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Green for Green: Financial Incentives Available for Renewable Energy Development

Client Alert

Authors: Jane C. Luxton, Todd B. Reinstein and William J. Walsh

1/20/2010

On January 8, 2010, President Obama announced the award of $2.3 billion in tax credits for clean energy manufacturing operations in 43 states, from funds allocated under the 2009 stimulus package.1 The previous month, the U.S. House of Representatives included a provision in the Jobs Bill it passed on December 16, 2009 that provides $2 billion in funding to restore money to the Department of Energy’s loan guarantee program for renewable energy that was diverted to pay for the "cash for clunkers" initiative last summer.2 The Senate will take up the bill early in 2010, and some clean-energy advocates in Congress and elsewhere are urging that more funds be appropriated for renewable energy incentives.

Make no mistake: the U.S. Government is working hard to promote renewable energy development and doing so in the most meaningful way possible – with loan guarantee programs, grants, and tax breaks. Many states have adopted additional economic measures that incentivize in-state renewable energy projects. But the hodgepodge nature of these programs – authorized by different pieces of legislation, administered under an array of regulatory regimes, subject to varying requirements and deadlines – presents a serious challenge to interested parties seeking financial assistance for renewables projects.

This article summarizes the main categories of economic incentives available for renewable energy development, along with key information about eligibility and availability.3 The four types of programs are: (1) U.S. Department of Energy (DOE) loan guarantees, (2) federal tax incentives, (3) other federal government economic incentive programs; and (4) state programs.

1. DOE Loan Guarantees

DOE administers two large-scale loan guarantee programs for clean energy generation and manufacture, which fall under Sections 1703 and 1705 of the Energy Policy Act of 2005 (EPAct), as amended by the American Recovery and Reinvestment Act of 2009 (ARRA).4 Major aspects of these programs are presented in the following table5:

Program

 

Key Elements

 

Eligibility

 

Other

 

1703

Loan guarantees for early commercial use of innovative clean energy technologies.

Aggregate funding for 1703 and 1705 of $100 billion.

Permanent program under Energy Policy Act of 2005

 

Biomass, geothermal, hydropower, solar, wave/tidal, wind (also carbon capture and sequestration, coal gasification, nuclear, fuel, vehicles, and energy transmission systems).

Projects must avoid, reduce, or sequester air pollutants or greenhouse gases, using significantly improved technologies compared to commercially available methods.

Funding depends on annual Congressional appropriations.

Priority given to loans of $25 million or more.

Borrower must pay cost of loan guarantee.

1705

Loan guarantees for renewable energy systems and facilities that manufacture components for renewable energy.

Aggregate funding for 1703 and 1705 of $100 billion; target for 1705 program is $4 billion to cover credit subsidy costs ($6 billion if cash-for-clunkers funding is restored).

Temporary program added to EPAct by ARRA.

Application must conform to Financial Institution Partnership Program (FIPP).

Biomass, geothermal, hydropower, solar, wave/tidal, wind (also energy transmission systems). Focus is on commercially available technologies.

Applicants must be commercial, non-profit, or public financial institutions, partnering with project developers.

First solicitation released Oct. 2009 for energy generation projects; manufacturing solicitation expected in early 2010.

Applications considered on rolling basis, with a cutoff for Part I application of Aug. 24, 2010.

Projects must comply with Davis-Bacon and NEPA. NEPA considerations disfavor more complex sites that would require an environmental impact statement (EIS) as opposed to a simpler environmental assessment (EA), given the September 30, 2011 construction start deadline.

Authority for program expires Sept. 30, 2011. All approved projects must begin construction by Sept. 30, 2011.

Minimum 20 percent equity requirement (may include funds from grants and tax credits, but caution is advised in relying on these in an application). Up to 80 percent of senior loan amount (64 percent of total project costs) may be guaranteed by DOE.

Bank must retain 20 percent of the loan amount ("skin in the game").

Application fees are $50,000 ($12,500 for Part I) and nonrefundable.

