Archive for the ‘Tax Credits’ Category

2013 Shaping Up to Be a Good Year for Wind

Photo by Lydd. Some rights reserved.

Photo by Lydd. Some rights reserved.

Despite the hurried efforts of Congress to avoid the fiscal cliff, wind power (and renewable energy as a whole) received an annual extension of its tax credit within the federal budget compromise. This renewal comes with a procedural change as well which states that, for wind projects to be eligible for the tax credit, they only need begin construction before December 31, 2013, where previously projects needed to be completed and operational to be eligible, a requirement that saw many projects stall as their developers realized they could not be completed before the end of the year.

The tax credit can be claimed in two ways: as a production credit, at a rate of 2.2 cents per kilowatt-hour for the first decade of production, or it can be claimed as an investment credit, which involves a flat payment of 30 percent of construction costs. With problems still facing the wind industry in terms of competing with fossil fuels and integrating wind plans with the U.S.’s larger energy schema, developers need all the governmental health they can get.

Growth issues aside, however, it appears from preliminary numbers through November 30, 2012, that wind power capacity may have edged out natural gas and coal as the leading energy source in 2012, with installed wind power adding up to 6,519 megawatts compared to natural gas’ 6,335 megawatts. As equipment (turbines, etc.) grows cheaper and more efficient, we can only expect (or at least hope with conviction) that this figure will grow in 2012.

Insurers Offer Coverage for Solar Developments

Photo by theregeneration. Some rights reserved.

Challenges to “green” energy developments abound. Compared to traditional companies even in the energy sector, means of financing projects are fast-changing, subsidies and tax credits are unpredictable, and data on projects’ returns are sparse. We wrote about trends in venture capital and IPOs for clean technology companies in February in a post recently linked to by The Atlantic, seeing energy storage and generation companies faring well in 2011. The wind industry is still waiting for Congress to vote on extending its production tax credit, and as we covered here, if it is not passed, the industry’s capacity might fall by three-quarters.

However, it is becoming easier for “green” developers to secure private financing in a functioning market. In January, we posted about a Deutsche Bank study aimed at providing data on the accuracy and reliability of energy audits associated with building retrofits, to encourage private investment in retrofits, the “low-hanging fruit” of carbon reduction. Now, insurers Assurant and GCube Insurance Services are offering an insurance product to help solar developers navigate the risks of mid-size projects, aiming to fill a gap in coverage that has often prevented developers from securing financing.

In particular, Assurant’s product uniquely bundles property and liability coverage with equipment warranty management, allowing developers to move beyond their skepticism and uncertainty toward warranty management frameworks. They offer $10 million of coverage per location – initially limited to photovoltaic projects in the US – ranging from 100kW to 3MW in capacity. Environmental Finance has a detailed description of the insurance product here.

As those behind the Deutsche Bank building-retrofit study did, we can hope Assurant’s product will lay the groundwork for further comprehensive coverage products in other clean technology sectors that might open the floodgates of private financing, maybe making debates like that over the wind PTC unnecessary.

The Wind May Keep Blowing, Just Not From Congress

Image by Chris Winters. Some rights reserved.

The American wind energy industry has long relied on a production tax credit (PTC) that returns 2.3 cents per kilowatt-hour produced as a tax credit to investors. Following the PTC’s expirations in 1999, 2001, and 2003, the industry’s installed capacity fell each time by three-quarters or more. In the past few months as the industry lobbied Congress to pass an extension to 2016 – the year the solar PTC expires – it has presented two arguments.

First, the industry has increasingly turned to domestic manufacturing for its components, sourcing 60% of its parts from American manufacturers in 2011 compared to 25% at the time the PTC was allowed to lapse at the turn of the century. Second, the industry is at such a scale that the cost of wind energy is decreasing, and a PTC effective through the 2013-2016 window would allow the industry to “finish the job,” in the words of American Wind Energy Association Denise Bode, quoted in a Greentechmedia article.

But Congress left the PTC, which had been tucked away in the payroll tax cut bill, out of the final version of the legislation. A standalone bill to extend the PTC is unlikely to pass, but some expect a lame-duck Congress to pass an extension after November’s elections. For now, it is a race for developers to get their turbines up and running before year’s end, when the tax credit ends.

