 65.5 megawatts of solar (the state caps the total number of credits that can be awarded each year).

Energy Projects Generate Land Revenue

Wind and solar energy projects in New Mexico have generated approximately $2 billion in construction activity. Moreover, because many of the plants are sited on lands leased from the State Land Office, state land leases are projected to provide $574 million in revenues for the state, or about $15 million per year. Other renewable energy projects on private lands are providing supplemental income for landowners, many of whom are farmers and ranchers.

“We have a lot of ranchers who are not making enough money from grazing and farming. This is a great opportunity for them to use their land and gain some economic benefit,” says Erica Velarde, clean energy program manager for New Mexico’s Energy Conservation and Management Division. Today New Mexico is a recognized state leader in the renewable energy sector. In 2013, Ernst & Young ranked New Mexico sixth nationally for wind and fourth for solar in its state renewable energy attractiveness indices. Six other states have enacted renewable energy production tax credits. The state may increase the number of credits available under the PTC to accommodate demand from energy companies. “Industry wants to raise the cap, and the legislature is considering it,” says Velarde.

This blog post was written by Jenny Weeks and Warren Leon, and was originally published in the Clean Energy States Alliance (CESA)’s 2015 report “Clean Energy Champions: The Importance of State Policies and Programs.” This report provides the first-ever comprehensive look at the ways states are advancing clean energy and suggests how to further encourage clean energy growth. For more information about CESA, please visit www.cesa.org.