2. Federal Tax Incentives

As with the DOE loan guarantee programs, the 2009 stimulus package expanded existing renewable energy tax incentives and added new ones. The three principal programs are Sections 45 and 48 of the Internal Revenue Code of 19866 and Section 1603 of ARRA.

Section 45 provides a production tax credit (PTC) for the production and sale of renewable energy to an unrelated taxpayer. With changes made under ARRA, the credit extends over a ten-year period and currently ranges from 1 cent to 2.1 cents per kilowatt (KW), depending on the type of power (these rates are adjusted annually for inflation). Facilities must be qualified (as defined in the statute). The modifications added under ARRA have expanded the range of structuring and tax allocation arrangements that are permissible.7 For example, taxpayers with qualifying facilities under Section 45 may temporarily receive an investment tax credit under Section 48 in lieu of the Section 45 credit. In certain circumstances the immediacy of the investment tax credit may be more beneficial than receiving the variable credit over ten years under the Section 45 provisions.

Section 48 makes available an investment tax credit (ITC) for equipment that uses certain renewable energy sources to generate electricity or heating or cooling. Eligible sources include solar, small wind (less than 100 KW), fuel cells, geothermal, microturbines, and heat pumps, with tax credits ranging from 10 to 30 percent. The tax credit is designed with some flexibility permitted; for example, it may be allocated within sale-leaseback arrangements, but there are limitations and considerations that require careful planning to maximize tax savings. Most applications of the Section 48 credit expire at the end of 2016.

In addition to the regular provisions of Section 48, ARRA added a new section 48C, allowing an ITC of 30 percent for qualified tangible personal property placed in service at manufacturing facilities for "qualified advanced energy projects." Qualifying projects are those that re-equip, expand, or establish a manufacturing facility for the production of renewable energy; fuel cells and related capabilities for electric or hybrid-electric vehicles; renewable energy electrical grids; carbon capture and sequestration; energy conservation, including renewable fuels and lighting technologies; and "other advanced energy property designed to reduce greenhouse gas as designated by the Secretary of Treasury." In August, the Treasury Department released guidance for this program, including useful definitions, in Notice 2009-72.8 Importantly, to qualify for the initial round of this tax credit, taxpayers must have submitted an application to DOE and the Internal Revenue Service (IRS) by Oct. 16, 2009. As noted at the beginning of this article, awards were announced Jan. 8, 2010, totaling the entire $2.3 billion originally allocated under the program. Future award rounds may be established if Congress appropriates additional funds.

Section 1603 of ARRA authorizes the Treasury Department to pay grants in lieu of tax credits for specified renewable energy property. The payments are available for solar, wind, geothermal, and other renewable energy investments placed in service in 2009 or 2010 that would qualify for a tax credit under Sections 45 or 48, discussed above. On July 9, 2009, Treasury and DOE announced guidance for the program, which sets forth application procedures and clarifies eligibility requirements.9 To date, the Treasury has disbursed almost $2 billion under this program.

3. Other Federal Government Programs

Additional federal programs tend to be specialized, and often are focused on assistance to university and other scientific researchers. For example, DOE has a grant program administered by its Advanced Research and Projects Agency (ARPA) that has been active in the areas of biofuels, wind, and solar technologies, as well as hybrid vehicles and their power sources. One of these initiatives targeted transformational energy technologies ready for commercialization. Other ARRA-funded grants totaling $32.7 billion have been awarded for state and private-sector projects across a spectrum of technologies and applications.10 However, these programs are not currently in a position to accept applications unless new funding is made available or the application process is reopened, because money remains undistributed after the first round of announced grants.11

Other federal programs include the U.S. Department of Agriculture’s Rural Energy for America Program (REAP), which provides grants to agricultural producers and rural small businesses for renewable energy systems and energy efficiency improvements. Eligible projects include those that produce energy from wind, solar, biomass, geothermal, hydropower, and hydrogen-based sources. Funding is available through 2012.12