The industry expects to see frantic building in anticipation of the deadline, but for construction to stall after the summer as uncertainty over the credit’s future intensifies. Business leaders say many projects that cannot be accelerated to completion in 2012 will have to be cancelled or delayed as land leases, interconnection agreements, and other permits expires. Inexpensive natural gas in addition to generally weak demand for electricity is prompting manufacturers to look to areas with strong government support for business, including Southeast Asia, Turkey, and much of Latin America.

This does not paint a rosy picture for the industry. Where can wind look for hope? To the states, for now, perhaps. On the same day that Congress appeared to leave the wind industry to its fate, Massachusetts governor Deval Patrick announced a major step forward for Cape Wind, which is aiming to be the first offshore wind project in the United States. Massachusetts utility NSTAR agreed to purchase 27.5% of the proposed project’s capacity. In December, New England utility National Grid, agreed to a power purchase agreement for 50% of Cape Wind’s capacity.

With the Massachusetts Supreme Judicial Court’s acceptance of the Department of Public Utilities’ approved price, the project can begin financing for its estimated $2.6 billion cost. The turbines will be five to thirteen miles off Cape Cod in Nantucket Sound, and construction will take 2.5 years. By then, who knows how the wind industry will look.

Not with a Bang But a Whimper (This is the Way the Ethanol Subsidies End)

Photo by William Bartlett. Some rights reserved.

While most of us were raising toasts as fireworks rang in the new year, a quiet but substantial change in renewable energy regulation came to pass. After 30 years of tax credits introduced by the U.S. Energy Tax Act of 1978, the ethanol industry watched these subsidies expire on New Year’s Eve.

Previously set to expire in December of 2010, the subsidies had been extended at the last minute to December 31, 2011. And while many expected that the extension might be the subsidies’ last, it didn’t stop U.S. Senators from passing an amendment to S. 782, the Economic Development Revitalization Act of 2011, in June of this year that would have proactively eliminated the subsidies.

S. 782 stalled, but the subsidies expired anyway. For better or for worse, ethanol will no longer receive the benefits of the 45-cents-per-gallon Volumetric Ethanol Excise Tax Credit or the 54-cents-per-gallon import tariff on foreign fuel ethanol. Yet the response to the subsidies’ end seems almost indifferent; the New York Times quotes a spokesperson from a trade group for ethanol producers: “The marketplace has evolved. The tax incentive is less necessary now than it was just two years ago.” A former president of the Iowa Corn Growers Association added, “It won’t be fatal as long as the demand for ethanol and gasoline remains strong.”

Perhaps it’s not an ending after all.

Treasury Updates Guidance on 1603 Program (Payments for Specified Energy Property in Lieu of Tax Credits)

Earlier this month the U.S. Department of the Treasury released an updated version of a set of Frequently Asked Questions relating to how the “1603 Program” affects construction that has already begun.

The 1603 Program reimburses “eligible applicants for a portion of the cost of installing specified energy property used in a trade or business or for the production of income.” Applicants who apply for and receive payments for property under section 1603 are electing to forego tax credits under sections 48 and 45 of the Internal Revenue Code.

For existing projects, in order to qualify for the program, applicants must demonstrate that work on a project began in 2009 or 2010. One way to show this is by meeting a 5% safe harbor: having paid 5% or more of the “total cost of the specified energy property before the end of 2010.”

Specifically, the updated FAQs added two new questions & answers, shown below, that address the application of the 5% safe harbor when there has been a change in ownership of the property or entity:

Q23. For applicants relying on the 5% safe harbor, what happens if ownership of the energy property changes between the time the property is acquired for use in a project and the time the project is placed in service?

A23. If a person (the transferor) contributes, assigns or transfers property to a second person (the transferee) and the transferee uses the property in a project, the transferee is treated for purposes of the 5% safe harbor as having paid or incurred, at the same time as the transferor, the costs that the transferor paid or incurred to acquire the property, but only if the transferor acquired the property for use in that project and is related to the transferee. A transferee and transferor that are related persons within the meaning of section 197(f)(9)(C) of the Internal Revenue Code immediately before or immediately after the contribution, assignment, or transfer of the property will be considered related for this purpose. However, if property is sold to an unrelated purchaser after December 31, 2011, the purchaser may not take the costs that the transferor incurred with respect to the property into account in determining whether the 5% safe harbor is met. This limitation does not apply in the case of a sale/leaseback arrangement. If an entity which met the 5% safe harbor with respect to a facility sells the facility to an unrelated entity and leases the facility back from that entity within 90 days of the placed in service date, the purchaser of the facility (assuming all other eligibility requirements are met) would be treated as satisfying the 5% safe harbor.

