Renewable Energy Projects
Federal Tax Incentives and Grants
John P. Boyd
Stephen J. (Seph) Wunder, Jr.
Clay M. Grayson
Renewable Portfolio Standards
• With the exception of South Carolina, nearly all of the states have
enacted (or are in the process of enacting) a renewable portfolio
standard (“RPS”), which requires that a certain portion of the
electric energy sold in the state
(or other jurisdiction) be sourced
from alternative energy
by a specified target year.
• A national RPS is likely on the way.
• Considering the current and expected enactment of RPSs, it is
projected that the supply of alternative energy over the next 10
years will not be sufficient to meet the demand requirements
pursuant to the RPSs.
Incentivizing Renewable Energy
• Unlike projects using traditional sources of fuel to
generate electric energy such as coal and natural gas,
projects powered by alternative energy sources have
historically struggled to be economically competitive.
• In light of this competitive disadvantage and the forced
ramp up of alternative energy pursuant to the RPSs, the
federal and state governments have responded by
enacting legislation that provides specified benefits to
help offset this disadvantage and to incentivize the
development and construction of alternative energy
projects
Federal Tax Incentives
• Economic viability of alternative energy projects often
turn on the availability of federal tax incentives
• Current federal incentives include:
– Production Tax Credits under section 45
– Investment Tax Credits under section 48
– Grant in Lieu of the Investment Tax Credit
• Economic conditions currently disfavor tax credits
Federal Tax Incentives
For purposes of qualifying for these
various federal tax incentives,
how are
“closed loop biomass”
and
“open-loop biomass”
defined?
Definitions – Biomass
•Closed loop Biomass means:
– Any organic matter from a plant
which is planted exclusively for
purposes of being used at a qualified
facility to produce electricity
Definitions – Biomass
• Open Loop Biomass means:
– Any agricultural livestock waste nutrients
• “Agricultural livestock waste nutrients” means:
– agricultural livestock manure and litter, including wood
shavings, straw, rice hulls, and other bedding material
for the disposition of manure
• “Agricultural livestock” includes
– bovine, swine, poultry, and sheep
Definitions – Biomass
• Open-Loop Biomass also includes:
– Any solid, nonhazardous, cellulosic waste material or any
lignin material which is derived from—
» Mill and harvesting residues, precommercial thinnings,
slash, and brush,
» Solid waste materials, including waste pallets, crates,
dunnage, manufacturing and construction wood wastes
(other than pressure-treated, chemically-treated, or
painted wood wastes), and landscape or right-of-way tree
trimmings, but not including municipal solid waste, gas
derived from the biodegradation of solid waste, or paper
which is commonly recycled, or
» Agricultural sources, including orchard tree crops,
vineyard, grain, legumes, sugar, and other crop byproducts or residues.
Definitions – Biomass cont…
“Open-loop biomass” does not include:
Biomass burned
in conjunction with fossil fuel (cofiring)
beyond such fossil fuel required for
startup and flame stabilization
Definitions – Qualified Facility
• In case of closed-loop biomass facility, a qualified
facility is one that is:
– Owned by the taxpayer, which is originally placed in service
after December 31, 1992, and before January 1, 2014, or
– Owned by the taxpayer which before January 1, 2014, is
originally placed in service and modified to use closed-loop
biomass to co-fire with coal, with other biomass, or with both,
but only if the modification is approved under the Biomass
Power for Rural Development Programs or is part of a pilot
project of the Commodity Credit Corporation as described in
65 Fed. Reg. 63052.
Definitions – Qualified Facility
• In case of open-loop biomass facility, a
qualified facility is one that:
– if using agricultural livestock waste nutrients,
» is originally placed in service after October 4, 2004 and
before January 14, 2014, and
» the nameplate capacity rating of which is not less than
150 kilowatts, or otherwise
– is originally placed in service
before January 1, 2014.
Definitions – Qualified Facility
• Expansion of Facility.