4. State Programs

State incentives for renewable energy vary considerably. New Jersey and California have been in the vanguard of efforts to promote renewable energy, using grants, tax breaks, and credible measures that encourage utilities to buy renewable energy generated by others. Typically states motivate the utilities by specifying a percentage of their energy output that must come from renewable sources, either produced by the utility or purchased from others (a renewable energy portfolio standard).13 Currently 29 states have mandatory programs, which can generate marketable credits. Up to 30 percent of the funding for some renewables projects, particularly in the area of solar cells, comes from the sale of these credits to utilities. As the number of states with renewables portfolio programs continues to change, this is an area that warrants careful attention.14

While many states offer incentives for residences, schools, and public hospitals, and in the area of hybrid vehicles and alternative fuel, the table below gives a quick sample of the status of programs available to industry and commercial operations in a representative collection of states.15 The richness of the programs available and the renewable technologies to which they apply differ significantly across states, making it important to look closely at individual state incentives programs.

State16

 

Tax Credit

 

Grant/Rebate

 

Loan

 

Utilities Portfolio Standard
(amounts and criteria vary widely)

 

CA

 

Yes (solar only)

 

Yes

 

No

 

Yes, 20 percent by 2010, 33 percent by 2020,
no credit trading (under discussion)

 

IL

 

Yes

 

Yes

 

No

 

Yes, 25 percent by 2025, credit trading allowed

 

MI

 

Yes

 

Some grants available, plus rebates

 

No

 

Yes, 10 percent by 2015, credit trading allowed

 

NV

 

Yes

 

Yes

 

No

 

Yes, 25 percent by 2025, credit trading allowed

 

NJ

 

Yes

 

Yes, including rebates in the form of tradeable solar renewable energy certificates

 

Yes

 

Yes, 22.5 percent by 2021, credit trading allowed

 

NY

 

Yes (green
buildings only)

 

Yes

 

No, closed

 

Yes, 29 percent by 2015, no credit trading

 

PA

 

Yes (wind only)

 

Yes

 

Yes

 

Yes, 18 percent by 2021, credit trading allowed

 

Financing Strategies

As a practical matter, given the continued lethargy in capital markets, project developers may need to combine public and private financing, in increasingly creative ways. Thus, project designers should consider the following approaches.

First, interested parties should systematically evaluate available funding opportunities and how they may fit into project planning. Programs differ significantly in criteria, scope, and timing. If the project has site flexibility, there may be clear advantages in selecting one state over another, particularly in light of varying renewable energy portfolio requirements and differing incentives for particular types of renewable energy.

Second, applications for funding need to meld a clear, technically solid description of the technology with an explanation of how it satisfies the policy preferences embedded in the incentive program, as well as the requirements that apply to the specific grant or loan solicitation. For example, U.S. ownership is not a prerequisite, as long as the operation is in the United States. Funding opportunities under ARRA give priority to proposals that maximize job creation, and benefits to local communities should always be stressed.

Third, funding applicants need to identify key obstacles to acceptance of the proposal. For instance, DOE’s 1705 loan guarantee program requires projects to be "shovel-ready" by September 30, 2011. As a practical matter, this may eliminate proposals that would require a full Environmental Impact Statement (EIS) under the National Environmental Policy Act (NEPA), which normally takes at least a year to complete, in favor of those that can proceed more quickly with a simpler NEPA Environmental Assessment (EA), such as reusing a previously contaminated brownfield, mining site, or industrial facility rather than a pristine "greenfield" location. Funding for numerous federal grant programs was provided by ARRA and has now been allocated. Parties interested in additional funding may want to consider the advisability of a legislative strategy.

Fourth, the support of local and federal political leaders can be critical. DOE has been in touch with states and communities to educate them about the bank-backed funding requirements in its loan guarantee program, with the thought that local assistance in facilitating partnerships between financial institutions and project developers can enhance the success of the application.