Q24. For applicants relying on the 5% safe harbor, what happens if ownership of the entity that met the 5% safe harbor changes before the property is placed in service?

A.24. If ownership of the entity that met the 5% safe harbor changes after December 31, 2011, and before the property is placed in service, eligibility is not affected if (1) the purchaser is an otherwise eligible Section 1603 applicant and (2) the entity being sold had commenced development of a project as evidenced by activity such as acquiring land, obtaining permits and licenses, entering into a power purchase agreement, entering into an interconnection agreement, and contracting with an Engineering, Procurement and Construction contractor. The purchaser of an entity which holds equipment only may not rely on costs paid or incurred to acquire that equipment. For example, a project company meets the safe harbor and commences development of a project by acquiring permits, a power purchase agreement and an interconnection agreement. A partnership interest in the project company is sold to a tax equity investor (or the tax equity investor makes a capital contribution in exchange for a partnership interest) in a partnership flip transaction. The project company (with the tax equity investor as a partner) may rely on costs incurred by the project company to satisfy the 5% safe harbor. On the other hand, if a project company meets the safe harbor by purchasing and taking delivery of equipment but does no other activity, the purchaser of the project company may not rely on costs incurred by the project company to satisfy the 5% safe harbor.

To learn more about the program and the updated guidance, you can visit the Treasury’s website, or check out these law firm memos from Mayer Brown or Ballard Spahr. Knowledge Mosaic’s Law Firm Memos search page has tons more related memos – just do a text search for Section 1603.

Two Updates in Building Betterment

Photo by Benson Kua. Some rights reserved.

Earlier in the summer, The Green Mien covered the President’s Better Buildings Initiative (BBI), highlighting a recently published independent study that lauded the Initiative as a major American jobs creator.

Driving the Initiative is a vision of a “clean energy economy” supported in large part by an energy efficient infrastructure. The President intends to hit the Initiative’s target – improving energy efficiency in commercial buildings by 20 percent by 2020 – with a series of incentives ranging from updated tax credits to increased financing opportunities. The administrative actions called for by the Initiative affect a range of agencies: the Treasury, the DOE, and the Department of Commerce all are specifically called out, while every agency is directed to undertake energy retrofits on Federal buildings.

All was relatively quiet on the BBI front over the fall, but early December brought a slew of developments. One intuits a renewed sense of urgency (and frustration?) from the White House when reading the December 2 Presidential Memorandum and Fact Sheet on the BBI, which announce that the administration is focusing “on steps we can take without waiting for Congress to make the critical energy efficiency investments we need.”

Following on the heels of these announcements came a GAO-issued report that identifies “current initiatives by federal agencies to foster green building in the nonfederal sector” as well as the known results of those initiatives. While not explicitly related to the BBI, the report covers a lot of the same territory – namely an inventory of incentives for “green” building. The scope of “green” building is fairly broad compared to the energy-efficient focus of BBI, but the GAO found that “energy conservation or efficiency” tops the list of “green” elements that existing initiatives are focused on.

While the GAO tallied up 94 federal initiatives – implemented by 11 agencies – that foster green building in the nonfederal sector, the report noted that “the overall results of most initiatives and their related investments are unknown” and that these agencies may be “missing opportunities” to work collaboratively with each other.

Let’s hope that the agencies can collaborate – and get results – when it comes time to implement the directives the BBI.

What the Tax Relief Bill Means for Renewable Energy Projects

Only last Friday did President Obama sign into law the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” and already the law firm analyses are pouring in. Many firms have issued special memos on the less publicized provisions of the Act that affect renewable energy.

These provisions include:

  • The one-year extension of a program under Section 1603 of the American Recovery and Reinvestment Tax Act, which provides cash grants for qualifying renewable energy projects in lieu of traditional tax credits;
  • An extension of tax credits through December 31, 2011, for  ethanol, biodiesel, renewable diesel and alternative fuels; and
  • Allowance for a 100% depreciation bonus on qualified new equipment placed in service between September 8, 2010 and January 1, 2012.

Read about these provisions in detail here: Dewey & LeBoeuf client alert, Mayer Brown Legal Update, Milbank, Tweed, Hadley & McCloy Client Alert.

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