Renewable Energy Projects Federal Tax Incentives and Grants. John P. Boyd Stephen J. (Seph) Wunder, Jr. Clay M. Grayson

Transcription

1 Renewable Energy Projects Federal Tax Incentives and Grants John P. Boyd Stephen J. (Seph) Wunder, Jr. Clay M. Grayson

2 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.

3 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

4 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

5 Federal Tax Incentives For purposes of qualifying for these various federal tax incentives, how are closed loop biomass and open-loop biomass defined?

6 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

7 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

8 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.

9 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

10 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

11 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.

12 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.

13 The Section 45 Production Tax Credit

14 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 )

15 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 for open-loop v. 2.1 for closed-loop multiplied by the kilowatt hours of electricity

16 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 ) The reference price for wind is currently 3.60 The reference prices for biomass, geothermal, and other alternative energy sources have not been determined

17 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.

18 The Section 48 Investment Tax Credit

19 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.

20 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.

21 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.

22 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.

23 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.

24 Grant in Lieu of Investment Tax Credit

25 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.

26 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.

27 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.

28 Grant in lieu of Investment Tax Credit The Treasury Department is now accepting applications for this program. To apply, go to

29 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.

30 Required Documentation Grant in Lieu 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)

31 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.

32 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.

33 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)

34 Grant in Lieu Payment Procedure Payment of Grant: Register with the Central Contractor Registration (CCR) at This registration must be completed before a payment can be made. Must provide a Data Universal Numbering System (DUNS) number from Dunn and Bradstreet: Payment is made within 5 days of notice of acceptance to the banking information provided in the CCR.

35 Structured Investment in Renewable Energy Projects

36 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.

37 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.

38 Option of the Developer. Investment in Renewable Energy Projects 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).

39 Investment in Renewable Energy Projects Developer Investor Option to purchase LLC, LP, or Biomass Project Manager or General Partner LLC or LP Member of Limited Partner Allocation of Tax Incentives and Depreciation Rights Biomass Project

40 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.

41 Investment in Renewable Energy Projects LLC or LP Leased Biomass Facility Landlord Lease Off-taker pursuant to the Lease

42 Investment in Alternative Energy Projects Tax Incentives can also serve as collateral to lenders.

43 Investment in Renewable Energy Projects Developer Investor Manager or General Partner Member of Limited Partner Lender LLC or LP Biomass Project Treasury incentive programs

44 Investment in Renewable Energy Projects Developer Investor Option to purchase LLC, LP, or Biomass Project Manager or General Partner Member of Limited Partner Lender LLC or LP Biomass Project Treasury incentive programs Leased Facility Landlord Off-taker pursuant to the Lease

45 Observations

46 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

47 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

48 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

49 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.