Fifth, close coordination among the developer, design and environmental engineers, private-sector financing sources, and lawyers is essential to avoid costly missteps and delays. Most deals involve a combination of private and public funding sources, and good planning results in cost-effective structuring of the project.

Sixth, continuing communications are valuable with the agency administering the grant, rebate, or loan guarantee, or approving the tax credit, to make sure all submissions are complete and to address any issues that arise.

Conclusion

There is no question that navigating the complex web of economic incentive programs for renewable energy development presents daunting challenges. The process may not be intuitively obvious, particularly to private-sector business interests that are more accustomed to direct deal making and decisions driven by economics. However, the government incentive regime has its rules, rhymes, and reasons, even if they are not immediately apparent. These sources of funding can mean the difference in whether a deal happens or not. With a clear understanding of how the programs work and a creative strategy that weaves together technical aspects, policy savvy, and practicality, obtaining some degree of government funding is a realistic goal and can help make the project a reality.

Endnotes

1 American Recovery and Reinvestment Act of 2009, Pub.L. 111-5. See A. Bull, "Obama Awards $2.3 Billion Clean Energy Tax Credits," Reuters, Jan. 8, 2010, available at http://news.yahoo.com/s/nm/20100108/ts_nm/us_obama_taxcredit.

2 H.R. 2847.

3 Should Congress enact federal climate change legislation with cap and trade provisions, the funding picture for renewable energy projects would change radically. Such a program’s requirements for the purchase of greenhouse gas emission allowances and the sale of carbon offsets attributable to renewable energy would create major new funding sources. This issue is not within the scope of this article, but for more information, see Jane C. Luxton and William J. Walsh, "Climate Change Legislation: It’s Time for Businesses to Take It Seriously," Pepper Hamilton Sustainability, Clean Tech, and Climate Change Alert, July 20, 2009, available at www.pepperlaw.com/publications_update.aspx?ArticleKey=1549.

4 Energy Policy Act of 2005, Pub.L. 109-58.

5 These programs have numerous other conditions and "fine print." Additional information is available at DOE’s Web site, see http://www.energy.gov/recovery/renewablefunding.htm.

6 Unless otherwise stated, all tax-related references to "Section" are to the Internal Revenue Code of 1986, as amended.

7 For more information, see Todd B. Reinstein, "American Recover and Reinvestment Act of 2009 Enhances Renewable Energy Tax Provisions," Pepper Hamilton Energy Tax Alert, Feb. 18, 2009, available at www.pepperlaw.com/publications_update.aspx?ArticleKey=1397.

8 See Todd. B. Reinstein, "Treasury Notice 2009-72 with Application Rules for Section 48C," Pepper Hamilton Energy Tax Alert, Aug. 14, 2009.

9 See http://www.treas.gov/recovery/1603.shtml.

10 See http://www.energy.gov/recovery/breakdown.htm.

11 See http://www07.grants.gov/search/search.do;jsessionid=
ClRGLTjMtgG9ymhPy7mKftHTTD7Kpy2GZRTbhZwQrNC52RTKlhJQ!-1179711943?mode=VIEWREVISIONS&revNum=8
.

12 More information is available at the USDA Web site: http://www.rurdev.usda.gov/ga/tenergy.htm.

13 See http://www.dsireusa.org/incentives/index.cfm?EE=1&RE=1&SPV=0&ST=0&searchtype=RPS&sh=1. Passage of a comprehensive energy bill, either as part of climate change legislation or independently, may result in such standards becoming mandatory nationwide.

14 States that have not traditionally had robust programs are looking to adopt major incentive programs, such as Maryland. See "O’Malley Proposed New Energy Policies," Washington Business Journal (Jan. 15, 2010) http://washington.bizjournals.com/washington/stories/2010/01/11/daily84.html.

15 See generally http://www.dsireusa.org/.

16 Many counties and municipalities offer additional programs.

Jane C. Luxton, Todd B. Reinstein and William J. Walsh

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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