• The term qualified facility shall include a new unit,
• but only to the extent of the increased amount of
electricity produced at the facility by reason of such
new unit.
The Section 45 Production Tax Credit
Section 45
Production Tax Credit
• IRC Section 45 establishes a production tax
credit that is currently equal to:
2.1¢ (“credit rate”)
multiplied by
the kilowatt hours of electricity that are:
c
– sold by the taxpayer to an unrelated person
during the taxable year
– produced in the U.S. at a qualifying biomass
energy project during the 10-year period
beginning on the date the project is originally
placed in service (“credit period”)
Disadvantage for Open-loop Biomass
under the Production Tax Credit
The credit rate is cut in half for open-loop
biomass energy projects, but not closed-loop
biomass energy projects.
1.05¢ for open-loop
v.
2.1¢ for closed-loop
multiplied by
the kilowatt hours of electricity
Limitations on the
Production Tax Credit
• The Production Tax Credit is reduced up to 50% by:
–
–
certain government grants
subsidized/tax-exempt financing that the taxpayer receives for use in
connection with the project
• The Production Tax Credit is further reduced if the Secretary
determines that the annual average contract price per kilowatt
hour of electricity generated from the same qualified energy
resources and sold in the previous year in the U.S. (“reference
price”) exceeds a certain level (currently 11.08¢)
– The reference price for wind is currently 3.60¢
– The reference prices for biomass, geothermal, and other alternative
energy sources have not been determined
Production Tax Credit
Eligibility
•
PTC is Producer Specific.
» If owner of such facility is not the producer
of the electricity, the person eligible for
the tax credit shall be the lessee or
operator of facility.
» Implications to the structure of investment.
The Section 48 Investment Tax Credit
Significant Changes made by the
American Recovery and
Reinvestment Act of 2009
The stimulus act permits Closed-loop and
Open-loop biomass energy producers to
elect the Section 48 Investment Tax
Credit instead of the Section 45
Production Tax Credit.
Section 48
Investment Tax Credit
IRC Section 48 establishes an
Investment Tax Credit for qualifying
biomass energy property placed in service
during the taxable year, which is equal to
30% of cost.
Definitions – Qualified Property
– For investment in biomass facilities,
“qualified property” means—
– Tangible personal property, or
– Other tangible property
» not including a building or its structural components, and
– With respect to which depreciation
(or amortization in lieu of depreciation) is allowable, but
only if such property is used
as an integral part of the
investment credit facility.
Definitions – Qualified Property
– “Integral Part” of Biomass Facilities:
• Roadways and paved parking areas located at the
qualified facility and used for the transport of
material to be processed at the facility and
movement of equipment are integral part.
– But if solely for employees and visitors – not integral part.
• Property used for unloading, transfer, storage, or
preparation for processing biomass material is
integral part.
• Equipment away from biomass plant is not integral
part, including slurry pipelines, trucks, railroad cars,
and barges.
Section 48
Investment Tax Credit
• Accelerated Depreciation Schedule
– The basis of energy property must be reduced by 50% of the
amount of the Investment Tax Credit.
• Limitation -
The Investment Tax Credit is subject to recapture of the
accelerated depreciation, if the energy property is disposed of or
otherwise ceases to be energy property in the hands of the taxpayer
within 5 years of being placed in service.
• Sale to federal or state agency, 501(c) entity triggers recapture
• Sale to disinterested other party, no recapture if both parties agree to be
jointly liable for recapture.
Grant in Lieu of Investment Tax Credit
Grant in Lieu of
Investment Tax Credit
• Section 1603 of the American Recovery and
Reinvestment Act of 2009
– Adds new Section 48(d)
• Ability to apply for cash Grant in Lieu of the Investment
Tax Credit for energy property placed in service
in 2009 or 2010
that would otherwise
be eligible for the
Investment Tax Credit.
Grant in lieu of
Investment Tax Credit
• Basis reduction and recapture provisions for the Investment
Tax Credit are made applicable to the Grant in Lieu.
• The ability to apply for the grant allows for the receipt of
cash (within 60 days of the later of the date application is
made or the facility is placed in service) without the need to
have taxable income or to implement a monetization
structure to recognize the immediate benefit.
• However, taking the Grant in Lieu may leave benefit of
depreciation deductions on the table if the owner cannot use
them.
Grant in Lieu
Eligibility issues
• Applicants not eligible:
– Federal, state or local government or agency
– Tax-exempt 501(c)
– Entity referred to in paragraph (4) of Section 54(j)
• However, the foregoing may hold an interest
through a taxable C corporation.
Grant in lieu of
Investment Tax Credit
• The Treasury Department is now accepting
applications for this program.
• To apply, go to https://treas1603.nrel.gov/.
Grant in lieu of
Investment Tax Credit
• A completed application will include:
– the signed and complete application form;
– supporting documentation;
– signed Terms and Conditions;
– and complete payment information.
• For property placed in service in 2009 or 2010, all
applications must be received before the statutory
deadline of October 1, 2011.
Grant in Lieu
Required Documentation
• Required Documentation
– Eligible Property – Design plans (required of all applicants), Final
engineering design documents stamped by a licensed professional
engineer
– Nameplate Capacity – Documentation of proof may be submitted
with design plans, commissioning report, or with the original
equipment manufacturer (OEM)/ equipment vendor specification
sheets.
– Closed-Loop biomass facility that co-fires - Documentation of
approval from the Biomass Power for Rural Development Programs
or is part of a pilot project of the Commodity Credit Corporation.
– Interconnection agreement (only if interconnected with a utility)
Grant in Lieu
Required Documentation
• Payments of Grants of $1,000,000 or more shall
submit an independent accountant’s certification
attesting to the accuracy of all costs claimed as the
basis of the property.
• Payments less than $1,000,000 (with eligible cost
basis more than $500,000) --> Submit Agreed-Upon
Procedures (AUP) prepared by independent
accountant in accordance with AICPA.
Grant in Lieu
Terms and Conditions
• Reporting Requirements to the Treasury:
•
•
•
•
On-going representations and warranties
Periodic reports as required by Treasury
Project performance report, annually, for a period of five years
Annual performance report, due no later than 21 days following
the end of the reporting period
• Annual certification for 5 years that the property has not been
sold to a disqualified person.
• Maintenance and access to records
• Project, financial, and accounting records to demonstrate
compliance with Section 1603 for 5 years.
Grant in Lieu
Terms & Conditions cont…
• Project performance report must include:
–
–
–
–
–
–
–
Name of applicant
Current owner of property
Treasury application number
Name of project
Location of project: city/ county, State, zip code
Number of jobs retained
Annual production (in kilowatt hours, MMBTUs, or
horsepower as applicable)
– Installed nameplate capacity (in kilowatt hours, MMBTUs, or
horsepower as applicable)
Grant in Lieu
Payment Procedure
• Payment of Grant:
– Register with the Central Contractor Registration (CCR) at
www.ccr.gov/startregistration.aspx. This registration must
be completed before a payment can be made.
– Must provide a Data Universal Numbering System (DUNS)
number from Dunn and Bradstreet: 1-866-705-5711
– Payment is made within 5 days of notice of acceptance to
the banking information provided in the CCR.
Structured Investment
in Renewable Energy Projects
Structured Investment in
Renewable Energy Projects
• Developers of alternative energy projects often have insufficient
income to utilize the tax attributes in the early years.
• In order for the provided tax incentives to serve their intended
purpose (i.e., incentivizing/financing the construction and
operation of alternative energy projects) it is essential that the
developers be able to recognize the benefit of these incentives.
• In other energy production sectors, like wind or solar, several
structures have evolved that allow the developer to “monetize”
the tax incentives by shifting entitlement to the incentives to
investors that can use them.
Investment in
Renewable Energy Projects
• LP or Manager-manager LLC
– A limited partnership or manager-managed limited liability
company both can be structured to allocate tax credits to
investors, with an allocation “flip” to the developer after the
10-year credit period ends (often includes Internal Rate of
Return hurdle to trigger the flip).
– The developer would act as general partner or manager, while
the investors would be limited partners or members.
Investment in
Renewable Energy Projects
• Option of the Developer.
– The developer may have an option to acquire the biomass
project from the investors for FMV at the time of exercise.
– Option is typically exercisable after the tax attribute stream
has run its course.
• The ability to monetize the tax attributes associated
with the biomass project allows developers to provide
significant returns to investors while maintaining a
relatively low cost of capital (especially where the
present value of these tax attributes to the developer
is small).
Investment in
Renewable Energy Projects
Investor
Developer
Manager or
General
Partner
Option to
purchase
LLC, LP, or
Biomass
Project
Member of
Limited
Partner
LLC or LP
Biomass
Project
Allocation of
Tax
Incentives
and
Depreciation
Rights
Investment in Alternative
Energy Projects
Lease
– A leasing structure provides another means in which
value may be added to the structure of the
investment
– Qualified property often reverting to the landlord
once the tax credit and the corresponding lease
expire.
Investment in
Renewable Energy Projects
LLC or LP
Leased
Biomass
Facility
Lease
Landlord
Off-taker
pursuant to
the Lease
Investment in Alternative
Energy Projects
Tax Incentives
can also serve
as collateral to lenders.
Investment in
Renewable Energy Projects
Investor
Developer
Manager or
General
Partner
Member of
Limited
Partner
LLC or LP
Lender
Biomass
Project
Treasury
incentive
programs
Investment in
Renewable Energy Projects
Investor
Developer
Option to
purchase
LLC, LP, or
Biomass
Project
Manager or
General
Partner
Member of
Limited
Partner
LLC or LP
Lender
Treasury
incentive
programs
Biomass
Project
Leased
Facility
Landlord
Off-taker
pursuant to
the Lease
Observations
Effect of Capacity Rating, Net
Capacity Factor, and Construction
Costs
• Factors that drive the Net Present Value of the Investment Tax
Credit higher and the Net Present Value of the Production Tax
Credit lower:
– Relatively low nameplate capacity rating
– Relatively low net capacity factor
– Relatively high construction costs
• Factors that drive the Net Present Value of the Investment Tax
Credit lower and the Net Present Value of the Production Tax
Credit higher:
– Relatively high nameplate capacity rating
– Relatively high net capacity factor
– Relatively low construction costs
Other Factors to Consider
• The amount of the Production Tax Credit is
reduced by 50% for Open-loop biomass, making
the Investment Tax Credit or the Grant in Lieu
often the preferable choice.
• Lack of production risk associated with the
Investment Tax Credit
Other Factors to Consider
• The amount of the Production Tax Credit is reduced by
up to 50% to the extent that the PTC Project is
financed by grants, tax-exempt debt, and/or subsidized
energy financing
• Because the cost of an alternative energy project isn’t
reduced for tax-exempt debt or subsidized energy
financing for purposes of determining the Investment
Tax Credit or the Grant in Lieu, the existence of such
financing for a PTC Project will often make it beneficial
for the owner to elect to take the Investment Tax
Credit, instead of the Production Tax Credit
Final Thoughts
• For Closed-loop biomass, a Net Present Value analysis makes a
compelling case whether to claim the Production Tax Credit or the
Investment Tax Credit.
• For Open-loop biomass, the Investment Tax Credit or the Grant will
almost always be superior to the Production Tax Credit.
• In current economic climate, the Grant provides immediate liquidity
and equity in the energy investment, but once a facility becomes
solvent, the tax credits may prove to be more worthwhile.